Writing this in the aftermath of the inauguration of the 47th President of the United States – along with his accompanying ‘close to 100’ Executive Orders – maybe now is a good time to question whether the market’s obsession with interest rates is the right focus for investors.
Perhaps, after a period where rate cuts in the major markets resulted in increases in 10-year government bond yields, other policies and powers will be used more.
The content and impact of those Executive Orders will be intriguing to see, especially when markets have been consistently wrong on the interest-rate policy. And, after a year of elections, in which 85% saw a change in command, the influence on global markets of politics in general – fiscal policy, regulatory change, weather and others – is worth pondering.
We believe it is likely that a number of these aspects can be expected to surpass the impact of traditional monetary policy tools such as interest rates in 2025 and beyond.
Post-pandemic fiscal stimulus and debt levels
The COVID-19 pandemic has left lasting scars on the global economy, with governments around the world amassing unprecedented levels of debt to finance stimulus packages and public-health responses. In 2025, many countries will face a delicate balancing act between managing public debt and stimulating growth.
Many countries will face a delicate balancing act between managing public debt and stimulating growth
In response, governments will likely implement more targeted fiscal policies, such as infrastructure spending or targeted subsidies, to spur economic recovery.
As these fiscal policies play out, their effect on global markets will likely be far more significant to market participants than changes in short-term interest rates.
We have been adding to US 10-year bonds to take advantage of the recent moves upwards but may have to wait for the capital return from falling rates, enjoying the income for now.
Government spending on infrastructure and green transition
Governments are likely to stimulate economies by spending on what they hope will be productive projects, such as infrastructure, technology and the green energy transition.
During 2025, fiscal policy will drive much of this investment, particularly through subsidies, tax incentives and government-led public-private partnerships. As a result, we see a more positive environment for best-in-class investment companies focused on these types of assets.
Political pressures and the shift towards protectionism
In the years leading up to 2025, political pressures from populism, nationalism and social inequality have driven changes in governments at elections at an unprecedented level.
Tariffs, subsidies and domestic procurement mandates will have a far-reaching influence on global supply chains
This has led to a more protectionist world. Fiscal policies such as tariffs, subsidies and domestic procurement mandates will have a far-reaching influence on global supply chains, trade relationships and corporate profitability. There is also the chance of a profound change in flows of currencies.
As a result, we will be watching the dollar closely.
Monetary policy’s limited effectiveness
In the aftermath of the global financial crisis and the pandemic, central banks have aggressively used monetary tools such as interest-rate cuts and quantitative easing to stimulate economic activity.
However, in 2025, these tools may be less effective, and there is an argument over what the aftermath of these policies looks like, with such high debt levels in western governments and beyond.
Nimble strategic bond fund managers could do well by picking their way through any volatility caused by the transition to this view.
Inflationary pressures and fiscal policy responses
In 2025, inflationary pressures will remain a key concern, especially in light of supply chain disruptions, geopolitical tensions, and rising energy prices.
While central banks will continue to manage inflation through interest-rate policy, fiscal policy may become the primary tool to address inflation’s root causes.
Looking to the future
As we enter 2025, the world’s financial markets will be increasingly shaped by fiscal policy rather than the actions of central banks. With rising debt levels, global infrastructure investments, political pressures for protectionism and welfare spending, government response options are decreasing.
In this environment, fiscal interventions are poised to play a more dominant role in determining global market trends. We believe a well-diversified, multi-manager portfolio is best placed to navigate this changing investment landscape for this year and beyond.
Rob Burdett is head of multi-manager at Nedgroup Investments
When will it finally be acknowledged that investing in ‘markets’ is not what it is all about. Investment is into companies. For example, it is generally recognised that the UK market is not that great, but there are some very worthwhile companies – such as for example BaE, Rolls Royce (not the cars), DS Smith, Tritax Eurobox, Unilever – just to mention a few. The same will apply to any country. The region could look poor, but that may well overlook some really good companies. Germany’s market hasn’t looked too tricky, but firms such as Siemens have done well over 2024. All those mentioned returned well over 10% in calendar year 2024.