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After five years of severe imbalances, global economies are converging on a reasonable state of equilibrium — a condition that is generally good for assets. Central banks, including the Fed, are responding to the stabilization of conditions by gradually cutting rates toward what they view as a neutral posture. Growth is running fairly strong, inflation is a touch high but tolerable, and AI technology has advanced to show real potential to enhance productivity over time.
If these were the only developments in the world, you should expect an era of stability and strong profits. This should be a pretty good time to take risk in markets. I say good, not great, because a good outcome is what markets are already discounting. Therefore, exceptional outcomes will be necessary to generate truly great returns.
Enter President-elect Trump and a team of aggressive interventionists. What will their policies be? What will the impacts be? We can assume that the bias will be pro-growth and pro-business, but the uncertainties are high. This political turn of events now fully entrenches a shift in the global world order from free-market globalization to mercantilism.
With the policy backdrop shifting so radically, it’s especially important to pick and choose the assets that are most appropriate given market conditions and your goals, which we believe will be different than the traditional market-cap weighted portfolio for many investors.
Below, I share a piece of our recent research where we translate the macroeconomic pressures discussed above into how we’d allocate capital in 2025. This topic has been at the core of conversations with our global client base, and we hope it is helpful to you as well.
Karen Karniol-Tambour
Co-Chief Investment Officer, Bridgewater Associates
How We Would Allocate Capital in 2025
For the first time, we are sharing how we would translate the macro and market pressures we are measuring today into positioning for a dynamic long-only asset allocation. Over the past year, we have developed a systematic approach to doing this at the total portfolio level by examining 1) how attractive it is to own assets and take risk and in which countries, and 2) which assets are most attractive. Looking forward into 2025, at a headline level:
- We expect 2025 to be roughly average (good, but not great) for holding financial assets and taking risk. As discussed above, global economies are converging on equilibrium, a condition which is generally good for financial assets and risk-taking. Central banks are likely to continue easing interest rates, and in the event of a negative shock they will face fewer constraints to easing than we’ve seen in some time. The environment ahead is likely to be good, not great, because asset prices are already pricing in strong outcomes (i.e., risk premiums are relatively compressed), especially in the US.
- We favor spreading risk more evenly than today’s concentrated market-cap weights. A market-cap portfolio is low-cost and efficient to implement, but relative to history it is more concentrated than it has ever been. The world ahead is likely to reward diversification, as increasing global fragmentation in response to rising mercantilist policies will reduce correlations and increase the likelihood that there will be clear winners and losers. In this environment, we think investors can benefit from holding a more balanced portfolio across countries with stable conditions that are priced to ease and are able to do so (the US, the UK, Canada), as well as in countries with substantial easing pressures (e.g., China).
- This environment is likely to favor stocks. We favor stocks in relation to bonds at a comparable level of risk as a strong economy with inflation in check should support corporate profits. The risk, in our view, is that growth continues to surprise to the upside and inflation is stickier than anticipated, supporting profits and leading to pressure to tighten policy relative to what’s currently discounted in bond markets. Within stocks, the US has the highest bar to achieve strong outperformance because priced-in expectations are already elevated—this is also where investors are most concentrated, and we’d favor more diversification. Within fixed income, we continue to think that inflation-linked bonds offer good option value even in a moderate inflation environment given low discounted inflation expectations.
The table below summarizes these views, highlighting the aggregate desirability of assets relative to cash, as well as the relative pressures on assets stemming from the economic environment.
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