- Capital markets in 2025 in a balancing act between positive fundamental data and political uncertainty
- The global economy continues to grow moderately and inflation is barely declining
- Monetary policy with moderate interest rate cuts
- Equities remain the favorite investment class
“The capital market year 2025 will be a balancing act for investors. Fundamentally, the prospects are good, but they are clouded by the political framework conditions,” says Dr. Frank Engels, CIO and board member responsible for portfolio management at Union Investment. “The global economy is growing moderately, inflation remains under control and central banks are loosening monetary policy.” These factors support opportunity-oriented investments. However, Engels also sees challenges for the capital market environment. “The uncertain geopolitical situation hovers over the stock market year like a sword of Damocles. “So caution remains appropriate,” he warns. Overall, the capital market strategist believes that the opportunities outweigh the risks.
Moderate growth in the global economy – despite Trump
With a view to the global economy, Engels expects moderate economic growth for 2025. “The USA remains the locomotive of the global economy – despite Trump,” he summarizes. The effects of the government support programs of recent years are evident here, as reindustrialization is in full swing and investment activity is increasing. However, the course of the US President-elect is likely to dampen growth somewhat. “Trump’s policy mix of restrictive immigration policy, tougher trade policy and higher debt has the effect of promoting inflation and rather dampening growth,” analyzes Engels. “The sequence of measures will be central, because not all plans are implemented at the same time or have a direct impact on the economy. The longer the presidency lasts, the greater the consequences for growth and inflation.” Engels hardly expects any effects on the US economy in the first half of the year. Overall, the economist, who has a doctorate, expects economic output to increase by 1.7 percent next year, followed by 1.4 percent in 2026. If Democrat Kamala Harris had won the election, according to Engels, the forecast would probably have been higher.
The policies of the new US government will not remain without consequences in Europe. This is particularly true for the German economy. “For Germany, trade and security policy will be under new circumstances in the coming years as a result of Trump’s re-election,” says Engels. “The export industry will have to prepare for new hurdles and difficulties.”
The productivity of the German economy continues to fall and growth dynamics will remain weak for the foreseeable future. -Dr. Frank Engels, board member of Union Investment
This development hits the country at a time when the current business model is already under pressure. “The productivity of the German economy continues to fall and growth dynamics will remain weak for the foreseeable future,” he warns. “Above all, there is a lack of investment. “Not just from companies, but also from the public,” he says, pointing to the huge investment backlog in public infrastructure. “Economic policy is important in the current phase, but it falls short. There is also an urgent need for a supply-oriented and therefore location-oriented policy in order to help compensate for the central competitive disadvantage of exorbitantly high energy costs.”
After all: Looking ahead to 2025, Engels expects the economy to stabilize. “Increased real wages should support growth in the long term. The economy also remains largely weak in the other core countries of the euro area, while things are doing better in the periphery. “So in 2025 we will be dealing with a two-speed Europe,” he predicts. Specifically, Engels therefore expects growth of 0.2 percent in Germany (2026: 0.2 percent), while 0.7 percent (2026: 0.7 percent) should be achievable in the Eurozone.
Phase of declining inflation is coming to an end
Engels does not expect any further easing of inflation, but also no further tightening. “Inflation will hardly fall, but it won’t rise again either,” he says. In the USA he expects inflation to reach 2.6 percent in 2025 and thus remain above the US Federal Reserve’s target. “Higher import tariffs and a more restrictive immigration policy by the new US government are likely to gradually drive up inflation from the second half of the year onwards.” In the euro area, however, given the weak economy, Engels sees inflation falling to 2.1 percent and thus close to the two percent threshold.
Monetary policy with moderate interest rate cuts
This gives the most important central banks further scope to reduce key interest rates. “At the current level, monetary policy is still restrictive,” Engels points out. “With inflation calming down, the central banks can take a slightly more relaxed course in 2025.” He expects the US Federal Reserve (Fed) to further cut key interest rates by a total of 75 basis points by the middle of the year. “After that, the Fed will proceed on sight,” believes Engels. In his opinion, what will be important is which effects of Trump’s economic policy will take effect first. “Some of the planned measures inhibit growth (e.g. migration policy) and inhibit inflation (e.g. energy policy projects), while others promote inflation (such as tariffs). Depending on the timing and pace of the individual measures, inflation or growth will determine the Fed’s agenda – and thus its course.” In the euro area, however, weak growth clearly dominates the approach of the European Central Bank (ECB). “We expect the ECB to cut key interest rates five times in 2025,” predicts Engels.
Corporate bonds before government securities
The shifts in the (economic) political framework also change the perspectives for individual asset classes. For government bonds, for example, the rising national debt in the USA is likely to have a long-term effect on returns, especially with longer maturities. “This effect will set in gradually and may only be slightly noticeable in 2025 – but it is coming,” Engels is convinced. The end of the decline in inflation is also likely to have an impact in this direction. At the same time, the slowing growth momentum is supporting the bond market. “We expect yields to rise slightly at the long end of the yield curve, while declines are likely at the short end. Overall, the yield curve will become somewhat steeper, both in the USA and in Europe,” explains the capital market expert. “Cash keeping becomes less attractive.”
For the much-watched ten-year government bonds, Engels expects yields to rise slightly to 4.5 percent for US bonds and 2.5 percent for their German counterparts. “Overall, interest rates are rising moderately, especially for longer terms, and safe government bonds in isolation will not be able to meet the return targets of many investors.” He therefore recommends looking at bonds with a yield premium. “Corporate bonds from solid borrowers in particular remain attractive.”
Equities continue to be the preferred asset class
The capital market strategist sees greater opportunities in stocks. “The global economy is growing moderately, key interest rates are gradually falling and corporate profits are likely to continue to rise moderately. This mix is good for stocks,” says Engels. He expects a double-digit increase in profits at the index level, which forms a solid foundation for further price increases. “Compared to previous years, we expect profit increases to broaden across more sectors and companies. The stock market is therefore no longer just supported by the “Magnificent Seven”, but increasingly by the entire corporate landscape.” In combination with slightly falling valuations, Engels believes that a mid-single-digit price increase for global stocks is realistic. “Individual stock selection is becoming even more important than before as a central success factor on the equity side under a renewed Trump legislature.”
Commodities as an important diversifier in an uncertain world
According to Engels, the importance of raw materials is likely to increase next year. “From a portfolio perspective, two structural advantages speak for adding raw materials: the diversification effect and, in the medium term, the green transformation.” Given the uncertain world situation, precious metals in particular – and gold in particular – should be able to develop a stabilizing effect in a diversified portfolio. “Gold is expensive from a valuation perspective, but it is good risk insurance and also benefits from higher fiscal deficits.” He is also optimistic about industrial metals, as the need to decarbonize the economy and the cyclical stabilization of the Chinese economy support demand in the future. “In the long term, industrial metals will remain our favorite in the raw materials sector,” says Engels. He is less confident about energy. In particular, he sees the price of oil under pressure due to weak fundamental data, with geopolitical tightening likely to repeatedly lead to price spikes. “We see the price per barrel of Brent oil in a range between $70 and $85 in 2025. This speaks more to tactical investing than strategic positioning.”
Balancing act with positive prospects
Overall, Engels assesses the prospects on the capital markets as promising. “After a brilliant capital market year in 2024, there is a good chance that 2025 will also promise solid returns. But the growth on the stock markets will probably be lower than in 2024, and the susceptibility to fluctuations is likely to increase.” He cites the overall geopolitical situation as the reason for this. “The situation in the Middle East and Eastern Europe, the new US government and the political uncertainty in core Europe have the potential to repeatedly cause temporary turmoil in the markets.” He therefore recommends that investors take a cautious, vigilant approach. However, this is offset by supporting factors such as global economic growth and falling key interest rates. “Investing in 2025 will be more like a balancing act between risk minimization and return orientation. “But this balancing act should be worth it because the chances outweigh the odds,” he is convinced.
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Given Engels’ recommendation for individual stock selection under a renewed Trump legislature, what industries or sectors would be particularly attractive for investors, and why?
Here are some open-ended questions based on the article, organized thematically:
**Economic Outlook & Policy**
* The article mentions a “two-speed Europe” by 2025. What factors are contributing to this divide, and what are the potential long-term consequences for the Eurozone as a whole?
* Engels highlights the importance of “supply-oriented and location-oriented policy” to address high energy costs. What specific measures could governments implement to achieve this, and what are the potential challenges they might face?
* How likely do you think it is that the predictions regarding inflation and interest rates will be accurate, considering the numerous political and economic uncertainties?
**Investment Strategy**
* Engels suggests that equities remain the preferred asset class. Do you agree with this assessment, and what other asset classes would you consider for a diversified portfolio in 2025, given the potential for market volatility?
* The article recommends “individual stock selection”. What factors should investors prioritize when choosing stocks under the “renewed Trump legislature”?
* This article advocates for a cautious approach to investing in 2025. What signs would indicate to you that it might be time to shift from a cautious to a more aggressive investment strategy?
**Global Uncertainties**
* The geopolitical situation is highlighted as a significant risk factor for the markets. In your opinion, which geopolitical events have the highest potential to impact global markets in the coming year, and how can investors prepare for them?
* Engels suggests that “the situation in the Middle East and Eastern Europe” is a potential source of market turmoil. Do you agree with this assessment? What specific developments in these regions are you watching closely?
* The article mentions the role of precious metals as a “stabilizing effect” due to increasing fiscal deficits. What other assets or strategies might provide portfolio stability during periods of economic uncertainty?
These are just some starting points, and the specific questions you ask will depend on your own interests and the participants involved in the discussion. The key is to encourage a thoughtful and nuanced exploration of the issues raised in the article.
