“Optimism on the
Horizon”
—— 2025 Global Market Outlook
[AIA – INTERNAL]
“Optimism on the Horizon”
——2025 Global Market Outlook
EXECUTIVE SUMMARY
2025 is expected to offer a supportive
market backdrop with higher volatility.
U.S. markets should remain resilient,
driven by earnings growth, though returns
will moderate after recent stellar gains.
2024 MARKET CROSSROADS: POLITICS, POLICY AND
INNOVATION SHAPE THE GLOBAL ECONOMY
Looking back, the global financial markets in 2024 rate adjustments, citing persistent inflation
were shaped by a series of critical political and challenges. This careful approach bolstered the U.S.
economic events. dollar, which reached a two-year high against other
major currencies.
In Japan, the Bank of Japan exited from its negative
interest rate policy in early 2024 but kept its short-
Political Shifts and Market Reactions
term interest rate at 0.25% ever since July,
In mid-2024, President Joe Biden announced he prioritizing a balance between economic recovery
would not seek re-election, paving the way for Vice and inflation management. The yen weakened
President Kamala Harris to become the Democratic significantly against the dollar in Q4, partly due to a
nominee. However, the November election brought revival of the yen carry trade, wherein investors
Donald Trump back to the presidency. Financial borrowed in yen to invest in higher-yielding foreign
markets responded with cautious optimism, assets, in light of the wide gap between Japanese
anticipating potential policy changes such as tax and global interest rates.
cuts, higher tariffs, and adjustments to immigration
policies. While these potential changes were viewed
as short-term boost to U.S. domestic economy, they Technological Innovation and Market
also introduced uncertainties, particularly around Leadership
inflation and global trade dynamics.
The year saw rapid advancements in artificial
intelligence (AI), transforming industries and
boosting market sentiment. The “Magnificent Seven”
Monetary Policies and Currency Dynamics
tech giants—Apple, Microsoft, Amazon, Alphabet,
The U.S. Federal Reserve (Fed) reduced interest rates Meta, Nvidia, and Tesla—continued to dominate,
by a cumulative 1 percentage point in 2024, setting supported by significant investments in AI and
the federal funds rate at 4.25%–4.50% at the related technologies. Their performance was a key
December FOMC meeting. Despite the cuts, the Fed driver of gains in U.S. equity markets, with the tech
adopted a more restrained outlook for future sector attracting strong investor interest.
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“Optimism on the Horizon”
——2025 Global Market Outlook
Geopolitical Tensions and Economic Outlook
In summary, the year 2024 was defined by an
Geopolitical risks remained a prominent factor, with
continued conflicts in the Middle East and intricate mix of political transitions, monetary
uncertainties surrounding global trade policies. policy shifts, technological advancements, and
These challenges, combined with the anticipated geopolitical challenges. These factors created a
policy shifts under the new Trump administration, dynamic and sometimes volatile environment for
added complexity to the financial landscape. global financial markets. As 2025 approaches, we
Investors maintained a cautious approach, weighing are closely monitoring these developments to
opportunities against risks arising from these navigate the evolving economic and investment
geopolitical developments. landscape.
GLOBAL MONETARY POLICY PATHWAY IN 2025
U.S. Federal Reserve: Gradual Easing Amid Resilient Growth
The Fed has adopted a measured approach to monetary easing in 2024, responding to cooling inflation while
navigating a robust economy. After three consecutive rate cuts, the federal funds rate now stands at 4.25%–4.50%,
down by 1 percentage point since September. However, the Fed signalled a slower pace of cuts in 2025, with
projections indicating the rate could settle around 3.9% by year-end, higher than previously forecast.
Market expectations of Fed
policy action have been revised
substantially in the aftermath
of i) more evidence of strong
economic activity for Q3 and
Q4 2024, and ii) the Republican
sweep victory, raising the odds
of a higher level of inflation in
2025. Expectations are now for
only 2 rate cuts by end 2025:
Jun 2025 and Dec 2025.
Chairman Jerome Powell highlighted the challenges of achieving the Fed’s 2% inflation target, as consumer prices
remain sticky, particularly in housing and services. Yet, resilient job growth and stronger-than-expected economic
performance have allowed the Fed to tread cautiously. While inflationary pressures are moderating, potential policy
shifts under the new Trump administration, such as tariffs, could reignite price concerns. The Fed’s emphasis on
data-dependent decision-making reflects its commitment to balancing economic stability and inflation control.
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“Optimism on the Horizon”
——2025 Global Market Outlook
When an economy enters a
recession, businesses cut more
jobs than they create. Over the
last two years, the Conference
Board Consumer Confidence
Survey has been signaling a
sharp decline in “jobs
plentiful”, a proxy of how easy
it is to change job to get a
higher salary, whereas the
“jobs hard to get”, which is
more related to unemployed
looking for a job, has remained
remarkably low over the
period.
European Central Bank: Easing Bias in Bank of Japan: Cautious Tightening Amid
Response to Weak Growth Wage-Driven Inflation
The European Central Bank (ECB) is taking a more The Bank of Japan (BoJ) has taken a gradual
aggressive stance toward monetary easing to approach to tightening, with short-term interest
counter weaker economic conditions. Following its rates currently at 0.25%. Rising wages and benign
cumulative 1 percentage point rate cut throughout inflation have prompted the BoJ to cautiously move
the year, the ECB’s deposit rate now stands at 3.00%. away from ultra-loose monetary policy. While core
The central bank also revised down its growth and inflation has cooled to 2.3%, policymakers are closely
inflation forecasts for 2024–2027, signalling an monitoring wage growth, which has shown signs of
extended easing cycle. Economists expect a further sustaining momentum. External risks, including
100-to-125 basis points of cuts by 2025, which slowing demand from China and uncertainty around
would bring rates below or close to 2%. U.S. trade policies, remain key factors in determining
the pace of future rate hikes.
By dropping references to restrictive policy, the ECB
has signalled a clear easing bias, leaving the door
open for further action. This dovish stance has been Global Divergence and Emerging Markets
welcomed by European equity markets, which are Monetary policy divergence among central banks is
still trading at a discount to their fair value. However, becoming increasingly apparent. While the ECB is
persistent challenges, including sluggish growth in firmly in an easing cycle, the Fed is moderating its
the services sector and ongoing political transition cuts, and the BoJ is tightening gradually. This
uncertainties, underscore the need for sustained divergence is influencing currency dynamics, with
monetary support. the euro weakening against the dollar. Meanwhile,
emerging market central banks, having navigated
currency pressures earlier in the year, are now
focusing on domestic growth. The rapid disinflation
progress in Asian emerging markets may
accommodate the scope for further rate cuts,
creating opportunities in local bond markets.
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“Optimism on the Horizon”
——2025 Global Market Outlook
The path of global monetary policy in 2025 will likely depend on evolving economic conditions, inflation trajectories,
and geopolitical developments. Investors should remain attuned to these shifts, as they present both risks and
opportunities across asset classes and regions.
CHINA – NAVIGATING STIMULUS STRATEGIES AMID
ECONOMIC HEADWINDS
In 2024, China’s economy faced significant challenges, including a sluggish property market,
weak consumer demand, and the looming threat of increased U.S. tariffs under the incoming
Trump administration. To counter these issues and stimulate growth, Chinese authorities
implemented a series of fiscal and monetary measures. In September, the government introduced
a comprehensive stimulus package aimed at revitalizing the economy. Key components included
interest rate cuts, reductions in the reserve requirement ratio for banks, and support for the
struggling real estate sector.
The property market is still contracting on
a seasonally adjusted basis. Residential
buildings sales are now at their lowest
level in nine years. Weak sales are also
reflected in tepid growth in mortgages,
amid below expectations credit expansion
in general. The focus of the government
on risk mitigation instead of direct support
to consumer demand contributes to delay
the stabilization of the housing market.
Additionally, the People’s Bank of China reduced the amount of cash banks are required to hold in reserve,
effectively increasing liquidity in the financial system. The government also announced plans to issue special
sovereign bonds and expand the budget deficit to fund infrastructure projects and support low-income households.
Despite these efforts, economic indicators such as retail sales and fixed asset investment showed signs of
deceleration, reflecting the ongoing fragility in domestic demand. The potential for new U.S. tariffs added external
pressure, prompting Chinese leaders to pledge further support, including increased government spending and
relaxed monetary policies, to ensure steady economic growth.
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“Optimism on the Horizon”
——2025 Global Market Outlook
Insufficient domestic demand is still weighing
significantly on China inflation. Both core and
services consumer price index (CPI) have
been below 0.5% year-over-year for the last
few months, and public policies prioritizing
the supply side of the economy are likely to
limit the scope of reflation. High youth
unemployment and falling property prices
also contribute to the risk of deflation.
Overall, while the stimulus measures have provided some relief, the Chinese economy has continued to grapple with
both internal and external challenges, necessitating ongoing policy adjustments to achieve sustainable growth (e.g.
robust demand-side fiscal stimulus or deeper economic reforms). Until such measures are effectively implemented,
macroeconomic challenges will likely limit sustained gains, as reflected in the current low yields on Chinese
government bonds.
As a result, we maintain a stance of cautious optimism towards China. Agile positioning is essential to
capitalize on short-term equity moves, while long-term optimism depends on major policy shifts.
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[AIA – INTERNAL]
“Optimism on the Horizon”
——2025 Global Market Outlook
KEY INVESTMENT VIEWS
2025 is expected to offer a broadly supportive environment for markets, albeit with heightened
uncertainty regarding the year’s trajectory. Two primary themes shape our outlook :
U.S. Exceptionalism Continues Increased Market Volatility
The likely policies under the new Trump However, the specifics and timing of these
administration are set to reinforce the policies remain uncertain. Historical
strength of the U.S. economy, emphasizing precedent suggests that actions such as
business-friendly measures, tax cuts, and a trade tariff implementations could trigger
loose fiscal approach. These actions should periods of market volatility, particularly in
sustain U.S. economic momentum and equity markets.
growth prospects.
Equity Market Outlook
The equity rally, which began in October 2022, has driven U.S. equities up by 70%, outperforming Europe and
Japan (+50%) and Asia ex-Japan (+40%). We anticipate continued U.S. outperformance in 2025 despite elevated
valuations, as both structural and cyclical growth remain concentrated in the U.S. The Trump administration’s
policies are likely to reinforce this trend while potentially posing challenges for other regions through trade
measures.
Moderating Returns in 2025
Equity gains in 2025 are expected to moderate, driven primarily by earnings growth rather than valuation
expansion. While high valuations limit upside potential, low double-digit earnings growth in the U.S. appears
achievable, offering room for decent returns.
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[AIA – INTERNAL]
“Optimism on the Horizon”
——2025 Global Market Outlook
Bond Market Outlook – Challenges Ahead
The outlook for bond markets in 2025 remains complex. Fundamental trends point to lower yields as central banks
continue cutting rates and inflation moderates. U.S. long bond yields could fall back towards 4%, but this scenario
hinges on market confidence regarding inflationary pressures from trade and immigration reforms, as well as the
large government deficit. Policy uncertainties in these areas could lead to bond market volatility and yield spikes.
Equities: U.S. markets should remain resilient, driven by earnings growth, but returns are expected to
moderate compared to the outsized gains of the last two years.
Bonds: A cautious stance is warranted as policy uncertainties and deficit concerns could lead to yield
volatility.
Investors should prepare for a year characterized by opportunity and volatility, leveraging clear policy
signals and macroeconomic trends to navigate this evolving landscape.
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[AIA – INTERNAL]
“Optimism on the Horizon”
——2025 Global Market Outlook
KEY TAKEAWAYS – LOOKING INTO 2025
Growth Inflation
U.S. growth expectations are rising again after The downward trend in U.S. inflation has
Trump’s election win, and recession risk has become less certain, and the Fed should at
dissipated despite a slower labor market and least slow down with its rate cuts. More
heightened policy uncertainty. divergence elsewhere.
Rates Credit
Bond yields outlook torn between ongoing Spreads remain at near record lows as overall
rate cuts (though fewer than expected yields have risen. They should widen under
before), and uncertain U.S. policy that could most scenarios, but a real blow-up remains
easily spike risk premia. unlikely.
Developed Market Asia Ex-Japan (AxJ)
Equities Equities
Equities can run further in 2025 in line with China continues to release more policy
robust earnings growth, although high U.S. support but outlook for external demand is
valuations should be a headwind. highly uncertain after Trump’s victory.
Stronger dollar further weighs on local Asian
markets.
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“Optimism on the Horizon”
——2025 Global Market Outlook
TACTICAL ASSET ALLOCATION (TAA) PREFERENCES
Balancing declining yields with the risk of yield spikes driven by
U.S. Treasury N U.S. politics
U.S. Investment Spreads at record lows; even slight widening can offset gains
Grade (IG) Credit UW- due to long duration.
Similar to U.S.; record-tight spreads mean mild widening
Asia IG Credit UW- erodes returns on long-duration benchmarks.
Global Developed U.S. market has strong growth fundamentals despite high
OW+
Market Equities valuations; benefits from Trump’s protectionist policies
Offshore Chinese equity outflows are pressuring the region.
AxJ Equities N Taiwan may benefit from AI but remains vulnerable to Trump
policies.
Some limited cash holdings can make sense as dry powder into
USD Cash N a potentially volatile start of 2025.
⚫ OW+ = Overweight
⚫ N = Neutral
⚫ UW- = Underweight
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“Optimism on the Horizon”
——2025 Global Market Outlook
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