In the run-up to Christmas and the New Year, many investors will be deciding on the best stocks, commodities and funds to invest in for 2025, to help navigate the complex but potentially rewarding global market environment.
While inflation and global instability remain areas of concern, investors who think carefully about where to invest for the year ahead can potentially benefit from potential upsides, including the expected impact of Donald Trump’s re-election on the stock market.
The UK stock market has struggled over recent years, but some experts believe that this now makes FTSE 250 stocks an attractive source of value. With UK interest rates hopefully now entering a cutting cycle, this could be one key source of diversification away from US megacaps.
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Bonds and commodities (especially gold), though, remain important components of a balanced portfolio.
The macro environment - risk and reward
“From an economic perspective, the environment is still quite benign,” Johanna Kyrklund, group chief investment officer at Schroders, told a 2025 crystal ball webinar this month (November). “With inflation rolling over, we’ve seen a number of central banks start to cut rates, which is very helpful.”
Schroders expects the US economy to return to expansion in 2025. “We’re not expecting a hard landing,” says Kyrklund. This is based largely on labour market resilience, as well as positive indications from savings data, and expectations that fiscal spending is unlikely to cut back significantly.
“This combination of rates coming down and growth holding up – what we often refer to as a ‘soft landing’ – is very benign for markets.”
However, there are risk factors that need to be considered.
Trump’s tariffs, which he recently announced would be newly levied on imports from Canada and Mexico from the outset of his presidency, could fan global inflation. While Schroders’ baseline model paints a positive picture for markets, elevated global tariffs could, they believe, negatively impact global trade and weigh on US consumer spending.
“Generally, an environment where global trade is contracting is one where the pie is shrinking,” says Kyrklund.
Furthermore, there is potential for the bond vigilantes to reject further fiscal spending in the US.
“Investors face a complex landscape” heading into 2025, Tom Stevenson, investment director at Fidelity International, tells MoneyWeek. US policy shifts, moderating inflation, and regional divergence all look set to influence the markets.
The global picture is in many respects harder to predict. “Outside the US, economies have struggled with stagnation and weak productivity,” Shaan Raithatha, senior economist at Vanguard, tells MoneyWeek. “Europe faces risks from global trade slowdowns, while China needs more aggressive policies to overcome structural issues.”
All the experts we’ve spoken to agree on one thing: the importance of diversification. In essence, while there are reasons to be optimistic about 2025, this optimism is laced with uncertainty for a variety of reasons, and the only way to hedge against this uncertainty is through a diversified portfolio.
“Diversifying investments that improve your portfolio resilience is very important,” says Kyrklund.
US equities - is the S&P 500 overvalued?
“While it is easy to create a narrative in favour of US equities, there are several scenarios which could quickly turn markets in a different direction,” Dan Coatsworth, investment analyst at AJ Bell, tells MoneyWeek.
So far they have responded positively to news of Donald Trump’s re-election, based on the assumption that he will throw his weight behind the stock market and adopt a pro-business, low-tax and low-regulation approach.
However, a more pessimistic read on his upcoming second term complicates the picture. “Bears say many of his policies threaten to push up inflation and cause heightened geopolitical tensions, such as through a trade war,” says Coatsworth.
“We’ve had a very strong year for markets,” said Kyrklund. “The question is, can equity prices, in particular, continue to rise in 2025?”
Kyrklund believes that equities will continue to be “the main source of returns” in 2025, but says that the current stretched valuation of the S&P 500, in particular, poses a challenge.
“We need to be a little bit careful there – a lot of good news has been priced in,” she says. Similarly, Raithatha suggests “a cautious approach towards US equities due to elevated valuations”.
There could be potential in smaller US stocks. “Deregulation, tariffs and tax cuts should favour smaller, domestically-focused US companies,” says Stevenson. “These stocks have underperformed the tech giants over the past two years and valuations are less stretched as a result.”
Global equities – are UK stocks undervalued?
Equity markets could, though, finally rotate away from the US megacaps that have dominated for the last two years. “I’d argue that if you move away from the megacaps in the US and look internationally, the valuations do look more attractive,” says Kyrklund.
Raithatha views UK equities, non-US developed markets, and emerging market equities as the best potential sources of returns. Emerging markets could, however, be dented by the headwinds facing China, including rising trade tensions and an insufficient fiscal stimulus.
The UK stock market is “cheap, offers attractive dividends, and contains lots of companies that might be in demand if the US market disappoints,” says Coatsworth.
There could also be a tailwind for UK infrastructure stocks, driven by renewed emphasis on public investment. This, says Stevenson, could offer “steady, inflation-linked returns”.
Besides the UK, investors may want to consider Japanese stocks. As of 19 November, the Nikkei 225’s earnings yield stood at 4.9%, compared to the S&P 500’s 4.1%, according to Bloomberg data compiled by CME Group. Other valuation metrics such as price-to-sales and price-to-book valuations support the view that Japanese stocks are undervalued, especially compared to US counterparts.
While Japan looks interesting, “Europe looks more challenged, and recovery in China will be muted”, says Stevenson.
In general, Stevenson advocates avoiding US megacaps where possible due to stretched valuations. This could mean allocating to global income funds rather than tracker funds as a source of income, as the latter will be oversaturated with the tech megacaps.
Bonds - income or diversification benefits?
Giulio Renzi-Ricci, head of asset allocation at Vanguard Europe, believes that “bonds are still back” and that yields are likely to remain above 4% across the curve in the US during 2025. He believes that bonds can act as a ballast for any long-term portfolio to offset fluctuations in other investments (particularly shares).
These high yields make bonds a particularly attractive investment at present, as they can provide a ‘coupon wall’, protecting positive returns even in the event of a modest interest rate rise, says Raithatha.
Kyrklund recommends holding bonds in a portfolio – but for income, rather than for diversification.
“Yields are still very attractive in bonds. [They are a] great source of return [and] income for clients,” she says. She also believes that they are currently “tactically cheap”.
Raithatha expects UK bonds to return 4.3%-5.3%, and global ex-UK bonds 4.5%-5.5%, to sterling investors over the next decade.
Commodities - should you invest in gold?
Rather than bonds, Kyrklund recommends commodities as a more effective means of diversifying away from equities in the current environment.
“Compared to the last decade, when commodities really offered no diversification, in this decade we have typically seen benefits from owning commodities from a diversifying standpoint.”
Investing in gold appears to be one particularly savvy route to diversification via commodities.
Gold has had a stellar year, and some could be forgiven for thinking this now isn’t a good time to buy gold. However, Kyrklund believes that it offers a solid hedge against currently elevated levels of fiscal spending as well as offering superior diversification from equities compared to bonds.
“Gold can be another hedge against any negative news from the US and inflation remaining sticky,” says Coatsworth. “Just look back to the 1970s, when commodities, notably gold and oil, did better than everything else during a period of lofty inflation and geopolitical tension, most notably in the Middle East.”
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