Four trends set to drive capital markets in 2025

The New York Stock Exchange. With high macroeconomic and financial market volatility, investors should focus on capital markets where the playing field is familiar. AFP

Looking at capital market history, the best performing assets often change from one decade to the next, driven by economic and political events.

Therefore, when looking at asset allocation it is vital to regularly reassess the forces in the system that result in structural trends. But do bear in mind that they typically take a few years to emerge.

Here are four capital market trends likely to drive asset class performances this decade.

1. Focus on familiar playing fields

With the increase in geopolitical conflicts in a multipolar world, the investment opportunity set has shrunk. Investors should continue to favour real assets over nominal claims, in jurisdictions where they are comfortable with the political risk.

Macroeconomic and financial market volatility is high, so it is better for investors to focus on capital markets where the playing field is familiar and where the rules of the game are stable and known.

Even though we do not anticipate full-blown deglobalisation with unconditional reshoring, store-of-value equity markets appear likely to profit. “Store-of-value” is an umbrella term for markets in countries where shareholder value and property rights are well protected and there is a strong institutional framework, sound governance and efficient allocation of capital. Examples are the US, Sweden and Switzerland, all of which have an exceptional track record of shareholder value creation.

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2. Sanctions bolstering gold and digital assets

Active industrial and fiscal policies, coupled with normalised interest rates, are significantly impacting public finances. This results in increasingly weak government balance sheets.

Meanwhile, geopolitical tensions have prompted western authorities to frequently use the centralised financial system for sanctioning. This benefits “out-of-system” assets, such as gold and Bitcoin, which are characterised by limited supply and insulated from potential western sanctions. This is because in the current context, non-western pools of capital may have moved some money out of that system.

Quite simply, when investors are more concerned about the return of their capital rather than the return on their capital, the premium required to hold out-of-system assets, even if they are unproductive, shrinks. We therefore work with the hypothesis of increased structural demand for out-of-system assets such as precious metals, led by gold, but also digital assets.

3. Dominance of USD capital markets

The rising demand for gold and other out-of-system assets, coupled with skyrocketing US government deficits have left investors wondering whether the current US dollar bull market is due for a reversal. Or indeed, if this marks the beginning of the end of the dollar’s reign as the world’s reserve currency and, potentially, the fiat currency system at large.

While there are merits to diversifying portfolios beyond the traditional USD-based financial system, for the foreseeable future no currency or alternative capital market appears poised to challenge the dominance of USD systems.

As in the past, the current secular US bull market is underpinned by the strength of the American information technology sector, which boasts unrivalled growth and free cash flow generation.

4. Innovation supercycle

The innovation supercycle has important implications for asset allocation. Historically, accelerated innovation has always led to significant shareholder value creation among leading companies. The big question is where this new market leadership will emerge. Looking at the current situation, the answer is likely to be the same as before: within the US IT sector.

The US IT giants had been fundamentally undervalued for more than 10 years. However, this is no longer the case. Today, their free cash flow yield is slightly below that of the S&P 500, and their valuations fairly reflect their growth prospects and free cash flow generation.

As such, investors who have a fundamental growth DNA are in a difficult position right now, as neither China nor Europe, which are burdened by structural issues, offer a viable alternative. In this context, it is too early to underweight the major US technology stocks, especially given their profitability and the strength of their franchises.

The leadership of the US tech sector is most likely to continue, even if its contribution to the outperformance of the US market is likely to be more challenging in the future.

Yves Bonzon is group chief investment officer at Julius Baer