Can 2025 be as good as 2024?

For equity investors the good news is they have just enjoyed a great year for investing, with most of the main markets delivering positive returns and the MSCI All World Index up strongly. Investors do not want 2025 to ruin it. The good news is many of the developments from last year point to a decent outlook.

Lower interest rates

The changes made in 2024 have, on the whole, been favourable to continuing positive returns from investing. The leading central banks have started edging interest rates down, with more to come in 2025. China needs to ease more to stimulate consumers at home and to speed is recovery from lockdowns and property collapses.

The US has just elected a new president, who is committed to accelerating the good rate of US growth achieved in 2024, with lower taxes, less regulation and support for new investment. The becalmed European Union (EU) economies should receive some boost from further rate cuts, with the bloc already enjoying lower rates than the US or UK.

It is true markets are having to tone down some of their past optimism over how quickly rates will fall and how far, but few doubt the direction of travel is still down. Inflation in the US and UK is sticky and more persistent than central banks would like, but it is not about to surge to the worrying levels of 2023. Lower rates usually boost asset prices and stimulate more activity, allowing people and companies to borrow a bit more.

The digital revolution powers on

Recent years have been dominated by the success of the giant US digital companies, led by Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla. These companies have embedded themselves in the lives of billions of people and millions of companies worldwide, playing a part in so many features of our lives.

They have taken over much of the advertising market to help pay for “free” services, signed people up to make regular payments for service, and recouped money from the overall selling price of hardware to add to the networks. Artificial Intelligence (AI) has given the wave a further wind.

With Elon Musk advising Donald Trump in the White House, technology will remain newsworthy and centre stage in growth plans. People willingly shop more online, download more entertainment, communicate more by social media, use many more apps to help organise their lives, and search for so much information.

War and peace

The bull market of 2024 happened despite two savage wars in Ukraine and Gaza causing plenty of death and destruction. As 2025 dawns, there are more hopeful signs that the combatants are seeing the need to negotiate.

President-elect Trump will insist on the European members of NATO paying more for their defence and shouldering more of the burden of providing troops and weapons for the security of Europe. He will support Israel in the Middle East and seek to rebuild the US/Arab/Israel coalition against Iran and its proxies in the region.

Success in these ventures would be a great relief to the troubled war zones – and an added bonus for markets.

The US will continue to outgrow Europe

The US growth rate is more than double the EU’s. The US will seek more advantage from cheaper energy than Europe and will reinforce its lead in technology. It will continue to outspend on defence and will have strong onshoring policies for industry.

The EU relies heavily on its commitment to net zero, with subsidy and support concentrated on products and businesses for energy transition. This will generate some new activity, but China is well set in many of the key materials and products of the green transition, which means imports from China will still be an important part of the investment. China will settle for a slower growth rate than pre pandemic, with government playing a large role in allocating capital and intervening in markets.

Tariff threats

One of the biggest worries is the growing interest in tariffs and other barriers to trade. The EU is working on a carbon-based tariff on imports of goods with a high energy content. President Trump is threatening a general tariff on all goods imports.

The EU and the US have in recent years been putting large tariffs and some bans on specified Chinese products. The standard EU tariff on imported cars is already 10% and the US one is 2.5%. Both have imposed much higher tariffs on Chinese battery vehicles, with the US at 100%. So far, markets have had bad days based on worries about tariffs, but the tariffs themselves have not had a big impact on world growth.

How the World Trade Organisation works

All the main trading nations belong to the World Trade Organisation. This body and its predecessor, the GATT rounds, has been successful at reducing tariffs and other barriers to trade in goods to low levels.

Each member must promise to offer the same tariff and trade terms to all members as it offers to its closest friends. Where a country imposes an unreasonable tariff or barrier on trade the affected country can bring a case before the WTO. They will investigate and adjudicate.

If the country complained about is infringing the rules, they are asked to amend. If they refuse to amend then the complainants can impose countervailing measures proportionate to the infringement. This system has brought the average tariff down to a low level for the major players.

Worries for the markets

Tariff and trade bans getting out of control will be a worry for markets. The last period of Trump in office resulted in targeted tariffs on China and did not lead to a global trade war depressing world output. Tariffs are Trump’s favourite word – but he often wishes to use them to get policy change by another country. They will need watching.

There could be deterioration in the conflicts around the world, but we would not expect the main powers to get directly committed to war. President-elect Trump is more interested in his domestic agenda and the EU does not have the forces to fight. Russia has been very stretched by its regional conflict in Ukraine. China does not wish to take on the US.

There could be central bank mistakes, squeezing money and credit too much, or there could be setbacks in getting inflation down leading to necessary central bank tightness.

Conclusion

There are plenty of things to be hopeful about as we enter 2025. Risks still need watching and managing. Equity returns are unlikely to match the great results achieved in 2024, but there is a way for the main economies and markets to avoid bad outcomes for the year ahead.