In a year of divergence, three shifts in 2025 should favour active managers

For investors, the same tune was stuck on repeat for the past two years. Robust US growth contrasted with subdued output in Europe and China, fixed income was challenged as select mega and large-cap equities dominated gains as the US dollar, gold and bitcoin also enjoyed momentum. But as 2025 begins, we believe the tempo is changing. With the macroeconomic environment improving in the context of stark disparities in valuations among asset classes, a new regime for market returns could benefit active managers. 

We see three potential shifts taking place:

1.	Improving macro conditions. Global growth is increasing and inflation easing, with the majority of developed economies expanding over the past year. With the majority of countries experiencing a slowdown over the past two years, 2025 could see a reversal of that trend. The sticky inflation witnessed across developed-market (DM) economies signals that a nominal recovery is underway
2.	Monetary policy easing. The ongoing trend of monetary policy easing, led by major central banks such as the European Central Bank (ECB), is set to play a pivotal role in shaping economic landscapes throughout 2025. This accommodative stance is expected to support recoveries in both DM and emerging markets (EMs), fostering an environment conducive to investment and consumer spending
3.	Balanced market returns. Despite subdued economic activity, investors have increasingly favoured growth stocks, resulting in a pronounced concentration of market performance within US mega-cap technology stocks. This trend has created a stark disparity in the relative valuations of different asset classes – particularly between equities and bonds, as well as across EM and DM stocks.

These shifts collectively suggest that markets could revert to more regular patterns than those seen in the past three years, setting the stage for a significant reshuffling of investment strategies. In our view, a long-anticipated mean reversion – where the importance of beta diminishes and strategic alpha positioning distinguishes successful investments – may take place, which investors should prepare for. Still, challenges lie ahead: 

• The need for fiscal consolidation among heavily indebted governments will clash with populist tendencies for tax cuts or increased spending
• The anticipated hike in US tariffs could disrupt world trade 
• High equity valuations and tight spreads could discourage investors from adding risk to their portfolios. 

These are the risks to our base case for 2025, and each would make precipitate a hard landing, yet our conviction remains in the case for a nominal recovery. In our report, we explain the analysis underpinning our views and provide a forecast of potential returns across equities, fixed income, convertible bonds and balanced portfolios for both scenarios.