Investment Insights

As we head into 2025, we have picked three key elements that we believe will have the greatest influence over market behaviour and performance: interest rates, the strength of the New Zealand dollar and geopolitical uncertainty.

While 2024 was characterised by broad market gains (or “beta” returns) in Singapore, we expect 2025 to be more centred on generating excess returns (or “alpha”). We believe the service economy, represented by financial services and transportation, will continue to contain key sectors which offer high sustainable returns, positive fundamental change and growth.

We believe that a changing political environment could present opportunities across asset classes in 2025, with fixed income in particular poised to benefit as markets adjust to more realistic inflation expectations.

In 2025, US economic growth is expected to continue due to fiscal stimulus, despite above-target inflation. Meanwhile, the strong dollar could face disruptions, the Bank of Japan may keep raising interest rates and China is seen balancing domestic stimulus with potential US tariffs. European growth may recover slowly due to US tariff risks, and global central banks' policies will likely diverge to manage these challenges.

We believe that investors should strive for a diversified global portfolio of quality companies that can thrive in an environment where the cost of capital may be higher than previously expected. Our collective experience of the pandemic reminds us that such an approach is a good idea.

We increased the overweight to growth assets given that economic data remains resilient against falling inflation and as global central banks lower interest rates. Regarding defensive assets, we have been relatively negative on sovereign bonds, and despite the rate-cutting cycle underway, we maintain this view.

During the first Trump presidency, China outperformed the S&P 500 and all the perceived beneficiaries of "China Plus One". While history may not be repeated, it is clear that China's domestic policy and market environment will become significant factors during Trump's second presidency.

We have adopted a more cautious stance on Thai bonds with the Bank of Thailand not expected to ease policy further following its interest rate cut in October. Elsewhere in the region, the reappointment of Sri Mulyani Indrawati as Indonesia's finance minister provides a positive medium-term outlook for Indonesian government bonds

The highly anticipated Global Plastics Treaty carries high hopes as it will be the first attempt at forming a global legally binding instrument to address plastic pollution across its entire lifecycle. Tackling plastic pollution will be a long, bumpy road requiring international cooperation, stringent policies and significant financial investment to drive effective solutions.

The bond market has turned its attention to the likely size of further interest rate reductions now that the RBNZ has made two cuts to the Official Cash Rate in quick succession. Our view is that New Zealand's monetary policy is on track to revive the economy, although the recovery will take some time.

The RBNZ's recent shift to a more dovish stance already appears to have buoyed New Zealand's equities at this early stage of the cycle, with examples including signs of strength in the retirement village and rental sectors, and the market has been delivering strong returns.

The Federal Reserve's interest rate cut in November was largely expected. However, Fed Chair Powell's comments pointed to changes in language, suggesting a shift towards a more uncertain policy, with inflation and employment trends influencing future rate adjustments.

As with the other markets, Japanese equities reacted immediately to Donald Trump's US presidential election win. The immediate election impact is expected to fade relatively quickly, with market focus turning to the trade policies Trump may pursue upon his return to the White House.

Volatility dominated risk markets in the early part of the July-September quarter, while perceptions of the US employment environment also had an impact. Over the quarter, we kept an overweight position on growth assets and maintained a neutral position on defensive assets.

Following Donald Trump's US presidential election win, in the near term we remain constructive on US growth and stocks, with the markets expecting corporate tax cuts and seeing a general penchant toward deregulation across industries as positive for earnings. In the longer term, we anticipate a rise in tail risks associated with fewer hurdles to fiscal expansion and higher US inflation.

The start of the Fed’s rate cut cycle was a boost to risk sentiment, with resilient US data and declining inflation placing the market in a goldilocks situation. Likewise, the start of a global rate cutting cycle sets up a positive environment for defensive assets.

In a move that reflected their disapproval of Japan's ruling coalition, voters deprived it of a lower house majority. While this outcome may not have a direct impact on the market, it is important to monitor the impact of political developments on economic policies in the short term.

The markets suggest that growth will stay at a premium in the short term. Hence, our focus on Future Quality companies, especially those capable of taking market share as the economic backdrop worsens, may prove beneficial.

The market expects more rate cuts from the Fed, giving Asian central banks room to lower rates, which is very supportive for domestic growth. Meanwhile, with more China stimulus measures anticipated, we see asset allocation into Chinese equities picking up pace and lift the entire market.

Japan’s long history of undercompensating equity investors, a legacy of deflation, is coming to an end with its risk premium now achieving parity with that of the US. This historic shift is being driven by rising dividend payouts ratios, strong earnings and reasonable valuation of underlying equities.

The start of the Fed’s rate cut cycle has created room for monetary easing across Asia. We expect Asian government bond yields, particularly high yielders like those of India, Indonesia and the Philippines, to trend lower.

This month we assess views in the market that the BOJ may have taken a dovish turn at its September policy meeting; we also point to further signs of a steady rise in wages and how that paves the way for a recovery in consumption and, ultimately, higher stocks.

Nikko AM NZ released its first annual “climate statement” under New Zealand’s new climate-related disclosures regime in July. The framework requires approximately 200 organisations, including large publicly listed companies, to release reports on how their activities may impact the climate and the effect of the climate on their businesses.

The raft of stimuli recently unveiled in China is the most coordinated policy since the start of the country’s economic downturn. This, along with the start of the Fed’s monetary policy easing, represents key fundamental changes. However, as the old saying goes, the devil is in the details.

We perceive heightened risk to both growth (two-way) and inflation (upside) compared to our previous guidance. Nevertheless, our central near-term scenario remains for slowing but positive growth in the US, alongside slowly moderating prices.