2024 in Review and 2025 Outlook

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December is always an opportunity to look back and reflect on what we learned in the past year. Like last year, I sat down with Kamran Moghadam to reflect on what happened in 2024 and what his views are for 2025. Kamran is Partners Capital’s Head of Global Macro and Tactical Asset Allocation and has been steering our strategic and tactical allocation decisions for over a decade.

Kamran’s overall view is that 2025 is likely to show further resilience in the global economy, and slow but continued easing of inflationary pressures. However, uncertainty and macro volatility will probably remain high, and we are likely to see increasing divergence in regional growth dynamics. This means that investing behind singular forecasts will be fraught with even more risk than usual and that a nuanced understanding of a range of possible scenarios will be critical in building diversified portfolios that are resilient and not a bet on a single view of the future. However, volatility also creates dispersion opportunities for active managers, particularly in Absolute Return. The political shift towards de-regulation is also likely to increase the merger and buyout deal flow, providing opportunities for active public and private equity managers.

Emmanuel Pitsilis: 2024 was going to be a very volatile year and lot happened from an economic, political and geopolitical perspective. What were the most salient events and surprises during the year?

Kamran Moghadam: Volatility was indeed the only certainty coming in 2024! At the same time, several elements of our central scenario played out well, while others surprised us.  Above all, despite high interest rates, we averted a recession as economic growth proved resilient, particularly in the US. Inflation moderated, particularly in the goods sector, but sticky services inflation kept the aggregate inflation persistently above target. The Fed and other central banks began easing policy but more slowly than what was embedded in market pricing at the beginning of the year. China reacted to its growth rate dipping below the 5% target by introducing a slew of fiscal and monetary measures aimed at addressing some of the pressures in the property market but did not unleash the large-scale stimulus targeted at boosting household consumption that experts have been calling for. Finally, geopolitical conflicts in Eastern Europe and the Middle East continued to unravel but have not had a major impact on the global economy and financial markets.

The high volatility of long-term rates was particularly pronounced. Despite a new cycle of rate cuts from the Fed beginning in September, 10-year yields at 4.3% are now c. 0.5% higher than their January level[1], after having been both much higher and lower over the course of the year. At the beginning of the year, many investors were thinking of increasing allocations to long-duration fixed income and we avoided that based on three important premises. First, the term premium was at historical lows, indicating that there was scope for the yield curve to steepen as short-term rates were decreasing in line with policy decisions. Second, we anticipated continued questions about fiscal deficits and the supply and demand dynamics in the fixed income markets. Third, ‘higher for longer’ dynamics were going to keep cash rates higher than what the markets were anticipating.

In this context of higher rates, it may be surprising that the global economy surprised on the upside with higher than expected growth. This was driven mainly by the US economy, which expanded at c. 2.8% this year[2], or double the Fed’s own forecast of 1.4% growth for 2024 as set out in its December 2023 projections[3]. While our central scenario was for a resilient economy, we were pleasantly surprised to the upside. Another surprise came from public equities markets. We had expected solid performance, however, were surprised by the extent of outperformance, with global equities up c. +24% through mid-December[4].  This performance was largely driven by concentrated returns within a few companies that benefited from AI expectations and AI-related capex in the US. Very few would have predicted the S&P500 above 6,000 at the same time last year.

EP: If you had a highlight one major event that will have a long-lasting impact on the economy and on markets, what would you pick?

KM: 2024 was often referred to as the greatest year for democracy, given the number of people voting in elections around the world. I think that the outcomes of these elections will have a long-lasting impact on the global economy and investment portfolios. These were often characterised as a shift to the right and to nationalism. While there is an element of that, what we actually saw is a vote against the incumbent orthodoxy, whether from the left, the right or the centre. This matters, as in almost of these markets, the country’s balance sheet may be the real loser of the elections. Attempts at fiscal consolidation and structural reforms, were often voted down in major economies, such as the US, France, Japan, and even Germany. Even China, without elections, is implementing a greater degree of deficit spending.

These elections have had material impacts on markets already. France is a case in point where the cost of government borrowing relative to other European nations rose materially after President Emmanuel Macron dissolved the Assemblée Nationale. Subsequently, Moody’s also cut France’s rating from Aa3 to Aa2 over “deteriorating finances”.

EP: Looking ahead, what are your initial thoughts for the global economy in 2025?

KM: We believe that inflation is likely to continue to moderate in the near term, particularly if we see a cooling in the shelter components. However, we are not going back to the dynamics of the past 25 years of continuously declining and low volatility inflation as structural inflationary forces remain in place.

When we met at about the same time last year, we talked about a change of paradigm. This new paradigm was centred around elevated and more volatile inflation and interest rates. This change is being driven by i) a shift towards more populist (i.e., fiscally profligate) policies in most developed economies; ii) supply chain derisking and reorganisation; and finally, iii) a shift toward cleaner energy that was inherently inflationary in the short term as we are building the necessary transmission and storage capacity. Looking at what happened in 2024 and what is likely to happen in 2025, we believe that the election outcomes will accelerate and reinforce this shift in most areas, except maybe for the cost of energy.

Fiscal largesse is the first important aspect. As we just discussed, in 2024, political pressure, in the context of multiple elections around the world have undermined attempts at fiscal consolidation. As noted earlier, there have been shifts towards greater fiscal easing taking place across many countries this year. In the EU, Germany is also shifting in a similar direction and away from traditional fiscal constraints. In this context, it is almost ironic to note that Greece and Portugal are now part of the few remaining fiscal stalwarts in Europe.

Geopolitical uncertainty and disruptions are likely to remain an issue for economic and business decision-makers. This is likely to be especially true in the first half of the year when the new Trump administration defines new policy directions that will impact the Ukraine conflict, the Middle East, and the continued tensions in the East China Sea.

Energy transition was a potential material contributor to long-term inflationary pressures. This probably remains true in the longer term but, in the short term, this pressure is likely to be less intense than what we thought only a year ago. In the US, the Trump administration is likely to implement policies that are more conducive to continued expansion of the use of fossil fuels. In Europe, there has been a realisation that some of the earlier objectives may have been too difficult to reach with existing capabilities and supply chains, and policy makers and business leaders are in an ongoing negotiation to figure out the right policy balance. Net-net, the inflationary pressure from energy transition may ease, at least in the short term.

Taking all this into account, our central scenario for 2025 is not fundamentally different from 2024. We expect growth to remain resilient, however there will be greater divergences across regions and countries. Those at risk of being targeted by tariffs will suffer growth drags from the uncertainty that is created, even before any tariffs are introduced. Inflation is likely to continue decreasing, with occasional spikes if and when tariffs are imposed, supply chains impacted, and labour force mobility declines.

2025 is also likely to benefit from several positive factors that will help in supporting economic growth. In the US, deregulation and the extension of tax cuts may spur investment. China is likely to continue to implement a more accommodative fiscal and monetary policy. AI adoption is likely to continue to gather speed, boosting productivity gains even beyond the rise we have seen in Q4 of this year.  Finally, we should also see gains in the manufacturing sector because of policy support to ‘re-industrialisation’ in many major economies, of likely increase in defence spending in Europe, and of likely increase in inventory ahead of potential increases in cost driven by potential tariffs.

EP: Tariffs have indeed been mentioned several times as one of the biggest risks to global growth next year. What is your sense of the risk this pauses to economic growth and how it will impact different parts of the world?

KM: We just wrote a longer piece on this issue in Inflection. In a nutshell, I believe that the impact is likely to be lower than today’s consensus. The key question is whether the incoming President sees tariffs as a desirable long-term goal in itself or as a negotiation tool to extract concessions (for example, he mentioned stricter controls on immigration and Fentanyl exports when threatening tariffs on Mexico and Canada). While some tariffs, particularly on China, are likely inevitable, we do not expect a definitive clarity on the eventual extent of tariff imposition to emerge for some time, if at all.  Some have speculated that ‘strategic unpredictability’ may be a goal in itself, as it affords greater latitude in negotiations.

However, any such uncertainty will result in an economic cost. For example, the IMF noted in its October 2024 World Economic Outlook that increases in tariffs and in business uncertainty could result in a c. -0.6% hit to economic growth, half of which from uncertainty alone. It also noted that non-resource rich countries are likely to be more at risk, which is consistent with our view that Europe may have the most to lose from a trade war triggered by the US.

Ultimately, the incoming administration will not be immune to economic growth and inflation considerations and is likely to factor in economic impact in its decision making. Hence, these growth and inflation trends will likely provide some guardrails around more extreme decisions.

EP: So how fast should we expect monetary policy easing to be? Inflation has been on everyone’s mind for several years, but central banks have made significant progress in controlling it. Are we out of the woods?

KM: As mentioned earlier, I think that inflation will continue to moderate but there are clear limits to how fast monetary policy easing can be. Beyond the long-term structural issues mentioned above, fiscal largesse will likely constrain central banks and a continued resilient economy is unlikely to facilitate much lower rates. So no, we are not out of the woods yet: elevated and more volatile inflation coming back was not a blip but is part of the new normal for the decade to come.

The impact of tariffs on inflation is also interesting to discuss here. In theory, a tariff has a one-time, non-sustained impact on inflation. So, in theory, central banks should be able to look through such a one-time event as long as they can assume that inflation expectations remain anchored. However, the recent past will not be helpful. As you remember, there was a lot of talk about transitory inflation post Covid and it turned out to be everything but transitory. So central banks are likely to be very cautious, be it to preserve credibility less the longer-term inflation expectations should become unanchored.

Last year, we equated the work of central bankers to walking a tightrope and this will remain the case in 2025.

EP: Is China going to step up a fiscal and monetary stimulus in 2025?

KM: China has taken a cautious incremental approach to addressing its economic issues so far. Recently, it has said that it would adopt an appropriately stimulative monetary policy in 2025. This is significant because it was the first such shift since 2010. State related media also emphasised that China still had ample capacity to increase fiscal stimulus.

There is a broad consensus that China will indeed need to step up its stimulus if it wants to sustain its 5% economic growth target and wants to stave off deflationary risks. Its recent focus on promoting lending to enterprises is in line with its traditional approach to growth. A change of mindset might be in sight and may lead to measures to boost domestic consumption. The latest consumption figures are encouraging from this perspective. This will be helpful in all scenarios and will be critical if the worst scenarios on tariffs were the materialise. For that last reason, it is likely that Chinese policy makers will wait for the new US administration to be in place before fully committing to a new direction on economic policy. I would like to add that China, with its closed capital account, also has more flexibility to adapt to tariffs than most countries as it could depreciate its currency to an extent and relatively quickly. This would not fully compensate for a scenario with 100% tariffs but could act as a buffer if needed.

Longer-term, there is no question that China has positioned itself as a leader in a number of key industries, ranging from solar to EVs, and remains a key manufacturing partner in many supply chains, with capabilities that very few countries will be able to match short term. In the context of a multi-generation game, these are significant assets.

EP: Last year, we leaned into less correlated strategies, income generating strategies (in particular in private debt) and into illiquidity (private equity in particular). Are we maintaining a similar bias in 2025?

KM: We have not updated our guidance on strategic and tactical asset allocation. We will do this in February like every year. Last year, we increased meaningfully our allocation to Absolute Return strategies in particular as a portfolio buffer in the context of our underweight to long-duration fixed income. This has served us very well and we remain wary of fixed income duration risk so are likely to continue this approach unless we see more signs of recessionary risks building.

Last year, we also increased our long-term strategic asset allocation to private assets including private equity, private debt, venture capital and real estate. We are working towards this long-term target in many of our clients’ portfolios. There is a longer discussion to be held about the valuations of private assets and you went deep into this topic in a previous newsletter focused on Private Equity. I agree with the views you outlined that focusing on value add in the lower middle market is likely to be a good approach for long-term investors looking for alpha in the asset class.

Liquid markets are obviously difficult to predict – it is why we do not try to time markets but focus on understanding what level of long-term exposure risk investors want to take. It is true that both Liquid Credit and Public Equities valuations are not particularly cheap by historical standards currently. Substantial earnings growth will be required to justify the current multiples in equities. From an overall market beta perspective, a lot will depend on continued AI capex and on whether we start seeing the associated productivity gains materialise. From an alpha perspective, 2025 is likely to be a better year for active management. We are likely to see a higher level of dispersion geographically and between winners and losers within specific industries as policy and technology shifts will have differentiated impact on different geographies, industries and specific companies.

It means tight risk management and designing portfolios that are resilient in several probable scenarios rather than optimising for a single most likely scenario.

EP: Last question – looking at your crystal ball, what could surprise investors in 2025 – both on the upside and downside?

KM: I am sorry to disappoint but I don’t have a crystal ball. But there are few things to watch for. Let’s be optimistic, as we are getting close to the festive period, business and consumer sentiment (‘animal spirits’) are strong. Regulatory and tax burdens are easing and President Trump may turn out to be more pragmatic than anticipated on tariffs. Geopolitically, we may see an end to Ukraine conflict, or we may at least enter a period of lower intensity fighting. This would ease a lot of suffering and would also benefit many economies, starting with Europe with its high energy dependency.

Technology is another space to watch. I would look for further breakthroughs in artificial intelligence, whether in the technology itself or in how it is deployed to increase productivity. You delved into this in details in your last newsletter. Crypto has also benefited of the US election result. Whether you believe or not in the long-term potential of crypto, uncertainty will be high and thus volatility is likely to remain. The Trump administration has telegraphed its much more favourable stance and there is a question about how much of what’s going to happen is already embedded in market prices. The real question is whether this contributes to further institutionalisation of the asset class and its use cases or whether it leads to more prices inflation and volatility.

Given the world we live in, it is also possible to paint very dark scenarios for the year or the years to come. Economic or military conflicts could intensify as we shift from a single superpower to a multipolar world more similar to the Westphalia order that prevailed before the First World War. This cannot be anyone’s central scenario for portfolio design but at least a small part of the portfolio should protect against that. I just hope, as a human being even more than as an investor, that we do not get to that.

[1] Source: Bloomberg

[2] Source: U.S. Bureau of Economic Analysis

[3] Source: U.S. Federal Reserve, FOMC Standard Economic Projections December 2023

[4] Source: Bloomberg, as of 13th December 2024, MSCI AC World Index

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