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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
2025 has got off to a volatile start in markets, with the first few months of the year marked by geopolitical and policy uncertainty, concerns about slowing US economic growth, and a shift in market leadership towards European stocks.
Looking ahead, we think uncertainty will remain high and could be a defining feature of 2025, but we still see potential opportunities.
Firstly, we see room to run for European stocks. Tailwinds from changes to government spending policies – particularly in Germany – have helped to fuel stronger sentiment towards European stocks. For the next leg of the trade, we look to corporate earnings growth, implementation of the new spending policies, and the potential for reduction in geopolitical risk. It’s also worth noting that European stocks still look significantly cheaper than their US peers, based on their price-to-earnings ratio, even though this gap has closed from the all-time highs we saw at the start of the year.
Turning to bonds, we continue to see potential opportunities for investors to generate income. We like bonds issued by UK companies that have a quality tilt – that is, those with strong balance sheets, which appear relatively well-placed to repay this debt. In our winter outlook, we spoke about ‘duration’ – that is, the length of time until a bond matures and the investor is repaid – and outlined how the yield, or interest rate, available from short-duration UK government bonds, or ‘gilts’, was comparable to the yield available from longer-duration gilts. The same is currently true for UK corporate bonds, so investors could access similar income levels from short-duration exposures, without taking on the higher level of risk around interest rates, economic growth and various other factors that could impact the value of longer-duration bonds.
Finally, with geopolitical uncertainty remaining high, we look to asset classes with low correlations to stocks and bonds, which might be able to boost portfolio diversification. Gold is one asset that we think could play a role as a diversifier for geopolitical risk – as it has done over the past eighteen months. We acknowledge that gold prices have risen significantly, but we think the downside risk could be cushioned by ongoing demand from central banks.
See our latest report, Turning views into action, for more.
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We set out our views for the coming months. This time, we’re highlighting three key themes: tailwinds for Europe, bonds for income, and going for gold.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the full capital originally invested.
Each investor has a different story, and we are steadfast partners to our clients in the UK because we listen to every one of them. Our full range of funds is one way we’re helping more investors build solid financial futures.
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