Buckle up for 2025

As we look toward 2025, investors face uncertainty regarding tariffs, geopolitics, inflation and interest rates, which could make for a volatile year.

In Europe, we expect recovery. Europe's economy will improve, coming off a low base. Growth will continue to come from the service component of the economy as the European consumer is still strong with unemployment levels low and savings rates high. Manufacturing will recover, again coming off of a low base, but with the threat of a trade war with the US and slower growth in China, recovery will be isolated to manufacturing related to national defense and electrification. The continent has suffered from political instability, with governments collapsing in both Germany and France. The story from the UK is more compelling. The UK has a stable government, inflation is moderating and the Bank of England has room to lower rates to stimulate growth. UK equities derive a lot of revenue outside of England which means a weaker pound should be a tailwind to earnings growth. In most developed markets we expect inflation to come down to target rates, giving central banks in Europe and the UK room to lower rates and stimulate their economies.

In Japan, look for stability. We expect the Bank of Japan to raise rates to fight Japan's newly found inflation, but with wages rising we don't see higher rates materially impacting the Japanese consumer. Deflation risks have finally receded due to wage pressures and a shortage of labor. As an exporter, Japan faces a potential hit from increases in US tariffs.

In emerging markets, we see stress. A stronger dollar and a struggling China are likely to be sources of stress. Higher rates in the US will put upward pressure on the dollar, a headwind for international equities, especially in emerging markets. China will continue to fight deflation as the central government looks to stimulate internal demand to offset weaker export growth due to higher US tariffs. China's growth will be below consensus, but the central government will introduce additional fiscal stimulus to increase domestic demand. A full-blown trade war is not our base case, but trade will dominate the headlines. In South Korea, the president briefly declared martial law in December, a move quickly swatted down by the parliament.