A few short years ago, most investors had never heard of ChatGPT, interest rates were zero, and Donald Trump was firmly a former president.
Fast forward to the end of 2024 and interest rates in the UK and across the pond are close to 5%, artificial intelligence is dominating financial reports, and Trump has regained presidency of the US – it’s been a year that’s defied predictions.
So, as we look ahead to 2025, what should investors expect?
In a word – volatility.
Expect shares and bonds to be jumpy over the next 12 months. Nothing new there, markets and yields have bounced about in 2024.
While it can create opportunities for nimble investors, it can be difficult to manage the emotional rollercoaster of a volatile investment market.
Heading into the New Year, there are three investments we see as the most compelling – though as always with investing, these should be part of a portfolio that is well diversified across regions and asset classes.
This isn’t personal advice. Remember all investments and any income they produce can fall as well as rise in value, so you could get back less than you invested. Yields are also variable and past performance isn’t a guide to future returns. If you’re not sure an investment is right for you, ask for financial advice.
Bonds
We’re bullish on bonds – though investors should manage their expectations on rate cuts.
This is a higher for longer era. Both the Fed and the Bank of England have warned that cuts will be slow to come and cautiously applied. After all, inflation isn’t conquered yet.
Added to that, incoming US president Donald Trump has a number of policies that could bring even more inflation.
On this side of the pond, the UK Autumn Budget will provide a bigger than expected fiscal boost to the economy – good news for the beneficiaries of the spending.
However, it means economists, like Capital Economics, has raised its expectation for inflation in 2025 and 2026, with inflation remaining above target throughout 2025. And it has reduced the scale of rate cuts in its outlook too.
But with the 10-year gilt and US Treasury yields both still above 4%, bonds are still as attractive to us as they were earlier in 2024.
Taking a long-term view, we think yields could lower to below 4% in future – of course nothing is guaranteed though.
By looking at bonds now there’s potential for capital gains in the future, as well as being rewarded with inflation-beating income in the near term, and the potential to diversify portfolios.
US smaller companies
We think the 47th US president’s impact on the US stock market could be positive for smaller companies.
In the campaign trail, Trump mooted a blanket 20% tariff on all imports into the US. Trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused, though investing in them carries more risk.
Trump has also proposed cuts to corporate taxes, which is positive for companies’ earnings – and therefore could be beneficial to stock prices.
Personal taxes, including income tax, are also expected to be lower under a Trump administration, which could boost consumption and raise economic activity – again good for domestically-focused smaller companies.
However, these tax cuts aren’t expected to be fully funded through spending cuts, but will instead push up the budget deficit – hence the jump in bond yields.
Infrastructure and renewables
While inflation and interest rates have proved headwinds for infrastructure, the macro-environment is – slowly – changing.
Falling inflation and interest rate cuts historically has been good for the sector. Add to that significant investment promised in the Autumn Budget in October and the outlook is brighter than it’s been in some time.
That political commitment was weighty. The chancellor promised £35bn in infrastructure improvements, more specifically new roads and an upgrade of our digital grid. Reeves also confirmed £4.5bn in cleaning up our water system, £20bn into green transport and a further £12bn in energy transition and renewables investment such as hydrogen, offshore wind and solar energy projects.
Both infrastructure and renewable energy offer investors potential for income and growth, and can add good diversification to a portfolio that already owns stocks and bonds.
From investing in bonds and US smaller companies to holding some gold, our experts have picked out five exchange traded funds (ETFs) that could benefit from these themes in 2025.