Overview

• Geopolitics could disrupt it all in 2025. The US economy is on a solid footing and the downside to growth in other regions is low. Markets moved quickly to price in the good (tax cuts and deregulation) and the bad (tariffs and cuts to immigration). We think reality will sit in the middle of the extremes, but asset allocators should position for some extreme risk. The situation in both Ukraine and Gaza remains unclear and could turn on a dime to impact the price of oil and inflation.
• The macro big five that allocators need to position for include: 1) Geopolitics will play a larger-than-normal role in driving returns;  2) The US remains the global economy’s engine of growth; 3) Inflation has eased and policy has room to pivot and support growth; 4) Australia will remain in limbo;  5) A lot of good news is priced into US risk assets.
• Move from underweight equities to overweight. US returns depend upon earnings growth and not PE expansion next year. US leadership is likely to continue during H1, but Japan and Europe have a valuation advantage, and rising earnings growth, and they will likely outperform in H2.
• Reduce the overweight in sovereign bonds, infrastructure, and property. The risk of a global trade war and a rising neutral Fed funds rate makes it difficult to be positive on sovereign bonds even though the Fed should continue to ease policy. Nonetheless, these assets offer protection against volatility, which will likely rise next year.
• The Aussie dollar has no clear direction. Movements in the US dollar will determine the $A/$US and the risks in either direction are relatively balanced. Stronger global growth should mean the $A/$US has some marginal upside risk, but a full-on global trade war is a clear negative.

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