Four risks that investors should watch in 2025

Global equities have just delivered a second year of stellar gains, but a range of investment risks may bring more volatile share markets in 2025. However, there are sound reasons why exciting opportunities are still available to active investors with sound processes to unearth them.

“Look at market fluctuations as your friend rather than your enemy: profit from folly rather than participate in it.”
Warren Buffett, Chairman and CEO, Berkshire Hathaway

1) Tariffs. The incoming Trump administration is prioritising higher tariffs on US imports. This brings the risk of higher living costs in the US, a stronger US dollar, and even the possibility of a global trade war. This could result in a slowdown in global economic growth that would be negative for equity markets. In particular, higher tariffs would compress margins of importers into the US if they were forced to absorb tariffs to maintain their post-tax retail prices.
However, we believe these threats should be viewed as part of a US negotiating strategy, leading to numerous country and sector exemptions – after all, President Trump likes to do a deal! Moreover, if other countries retaliate, they are expected to do so in ways that limit the risk of a full-scale global trade war.
Investors should remember that companies without close substitutes, which are able to onshore production to the US or provide services, should suffer less impact from tariffs.

2) Growing fiscal deficits threaten higher bond yields. Government borrowing continues to rise inexorably across developed economies. Ageing populations, rising defence needs, and stagnating living standards are pushing up government spending faster than taxation. Rising fiscal debt in countries such as the US, UK, France, and Italy could lead to government bond markets demanding yet higher yields. This would drive up corporate borrowing costs and equity discount rates, pushing down share prices.
However, fear of a ‘Liz Truss moment’ now looms large over global policymakers and should restrain their spending and tax-cutting instincts. Moreover, a resumption of labour productivity growth will boost tax revenues, easing deficits without unpopular tax rate hikes. Furthermore, strong household balance sheets will mitigate the impact of any fiscal tightening.
Investors may find that profitable companies with moderate borrowings, financed over longer durations, may outperform under such a scenario.

3) Higher inflation brings higher interest rates. The US is facing a perfect storm of higher tariffs, expanding fiscal deficits, curbs on immigration, and threats to the Federal Reserve’s independence. Although economic interactions are complicated, these factors all threaten to drive up inflation, which risks higher interest rates, that would slow economic activity and corporate earnings growth. However, the inflationary impact of tariffs should be a one-off event providing a trade war is avoided. Furthermore, this risk is now more fully reflected in bond yields and share prices, so higher cyclical lows in global interest rates should now come as less of a surprise to equity markets.
Investing in quality companies with the pricing power that comes from a unique competitive advantage, positive free cash flow growth, and a strong balance sheet can help investors navigate ‘higher for longer’ interest rates.

4) China’s structural problems could lead to a deflationary spiral. Falling producer prices and stagnant consumer inflation reflect the supply/demand imbalance in China. Falling property prices – where most Chinese wealth is invested – and rising youth unemployment are often associated with high savings and low consumption rates as fears of deflation deter consumption by households (or investment by companies).
Government measures to stimulate manufacturing have driven exports and a massive trade surplus, at the cost of strained trade relations with Western governments. Any fall in exports could feed into unemployment, reducing consumption further and accelerating deflation.
However, China’s government is expected to mitigate this risk by launching further stimulus measures over the first half of 2025.
Investors may benefit from limiting their exposure to China, especially to companies that depend on either exported goods or discretionary spending in China. However, sectors aligned with the Chinese government’s priorities – such as technology, advanced manufacturing, and healthcare – may still perform strongly.

Where does this leave investors?

An extended period of strong equity market performance brings a set of rising global macro risks into sharper focus. Investors should recognise the potential dangers of higher tariffs, a spike in bond yields, higher interest rates, or deflation in China, which may well bring increased market volatility.

However, there are good reasons to expect that policymakers will choose (or be forced by markets) to act in ways that reduce the likelihood and impact of these risks.

The Pengana Axiom International Fund focusses on stocks that demonstrate solid pricing power, positive cash flow, strong balance sheets, and that manage their China exposure prudently, which positions it well for 2025.