DWS is expecting a 20% plus jump in equities again next year, although it warned of downside risks in its 2025 market outlook.
“If someone had told us five years ago that we would face a global pandemic, a real estate crisis in China, major disruptions to supply chains, the outbreak of war in Europe and the escalation of conflicts in the Middle East plus that yields on two-year US bonds would rise above 5%, no one would have expected such a good performance from the capital markets,” said Vincenzo Vedda, chief investment officer at DWS. “I expect equities to continue to go up.”
However, Vedda noted that if assumptions of a soft landing and a significant rise in corporate earnings, especially in the US, prove to be ill-founded, there could be negative surprises and so diversification remains key.
David Bianco, chief investment officer for the US, noted that deregulation and tax cuts from the incoming Trump administration would support corporate earnings and he expects these to be in the range of 10-15% next year. He singled out technology stocks, financial services, energy and utilities as ones to watch.
He noted that the biggest downside risk, higher tariffs, could be offset by lower taxes, while valuations at a forward price-earnings ratio of 21.5x remain stretched, but this is justified by earnings growth and economic expansion.
Meanwhile, in Asia, DWS’s outlook for equities is currently neutral as the markets are still waiting on the details of stimulus measures in China, although Ivy Ng, chief investment officer for the region, noted that the impact of tariffs could be less than people expected.
The continued rise of India’s stock market presupposes that companies continue to increase profitability, while Ng noted that Japanese equities could be supported by a cyclical recovery in the global economy as well as higher real wages locally.
In Asian bonds, Ng sees opportunities in diversifying away from China, particularly towards India, Indonesia and Japan, while noting that further interest rate cuts and favourable inflation trends in the region were a tailwind.
Meanwhile, in Europe, Marcus Poppe, co-head of European equities, is forecasting a bounce back next year, which should particularly favour small to mid-cap stocks. Poppe also notes that a change in private consumption could also act as a tailwind.
In terms of European fixed income, Thomas Hoefer, head of European corporate bonds for Europe, the Middle East and Africa, said that the asset class remains attractive.
He noted that credit spreads on corporate bonds were at historically low levels but still acceptable compared with government bonds. He favours high-quality euro-denominated corporate bonds.
In terms of high yield, Hoefer notes that spreads will likely widen leading to price losses, however the higher yields compensate for this risk.
