Big macro risks the pros are watching in 2025

The year 2024 had its fair share of economic woes and geopolitical strife from inflation and interest rates to Syria and South Korea. Investors will be hoping 2025 will be slightly calmer, but storms are already gathering.

We talked to industry experts to find out what macroeconomic risks lie await in 2025 and how investors can best defend their portfolios against them.

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For Edmund Harriss, chief investment officer at Guinness Global Investors, macro risk assessments must be looked at in terms of “where they land”.

Harriss said: “Our investment approach boils down to two questions. One, what can drive or sustain a company’s operational performance? The second question is, what is the market’s current assessment of that operational outlook, as implied by the share price?”

That means for 2025 looking at the trajectory for interest rates in the US and Europe to a lesser extent and the impact on valuation.

Harriss said: “Conflict leading to higher commodity or transportation costs, trade tariffs and China’s stimulus efforts are other risks. China and Taiwan take up pages of commentary but China’s focus on restarting its domestic economy is a bigger priority.”

So, how can investors take a defensive posture against these risks?

Harriss notes that US government policy on the use of tariffs as a foreign policy tool will be hardest to manage.

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He thinks the best solution is to focus on quality companies – those with dominant market positions, pricing power, cost control, and internal cash generation. 

“In an uncertain environment, we would expect the gap between top-tier and second-tier companies to widen as the difference between those with genuine competitive advantage and those that have been riding market themes becomes apparent,” he said.

A word on valuation

Harriss, however, cautioned on valuations. He says: “A word on valuation – low market multiple, high dividend yield will not provide downside protection in an unstable operating environment. The core business, the engine, need to generate strong and growing cash flows and it needs a strong market position versus peers to do that.”

Some names he highlights include advertising agency Publicis Groupe SA (EURONEXT:PUB), whose advantages are in “data and data sharing”, London Stock Exchange Group (LSE:LSEG), which is also benefiting from its new very high-quality business core of data and analytics, and Taiwanese manufacturer Hon Hai Precision Industry Co Ltd DR (LSE:HHPD), which is benefiting from the production of AI servers.

Tom O’Hara and Jamie Ross, co-managers of Henderson European Trust Ord (LSE:HET), point out the starting point for obvious downside risk in Europe is a very tough political environment going into 2025.

Ross said: “Some people say the politics don’t matter; it is the stocks which do the talking. Well, that’s correct over a three- to five-year view, it is not over a six- to 12-month view. So, we have to look at the implosions of the French and German governments. That is, the two powerhouses of European integration no longer acting in that role and that is a unique situation.”

For upside risk, Ross highlighted the valuation difference between European and US markets.

He said: “We’ve talked about Europe being cheap for some time, but the valuation difference is wider than it’s been for 20 years. You have an exceptionally inexpensive European market compared with the US and valuation is a really good starting point for thinking about risk.

“It’s like a piece of elastic which can only stretch so far and when it pings it comes back very hard. Valuations can then be re-rated against the US in very short order. Whenever everyone is telling you not to buy Europe, it is the time to do it.”

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Tarriff risk over-estimated?

O’Hara pointed to the uncertainty around Donald Trump’s return to the US presidency. However, he believes tariffs are an over-estimated risk.

He said: “If you look at the European equity benchmark then roughly a quarter is exposed to the US in terms of revenues and a proportion of that is local for local, so revenues earned over there.” 

On Trump’s proposed tariffs it all depends on whether the rhetoric is turned into action, points out David Lewis, investment manager, Merlin Funds at Jupiter Asset Management.

“He’s talked about raising tariffs, which would have negative implications for countries which export to the US and lead to reciprocal moves hitting global growth. He’s also talked about ending conflicts such as Ukraine and driving up US growth. But it all depends on what he does and does not do,” said Lewis.

Lewis said higher tariffs could have a big impact on tech stocks such as Apple Inc (NASDAQ:AAPL), which have manufacturing centres outside the US. “That risk hasn’t necessarily been priced into those companies,” he said.

An agreement to end the Ukraine conflict could potentially “lift the cloud” that has sat above Europe, Lewis added. “You could get a lot of spending on the rebuilding of Ukraine and perhaps more oil and gas being exported out of Russia bringing down high energy prices,” he said. “But you would still expect military spending to increase as countries restock ammunition. Military spending can have a stimulating impact on economies over time.”

When it comes to defensive ballast, Merlin has significant exposure to those markets which are unloved and priced at attractive valuations, such as the UK.

“We also have exposure to Japan which has made significant moves to boost corporate governance and price to book ratios. We’ve seen more share buybacks and dividends there, but it is still in its infancy,” he said.

Inflation risk

Stubborn levels of inflation, particularly in the US, were highlighted as a key macroeconomic concern of Michael Walsh, a solutions strategist at T. Rowe Price.

Walsh said: “The last mile in getting inflation down is proving to be the hardest. That is where we see the potential for disruption in 2025 and then linked to that is what is ahead for central bank policy. There is more uncertainty there than there has been for the last two or three years. Different central banks are moving in different directions which has the potential to rattle markets.”

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He added that US markets are expecting earnings and profits to be strong in 2025, but if that “soft landing” does not materialise that could lead to a difficult year for investors.

“There isn’t much room for missteps,” he said. “In China, if growth falls away from its target because trade or consumer issues continue, then that could hit investor sentiment. We also have elections coming up in Germany and Canada which adds to uncertainty.”

Despite this Walsh said T. Rowe Price is “slightly risk-on” with its multi-asset portfolios being overweight in equities. “We think they can still rise in the short term helped by business-friendly moves from Trump. But as the year goes on, there is a lot of good news priced in and maybe room for those to disappoint,” he said.

Bond outlook in 2025

To add ballast Walsh said inflation-linked bonds are an option if inflation surprises to the upside. “Bond yields are still an attractive home for cash. If you see turbulence in equity markets, then having a bit of cash on the sidelines ready to re-invest at a more attractive point can be a good strategy,” he added.

Jonathan Davis, economist and wealth adviser at Jonathan Davis Wealth Management, says bond yields are a key risk to global stock markets next year.

“As reflation has started to return, you should expect an upcycle of one to two years of rising inflation, after two to two and a half years of disinflation. Long rates will rise. This will pressure global stocks, especially the Nasdaq and S&P 500.”