Principal Asset Management reckons that investors should consider diversifying away from the US, the US‐headquartered investment manager said in its 2025 outlook.
US equities have remained a popular pick for this year due to last year’s outperformance of the Magnificent Seven, prospects of further tax cuts and deregulation from the incoming Trump administration and robust growth rates.
However, Principal Asset Management sees value elsewhere, noting that valuations in Japan, while expensive, are not as stretched as they are in the US. It also emphasises the impact of corporate governance reforms there.
In addition, it notes that UK valuations are cheap and while it faces structural issues, pessimism is “extreme”. In India, valuations are also stretched, although growth rates remain robust.
By contrast, it notes that Europe, Mexico and China are likely to be impacted by US trade policy and their cheap valuations will not be enough to offset negative fundamentals.
Within the US, the asset manager also likes small caps, which is more of a consensus pick as rate cuts and an uptick in M&A activity are expected to help them disproportionately compared with large cap stocks.
Within fixed income, it notes that since the US Federal Reserve began cutting in September, yields have jumped 80 basis points, which is unusual and possibly driven by reduced rate cut expectations as well as the likely impact of tariffs and a shift in immigration policy under a second Trump administration.
The asset manager said that as it expects the Fed cutting cycle to be short and shallow longer end bond yields are likely to remain range bound and are unlikely to fall below 4% this year.
With regards to credit, it notes that although spreads remain tight, the total yield generated from fixed income remains attractive relative to history and credit continues to offer additional carry Treasuries.
