CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist
Head of Franklin Templeton Institute
Preview
Following consecutive years of robust returns across global equity, fixed income and alternative strategies, can 2025 offer a repeat performance? Globally, positive fundamentals for growth, inflation and interest rates, as well as the absence of significant imbalances or credit misallocation, offer favorable preconditions for positive returns across most asset classes and regions.
In particular, the re-election of President Donald Trump, accompanied by a Republican “clean sweep” that has given the party legislative majorities in the US Senate and House of Representatives, should provide markets with strong support into 2025. We believe earnings-friendly tax cuts and deregulation, accompanied by supportive macroeconomic fundamentals, should set the stage for solid returns.
We conclude our outlook for 2025 with observations about investment themes. Identifying longer-term trends in society and the economy can point to durable sources of excess return, in some cases uncorrelated to other types of portfolio risk. In this report, we consider five candidate themes: infrastructure, digital finance, sustainability, artificial intelligence and demographics.
In looking ahead to 2025, we believe investors should reinforce a portfolio-centric approach to managing their wealth and assets. It is vital to identify both probable sources of return, and candidates of risk. Balancing return and risk by correlation, volatility and liquidity preference is increasingly important. In 2025, we believe the effective management of wealth is less likely to be driven by spectacular returns on a subset of assets, and more likely to reflect sound portfolio decisions.
Stephen Dover, CFA
Chief Investment Strategist
Head of Franklin Templeton Institute
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
Companies in the technology sector have historically been volatile due to the rapid pace of product change and development within the sector. Artificial Intelligence is subject to various risks, including, potentially rapid product obsolescence, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.