Outlook 2025 – what are mega forces?

What risks are associated with these mega forces?

While digital disruption and AI are transforming how we live and work, they may bring risks such as cybersecurity threats, potential job displacement and regulatory challenges. The rapid pace of technological change can also lead to market dispersion – as companies and industries adapt, there will likely be winners and losers. Meanwhile, as the world splits into competing blocs (geopolitical fragmentation), increased geopolitical tensions, trade disruptions and economic sanctions could occur. Demographic divergence between ageing advanced economies and younger emerging markets could lead to different economic growth rates, labour market dynamics and policy responses. These are some examples of the potential risks to investors as mega forces evolve, highlighting the importance of a well-diversified investment strategy and a more active approach to managing portfolios.

Which of these mega forces makes an especially compelling argument for an investment case?

AI has remained a strong force for markets in 2024, whether driving positive sentiment or volatility, particularly for mega-cap US technology stocks. Our conviction on tech remains strong – investors have questioned whether the price for growth may be too high, but we believe in tech’s longer-term growth prospects. We also see opportunities beyond tech as the AI build-out phase gathers pace. We think markets could be underestimating the scale of capital spending and AI power needs. As companies and governments continue to build out AI capacity through more advanced models with greater power demands, we believe the infrastructure needed to support this growth will require significant investment, creating potential opportunities in the firms helping to develop this infrastructure.

Which world regions have been on the sidelines for the last few years and are now worth a longer look?

For several years, UK assets have been out of favour with investors, amid relatively muted economic growth and uncertainty after the Brexit vote. However, we believe the investment case has become more compelling, with opportunities for investors in UK stocks and bonds. In stocks, our view is underpinned by greater policy certainty post-General Election, as well as attractive valuations – especially compared to markets such as the US – and deep value within the UK market. At the same time, the Bank of England (BoE) has begun cutting interest rates amid slowing inflation. Interest rate cuts mean that newly issued bonds pay a lower rate of interest than existing bonds, thereby increasing demand for existing bonds and pushing their prices up. We therefore think that the case for gilts and sterling credit has strengthened amid the BoE’s rate-cutting cycle.

Lastly, you advocate for a "more active approach to the investment portfolios". What would be a very soft and easy first step for risk averse investors to start a more hands-on approach?

In the past, many investors relied on "60/40" portfolios – generally consisting of 60% in stocks and 40% in bonds – in the belief that this was the optimal mix of these "asset classes", due to the different ways that stocks and bonds behave. They tended to allocate a certain amount of their portfolio to different regions and then leave these portfolios unchanged over time, in the hope that this broad, diversified approach would deliver the best returns. However, we don’t think this will necessarily work from now on, due to the higher levels of economic and market volatility mentioned earlier. We think that an easy first step for risk averse investors to start taking a more hands-on approach would be to more frequently review and adjust the mix of stocks and bonds in a portfolio and where to invest.

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