The themes that matter for the coming year.

Global fixed income

Robert Ostrowski, Chief Investment Officer

The new Trump administration inherits what has been the strongest developed market economy recently, albeit with some unevenness between manufacturing and services.

The soft landing and progress on the inflation front has allowed the Federal Reserve to begin a new easing cycle. But going forward, the election result has the potential to establish a more complicated and longer-term bond-unfriendly environment.

Similar to his first term, President-elect Trump’s tax policy plans seem likely to expand the deficit and fuel federal borrowing further, the previewed immigration policy could have an inflationary impact, particularly on the service component.

In the meantime, a combination of a doveish leaning Fed in the short-term and uncertainty about the long-term success of the new administration’s policies should result in further steepening of the US yield curve, as occurred after the 2016 election. This combination of actions may boost short-term inflation before it has fully retreated to the Fed’s target, causing it to eventually ease less than anticipated in the current cycle.

For spread markets, positive growth policies could be good for corporate debt and in fact, the post-election trade has been positive as it has been in the equity market. But unlike in the equity market, animal spirits are not always best for bond risk investors, sometimes resulting in more volatile spread markets. With investment-grade and high-yield spreads already at historically tight levels, that volatility could be mixed for corporate bond returns.

Foreign policy shifts and the more aggressive wielding of tariffs that Trump promises may prove disruptive. Europe and China are already growth challenged and geopolitical conditions remain tense. A sudden geopolitical driven shift to risk-off by investors could quickly reverse the post-election run-up in the dollar, introducing new opportunities in non-US developed as well as emerging markets.

Private equity

Brooks Harrington, Chief Investment Officer

Private equity is now a mature asset class and investors need to pick their spots in order to continue generating investment returns in line with expectations.

The US economy continues to drive global growth forward. Across most metrics the economic backdrop is very healthy whether its employment, productivity, GDP growth, or stock market levels. Inflation is no longer the problem it was 12-24 months ago and the US Fed has already begun cutting rates. The uncertainty around the election is over with a major stock market rally on Trump’s first day as president-elect. Private equity activity has followed suit with improving metrics across deal flow, credit availability, and exit activity. The lower end of the market continues to be an exciting area that is less efficient, less competitive, less intermediated, with significant opportunity for needle moving operational value add to help companies reach scale and reward investors with higher investment returns.

The "democratisation" of private equity will continue as the wealth and retail market offers the industry the largest opportunity for raising new capital.

Artificial intelligence (AI) dominated the conversation in 2024, and that trend will most likely continue. Whether AI represents full scale technological revolution or productivity enhancement on the margin and under what timeline will continue to be debated. Separating the hype from reality will be important for investors. Regardless, technology and innovation will continue to present some of the most attractive investment opportunities across the US.

Europe will continue to lead on addressing climate change presenting a significant investment opportunity backed up by regulatory tailwinds, government support and institutional appetite. Cross border investment in China remains muted due to geopolitical uncertainty. Other regional countries will benefit as a portion of that capital will flow to India, Japan, and southeast Asia.

We believe that investors who have a global reach, significant deal flow, rigorous underwriting standards and flexible investment frameworks will continue to be rewarded.

Emerging markets debt

Jason DeVito, Senior Portfolio Manager

Mohammed Elmi, Senior Portfolio Manager

Although sovereign and corporate credit spreads are at multi-year tights, we remain constructive on emerging market debt going into 2025. The tight valuations in our opinion are largely justified when one considers how the asset class has successfully navigated the Covid inflationary burst and the resultant prolonged period of tight global monetary policy with minimal defaults.

From a debt, budgetary and external position perspective, a number of core and frontier emerging market economies have seen material improvements over the past 12 months. According to Bank of America Merrill Lynch almost three-quarters (73%) of new emerging market ratings actions this year moved in a positive direction, compared to the near-total spate of downgrades (93%) witnessed in 2020.

The external macro backdrop in 2025 is also likely to be conducive to emerging market debt: moderating global growth and inflation, coupled with the Fed and other major central banks continuing to ease monetary policy, will buttress the attractive emerging market yields on offer.

Despite the increased geopolitical risks; an unpredictable new US administration; and anaemic growth in China, we believe a combination of frontier and core Emerging Market names will likely outperform in 2025. Within frontier markets we continue to like Sub-Saharan African credits such as Ivory Coast and Kenya. Underpinned by improving credit profiles and attractive valuations, they also offer investors diversification benefits from potential macro headwinds.

In Latin America, a few darling stories exist. In Argentina, the significant abatement of inflation and a resumption of GDP growth has caught the eye of outside investors. This is occurring against a backdrop of governance and improvements in the regulatory framework. Additionally, El Salvador has seen healthy market access and may benefit as Trump looks to enhance investment into western hemisphere countries that have been strict on narcotics crimes. Furthermore, broadly speaking, any impetus to US economic growth can benefit commodity exporters, many of whom are in Latin America.

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