15 minute read

Welcome to our 2025 Macro Outlook, where we share our forward-looking perspective on the macro shifts that will shape the investment landscape in the year ahead and beyond.

As we close out 2024, we wish you and your loved ones joy, health, and prosperity. Thank you for your continued trust in StashAway, and we look forward to guiding your investment journey in the new year.

Yours in investing,

Stephanie Leung, Chief Investment Officer

2025 Macro Outlook

As we look back to 2024, the global economy and markets have demonstrated resilience in the face of multiple challenges – from tight monetary policy to geopolitical tensions.

Looking ahead to 2025, we see a convergence of economic, policy, and technological shifts that will present both new challenges and new opportunities for investors. Three key forces stand out: a global pivot toward fiscal tools after years of monetary expansion, an acceleration of AI adoption, and the economic implications of Trump's return to office.

We call this emerging paradigm "FAT" – where fiscal policy, AI advancements, and Trump's agenda will fundamentally shape markets in 2025 and beyond. Here’s our examination of how these forces may interact, and how investors can navigate this new normal.

(You can refer to our Glossary at the end for a breakdown of the terms used in this article.)

Key takeaways:

• 2024 has been a good year for risk assets. Despite macro uncertainties, factors such as ample liquidity, developments in AI, and a strong US consumer have allowed the global economy to remain resilient and supported markets. Expectations for pro-business policies under a second Trump administration have further buoyed markets – and risk assets in particular. That said, the market remains concerned about longer-term inflation prospects, as indicated by weak performance from bonds and a solid showing from gold.
• We see the start of a shift in global policy making from monetary to fiscal expansion. As we exit the era of “Great Monetary Expansion” that marked most of the previous two decades, the coming years may mark the beginning of a “Great Fiscal Expansion”. In the US, President-elect Donald Trump’s proposed policy mix points clearly to a more expansionary fiscal stance. But this shift is also happening globally: China’s leaders have reiterated more proactive fiscal measures to support its economy, while politicians in France and Germany calling for a relaxation of its strict spending rules have been gaining popular support.
• Continued advancements in AI are positive for growth and markets. As frontier research labs continue to race toward achieving artificial general intelligence (AGI), we see the technology continuing to accelerate and increasingly drive impacts on the macro and market landscape. We see boosts to labour productivity and wider corporate margins as key positives.
• These macro shifts are likely to keep us in a regime of “Inflationary Growth” into the year ahead. On the whole, we see these policy shifts and technological advancements supporting robust global economic growth in the near term – but also contributing to a higher structural inflation rate. Such an environment has significant implications for asset allocation. Our portfolios remain positioned to put cash to work in financial assets like equities, which offer potential for higher returns, and real assets like gold, which provide diversification benefits.

In 2024, economic resilience has supported risk assets, but inflation concerns continue to weigh on bonds

Looking back to the past year, the one word that may best characterise it is resilience.

Earlier this year, our Economic Regime Asset Allocation (ERAA®) investment framework signalled a shift in the macro environment from one of “Stagflation” to one of “Inflationary Growth”. As the name suggests, this regime is characterised by above-average inflation pressures, but a return to growth.

That’s because, in the face of tight monetary policy and economic uncertainty, the US consumer has remained strong as the labour market cooled but largely held up. That contributed to a moderation in inflation from extremely high levels, which in turn allowed central banks like the US Federal Reserve (Fed) to start their interest rate cutting cycles. (For more, see here: CIO Insights: Fed rate cuts have begun – here’s what it means for your investments.)

On top of that, breakthroughs in AI have underpinned capital spending and buoyed investor sentiment – especially among the mega-cap tech companies that have so-far directly benefitted from them. In total, that has meant that global growth has held up, and the economy has managed to avoid a so-called “hard landing”.

Add to that a pro-business and expansionary fiscal stance under US President-elect Trump, these positive growth prospects have been supporting risk assets. (Read more on that here: CIO Update: What another Trump presidency could mean for your investments.) Global equities are up 21% for the year to mid-December, and the S&P 500 has gained more than 28%.

But while the picture on growth is positive, the bond market remains concerned about longer-term prospects surrounding inflation – as reflected in still-negative returns for global bonds this year. That’s also been shown in the 28% return for gold – the best-performing asset class this year, and the best hedge during market drawdowns. As illustrated in Chart 1 below, during the equity sell-offs in April and August of this year, gold provided strong protection.

In 2025 and beyond, we see fiscal expansion and AI as the key trends shaping the macro environment

Given last year’s diverging performance in key asset classes, the big question is whether that trend will persist, or if 2025 will see markets snapping back to their historical norms.

To answer that, we need to understand two key trends that we believe will materialise in 2025 and drive asset class returns for years to come: an increased focus on fiscal policy, and ongoing advancements in AI.

Key trend #1: From monetary to fiscal

Crises often trigger seismic shifts in popular opinion and policies. Take the Global Financial Crisis in 2007–08, for example. That marked the start of an era dominated by monetary policy, or the economic tools used by monetary authorities like the Fed. Indeed, we witnessed a "Great Monetary Expansion” characterised by low interest rates, quantitative easing, and central banks as the key drivers of the economic cycle.

The most recent crisis, the COVID-19 pandemic, appears to have ushered in a period of elevated government spending – which along with taxation, is one of the key tools of fiscal policy. This could be laying the groundwork for an era of "Great Fiscal Expansion."

As the global economy re-calibrated in the wake of the pandemic, we’ve seen that governments have increasingly relied on boosting spending to stimulate growth – especially as central banks ran into limits on monetary stimulus when interest rates were close to zero. That’s illustrated in Table 1 below, which shows fiscal balances widening and debt levels increasing for most major economies.

Fiscal expansion is key to Trumponomics

A Trump administration 2.0 would further solidify this “great rotation” from monetary to fiscal expansion. As President-elect Trump takes office in January, his proposed policy mix of tax cuts and increased spending suggests that the US fiscal deficit will remain materially higher than pre-pandemic levels.

The US Committee for a Responsible Federal Budget projects a central scenario where US debt could expand to nearly US$8 trillion, or 143% of GDP, by 2035. While we note that some of Trump’s proposals ultimately may not be approved by Congress, over 50% of spending increases come from the extension of Trump’s Tax Cuts and Jobs Act – which has high odds of passing given Republican control of the legislature.

In recent weeks, however, there’ve been a lot of headlines on the incoming administration’s plans to reduce the budget deficit. For example, Treasury secretary nominee Scott Bessent highlighted his aim to reduce it to 3% by 2028, and the proposed Department of Government Efficiency (DOGE) floated a target of cutting government expenditures by US$2 trillion by 4 July 2026.

But our analysis suggests that the scope for such deep spending cuts is limited. The proposed US$2 trillion in cuts, is more than the Congressional Budget Office’s projections of the US government’s discretionary spending of about US$1.8 trillion. That would suggest the government would need to dip into entitlement spending (i.e., Social Security and healthcare programs) – a move that would be deeply unpopular among the electorate.

Instead, we think what’s achievable for DOGE is a focus on de-regulation and a reduction in bureaucracy bloat to make it easier for companies to do business – for example, by simplifying the process of bringing new medicines to market.

Other major economies are also shifting their stances

Importantly, this paradigm shift appears to be happening not only in the US, but in other major economies globally:

• The latest signals from China point to “more proactive” fiscal policy in the year ahead – which has been the missing puzzle piece in reviving its ailing economy. (For more on that, see CIO Insights: Has the tide turned for China’s economy?) But over the longer-term, more spending will also be needed to support its growth amid demographic challenges and global trade shifts.
• The Eurozone is also showing signs of moving toward a looser fiscal approach. Even in fiscally-prudent Germany, both voters and policymakers are urging the government to re-examine its strict spending rules to give the country more room to address longer-term challenges – by upgrading its infrastructure or boosting defence spending, for example. In France, opposition from both left and right-wing parties over plans to rein in the deficit resulted in a dissolution of the government. 

Key trend #2: AI agents in the workplace

Developments in AI have played a major role in buoying markets – and in particular, the Magnificent 7 – since the tail-end of 2022, when the public launch of ChatGPT marked a watershed moment for generative AI (GenAI). (For more, see CIO Insights: What’s next for investing in AI?)

But while the past 2 years have mostly been about experimentation and personal adoption of GenAI (think of those cute poems or AI-generated images that we’ve all tried to create!), we expect 2025 to mark the start of true wide-spread adoption of AI in business processes. 

In particular, researchers at leading labs are focused on making “AI agents” widely available – autonomous systems that can perform end-to-end tasks without human intervention. For example, Sam Altman from OpenAI has discussed achieving their definition of “Artificial General Intelligence” (AGI) – a form of artificial intelligence that can complete tasks to the same level, or a step above, humans – as soon as next year. 

Enhancing productivity across industries

There are already signs that companies that have integrated AI in their workflows are experiencing a significant increase in output: a recent study by PwC found that sectors with the highest AI penetration are seeing 4.8x greater labour productivity growth.

This is especially significant in the context of weak productivity growth over much of the past decade – with OECD countries posting an average increase of only 1.1% between 2011–2020, and declines in 2021–22 related to the pandemic. 

This boost in productivity not only reduces costs for businesses but also enables faster innovation cycles, creating a positive feedback loop that lifts aggregate productivity and fuels economic growth:

• A study by Goldman Sachs estimates that widespread adoption of AI could lift productivity growth by 1.5 percentage points and drive a 7% increase in global GDP over a 10-year period. 
• Another study by IDC shows that every dollar spent on AI solutions and services is expected to generate US$4.60 into the global economy by 2030 – adding almost US$20 trillion of cumulative economic benefit.

Corporate margins could widen on productivity gains

The productivity gains brought by AI can also translate directly into improved corporate margins for some industries. Already, tools such as AI-powered coding assistants are transforming software development – enabling tech companies at the forefront of AI developments to operate more efficiently. For example, demand for IT-related skills saw a 26% decline overall in the past few years as tech giants like Meta and X were able to significantly cut headcount while increasing output.

And this is just the beginning: a recent survey conducted by PwC shows that while only one-third of CEOs say their companies have adopted GenAI, more than double that amount see the technology significantly impacting their firms over the next 3 years.

The productivity gains brought by AI can also translate directly into improved corporate margins for some industries. Already, tools such as AI-powered coding assistants are transforming software development – enabling tech companies at the forefront of AI developments to operate more efficiently. For example, demand for IT-related skills saw a 26% decline overall in the past few years as tech giants like Meta and X were able to significantly cut headcount while increasing output.

And this is just the beginning: a recent survey conducted by PwC shows that while only one-third of CEOs say their companies have adopted GenAI, more than double that amount see the technology significantly impacting their firms over the next 3 years.

The big picture: these macro shifts are good for growth but may keep inflation elevated

In an era of “Great Fiscal Expansion”, we would expect a more balanced role between monetary and fiscal policies to more smoothly manage the economic cycle – with governments taking a more proactive and direct role, alongside more data-dependent central banks. 

We’ve already witnessed this dynamic play out somewhat in recent years. In 2022, for example, as the Federal Reserve raised interest rates and began its quantitative tightening program, the US government simultaneously drew down its Treasury General Account (TGA). From a peak in May 2022 to a trough a year later, the TGA saw a drawdown of US$916 billion – more than offsetting the US$554 billion decline in the Fed’s balance sheet during the same period. 

AI’s impact on inflation may be more nuanced

For AI, the technology’s potential to support productivity in the years ahead bodes well for economic growth – though this will depend on the pace and scale of adoption.

On inflation, while it’s conventional wisdom that technology is deflationary, we note that AI’s impact on prices may be more nuanced compared with the Internet era’s direct deflationary impact on goods.

For one, the capital outlays related to building out AI-related infrastructure are likely to be inflationary in the near term. But while AI will displace some jobs, history has shown that new types of jobs are created when new technologies emerge. In addition, as people get more free time, services that cater to those needs will see an increase in demand (as Chart 4 below shows, yoga teachers are in high demand!). These factors could offset the deflationary forces in sectors impacted by AI.

A key risk to growth: Trump’s stance on immigration

In terms of risks to the outlook, the market has been focused on Trump’s threats of outsized tariffs. But we think these are a starting point for negotiation with trade partners, and will likely be implemented in a more targeted manner to avoid stoking inflation and hurting the US consumer. Indeed, the top issues that American voters want Trump to focus on in his first 100 days in office are inflation and immigration.

Given this focus, we believe his administration enacting strict immigration policies is a bigger risk. As of end-2022, the number of unauthorised immigrants totalled an estimated 11 million people, or about 5% of the US workforce – largely concentrated in agriculture, construction, and leisure and hospitality. 

A large-scale deportation of this population would mean an increase in labour costs and uptick in inflation, as well as a significant hit to GDP: the Peterson Institute for International Economics estimates that output could be up to 7.4% lower by the end of Trump’s term in 20287.

In an “Inflationary Growth” regime, investors should continue to put their cash to work

Put together, the impact of the macro shifts we outlined above are likely to continue to keep the economy in a regime of “Inflationary Growth” in the near-term.

That’s in line with the signal that the Fed sent at its last meeting of 2024 – when it updated its projections to reflect stronger economic growth and more persistent inflation ahead. The central bank is set to continue to bring interest rates back to a more neutral level next year, but at a more gradual pace to reflect the uncertainties ahead. Indeed, it now sees just 50 bps of rate cuts in the year ahead, down from 100 bps as of its September meeting. 

In this environment, declining real rates – driven by falling nominal rates and sticky inflation – reduce the appeal of holding cash, and should encourage investors to seek higher-returning assets. Our ERAA®-managed portfolios have been positioned for such an environment following our latest re-optimisation earlier this year.

Equities tend to perform well in this environment, as economic growth drives demand and higher prices support nominal revenues. Given the president-elect’s proposed policies, cyclical sectors like industrials and aerospace could benefit from increased infrastructure spending and capital outlays. We also see potential for rotations in US equities – from mega-cap tech to the broader market – as a revival in the manufacturing cycle benefits broader parts of the economy.

Real assets, like gold and real estate, can help as hedges to inflation. They also provide diversification benefits, particularly during periods of market stress and elevated geopolitical tensions, like we’re seeing today. Global central banks’ demand for gold should also be a steady source of support in the years ahead as they continue to diversify their holdings.

Finally, given the low risk of a recession in the near-term, and prospect of wider deficits and increased bond issuance to fund fiscal spending, we remain underweight on fixed income – particularly longer-duration bonds.

Focus on the signal to stay invested through the noise

As we navigate these major macro shifts in 2025 and beyond, it’s crucial to focus on the signal rather than the noise. While a Trump administration 2.0 may bring the same headline-grabbing bluster as his first term, as long as the economy’s fundamentals remain solid, those headlines should remain just that – fleeting news without lasting impacts on markets.

What’s important is staying disciplined and aligned with your long-term strategy. Focusing on the fundamentals, rather than reacting to short-term market movements, will allow you to navigate through the noise and capitalise on long-term opportunities.

Glossary

Fiscal policy

Tools used by governments to influence the economy through spending and taxation. Increasing government spending or cutting taxes can be used to boost growth, for example.

Monetary policy

Tools used by central banks to manage the economy by controlling the money supply. The main one being interest rates – raising them makes borrowing more expensive to fight inflation, while lowering them encourages borrowing to stimulate growth.

Quantitative easing/tightening

Central bank strategies to either buy bonds and increase the supply of money to the economy, stimulating economic growth (easing), or stop replacing bonds when they mature, reducing the supply of money (tightening).

Discretionary spending

Government spending that must be approved each year through the budget, like defense or education. This differs from mandatory spending on programs like Social Security.

Treasury General Account (TGA)

The US government's main operating account at the Federal Reserve. When the government spends from this account, it essentially puts money into the economy. When it collects taxes or issues new debt, it reduces money in the economy.

Real interest rates

Interest rates adjusted for inflation. For example, if a bond pays 5% interest but inflation is 3%, the real interest rate is 2%. This helps measure the true cost of borrowing.

Risk assets

Asset classes that can deliver higher potential returns but also carry greater risk. These typically include stocks, real estate, commodities, and higher-yielding bonds.