Annual outlook 2025: Active multi-asset management through diverging markets

Structurally higher inflation rates, a fundamentally changed geopolitical situation and rising levels of debt worldwide: investors will have to find answers to new challenges in the coming year. This is emphasized by the experts from the multi-asset investment company FERI in their annual outlook for 2025. Against the backdrop of these developments, increased uncertainty and potentially shorter cycles are to be expected in the coming year, both in the real economy and on the capital markets. 

The FERI experts consider a significant risk to be a renewed rise in inflation, to which the Fed would have to respond by resuming its monetary tightening cycle. The consequences would be a significant increase in the probability of recession and presumably also a deeper economic downturn. Positive impetus could come from productivity gains as a result of digitalization processes and the increasing use of artificial intelligence applications.

“In this environment, investors are well advised to implement a targeted combination of different investment segments, instruments and return drivers with a broad-based multi-asset strategy, which is supplemented by flexible allocation management. This offers the possibility of optimization in terms of return and risk expectations,” summarizes Dr. Marcel V. Lähn, Board Member and Chief Investment Officer of FERI. He adds: “Stability and resilience of the portfolio can be achieved through an expanded investment spectrum including commodities and precious metals as well as hedge funds and volatility strategies. In addition, digital assets and private markets investments should also be included in the portfolio to maintain positive return opportunities.” 

Will the US Federal Reserve succeed in its balancing act?

Looking ahead to 2025, FERI sees the biggest challenge for investors in adequately reflecting the divergent economic development in the individual countries and regions in a multi-asset portfolio, reacting to possible scenario changes and taking geopolitical developments into account. In the USA, it remains to be seen whether the Federal Reserve will succeed for the first time in its history in striking a balance between ensuring price stability on the one hand and securing a high level of employment on the other in the course of the monetary easing that has been introduced. “Historical experience does not suggest that a US economy with sustained solid growth, low inflation and falling interest rates is the most likely scenario,” says Axel Angermann, Chief Economist of the FERI Group.
 

In Europe, growth momentum has remained consistently weak since the coronavirus pandemic. According to FERI, a fall in inflation to 2% and continued interest rate cuts by the European Central Bank create the fundamental conditions for a new upturn, which could begin in 2025. “We see the greatest risk in the negative consequences of a protectionist trade policy by the US government, which would hit Europe's export-oriented economies hard,” says Angermann. In addition, the serious structural challenges must be tackled. “If this does not succeed, Europe risks being further left behind in global competition.”

Greater heterogeneity on the equity market, positive returns on bonds

The FERI experts expect significantly greater heterogeneity on the equity market in the coming year. “More than in the past, it will be important to determine the right country and sector allocation in specific situations,” says Lähn. Much will depend on whether the US economy slips into recession over the course of the year. In this case, defensive segments would benefit compared to the overall market. Professional investors could then start to build up weakened cyclical equities and interest-sensitive growth stocks, which are likely to benefit from the prospect of a new economic upturn. In general, the markets could be characterized by higher fluctuations, which is why the environment for hedge funds and volatility strategies will remain above average.

The bond segment has generally become more attractive in the wake of significantly higher real and nominal interest rates. “Government bonds with high credit ratings can generate positive returns again,” says Lähn. “However, the times of extremely low or even negative market interest rates due to structural inflation risks and ever-increasing government debt are definitely over.” This argues against a new multi-year bull market in bonds with high credit ratings.

In principle, the FERI experts believe that as part of an active multi-asset strategy, it also makes sense to hold part of the investment assets as a cash position, at least temporarily, in times of increased uncertainty or volatility in order to be able to react flexibly to changing circumstances and quickly take advantage of any opportunities that arise.