What’s on the horizon across asset classes in 2025?

Although macroeconomic imbalances have largely abated and markets can expect central banks to ease monetary policies, investors will be in for a bumpy ride in the year ahead. Navigating the complexities of a second Trump administration, ongoing geopolitical risks, and unwinding global trade relationships, alongside broader structural themes like the artificial intelligence (AI) boom and the energy transition are all set to impact the investor agenda for 2025.

And although the political commitment to the climate crisis will take a back seat to inflation and energy prices, investors remain focused on constructively engaging with portfolio companies on a broad range of ESG factors.

So, as we enter the New Year, what are First Sentier Investors’ asset class experts anticipating(1) for the year ahead?

All eyes on the US

Markets will be closely watching the US and any moves by the Federal Reserve, which will be a defining factor in the forward trajectory for inflation and interest rates.

“We can be certain of increased volatility from the US election outcome, coupled with disrupted global trade flows and the real risk of a return to higher inflation,” commented Dr David Walsh, Head of Investments, at RQI Investors.

Nigel Foo, Head of Asia Fixed Income, continued, “The market remains bifurcated on whether the Fed’s rate cuts are enough to have provided a soft landing for the US economy. Our view is that any rate cuts delivered will come with a time lag and the economy will continue reeling from the effects of the rate hikes delivered over the last few years.

“With the weakness anticipated in the global economy, a risk-off scenario could occur very quickly at current valuations which will see market pricing of rate cuts reverting to historical magnitudes of 300-400bps, which could lead to a large rally in rates.

“Volatility could play out more visibly from the US election and other geopolitical events, both of which would warrant a dynamic approach to managing our duration and currency exposures. We emphasise the need to be nimble in managing strategy positions as we enter a period of slower growth and late stage of the credit cycle,” said Mr Foo.

Where to look in volatile equity markets

Dr Walsh said an economic slowdown is likely, especially if policy uncertainty and political instability takes hold, “It is unlikely there will be a strong broad-based return to a growth cycle, given the market and political risks faced.

“In this event, there should be the usual rotation to more defensive quality stocks, away from risk and from lower quality growth. Value as a style plays out well in this environment, especially the better-quality end of value that RQI favours.”

He went on to say that in Australia, the equity market volatility seen in the second half of 2024 was influenced by China’s stimulus package and the realisation that this package may be ineffective. Dr Walsh pointed to the potential efficacy of internal fiscal and monetary policies, highlighting they would be more successful in a planned economy, but the risk is still high and Australia’s own fortunes are closely tied to this.

Dushko Bajic, Head of Australian Equities Growth, expects the economy will grow at modest levels in the year ahead, “Next year, credit growth is forecast to be 5% and the local economy is forecast to grow by circa 2% in real terms and 5% nominally. Our expectations are that interest rates will be steady or moderately lower.

“Keeping a cap on this growth are terms of trade and cost-of-living pressure headwinds, but we can expect this to be offset by a strong labour market, net migration and a positive wealth effect,” he said.

Mr Bajic went on to highlight that it remains a stock pickers market, “Active fund managers will continue scrutinising company fundamentals to determine stock winners rather than those particularly sensitive to interest rates, as they did throughout 2024.

“We see opportunities in companies that are at the centre of solving productivity problems faced by individual businesses and the wider economy. We remain focused on identifying companies that can ‘run their own race’ and don’t need an uplift in activity from lower interest rates or pricing derived from general inflation to deliver strong top-line and earnings growth at attractive returns on invested capital.”

Resilience in Asian economies

Mr Foo said that resilience continued to characterise Asian economies.

“We expect that a moderating inflationary backdrop and healthy fundamentals will remain favourable tailwinds for Asian economies and currencies.

“Despite elevated and enduring geopolitical risks, Asian economies have been resilient. The technology upcycle growth outlook has favoured some economies, but we are also seeing that export-oriented economies are showing signs of weakness resulting from China’s slowdown and the lacklustre demand from other regions, which we expect to continue.

“We remain constructive on the region’s longer-term growth prospects as Asian economies continue to move up the value chain in the global economy. Our portfolios are poised to weather bearish outcomes in our investment region and globally. We have ensured sufficient diversification in our portfolios and have coupled this with a bias for higher quality names, with a preference for issuers with the liquidity and resilience to withstand a hard global landing, should such a scenario emerge,” concluded Mr Foo.

Surging AI growth

AI has continued to dazzle stock markets with the Magnificent Seven stocks, comprising Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA) and Tesla (NASDAQ: TSLA), dominating headlines throughout the year. But the opportunity set is much wider.

Dr Walsh points to the ongoing surge in AI’s growth, “The unprecedented growth, particularly with generative AI like ChatGPT and Claude, and tools like Microsoft Copilot presents such a breadth of opportunities that it is hard to assess. But most mooted and long-awaited economic productivity improvements have been associated with the speeding up of current workflows rather than generating new ones.

“There is a real danger that the extreme expectations of AI will not arise in practice or will be much more muted. The potential positives – mostly around improved productivity in current and new tasks – need to be material and significant.

“At RQI Investors, we see the opportunities to use AI abound, but as always, it is the economic insights that drives our ongoing research and development, levered by advanced tools like AI – not AI that is the key,” said Dr Walsh.

Energy needs powered by digital transformation, a boon for real assets

The explosion in AI and digital transformations is also driving demand across real assets.

Stephen Hayes, Head of Property Securities said, “The data centre sector continues to be at the forefront of one of the largest mega trends in decades, benefitting from robust demand and increased pricing power driven by digital transformation and accelerating AI requirements. The shortage and difficulty in accessing power for new data centres has heightened barriers to entry which is expected to support rental growth.

“Data centres play an integral role in supporting the growth of the digital economy and they currently boast low economic sensitivity due to the current imbalances in supply and demand. For this reason, we believe this property sub-sector is well-positioned over the medium to long term.”

Danny Latham, Partner and Head of Igneo Infrastructure Partners (Igneo) Australia and New Zealand flagged a greater shift from traditional utility and transportation assets to ‘Infrastructure 2.0’ assets that would support macro thematic tailwinds around the energy transition and the digital economy.

“With these tailwinds presenting the biggest opportunities, our firm belief is that accessing value will come from building infrastructure assets from the bottom up. Large cap transactions in the data centre and renewables space are trading at high multiples which assumes businesses can deliver forward growth as if it were here today.

“We executed our ‘buy to build’ strategy with the 2023 acquisition of US Signal. Since then, we have reinvigorated its’ management team and injected capital into the business to facilitate value accretive growth including the addition of six data centres to US Signal’s existing 10 to expand its footprint in North America.

“We are also seeing attractive opportunities globally supported by the energy transition. Atmos Renewables benefits from that thematic and is another great example of building businesses, to the point that it has grown to be the fifth largest renewables provider in Australia,” said Mr Latham.

Regulated US utilities are also enjoying strong momentum with Peter Meany, Head of Global Listed Infrastructure, saying that robust sales, capital expenditure and earnings growth are being driven by a keen appetite for electricity, stemming from economic growth and the needs from data centres and the AI trend.

“Utilities in the US and elsewhere have begun to pursue an ‘all-of-the-above’ approach to power generation, with the renewables build-out continuing alongside the construction of additional natural gas power plants, extensions to coal and nuclear power plan service lives, and nuclear power plant re-starts.

“We see no signs in demand easing and expect it to continue through 2025 and well beyond. We believe that US utilities’ long-term annual earnings growth rate will increase materially, from a range of between 4% and 6% to a range of between 5% and 8% as a result. While European peers have not yet shown the ability to benefit from this theme to the same extent, we ultimately expect this theme to provide a tailwind to the earnings of operators on both sides of the Atlantic,” Mr Meany commented.

Easing toll road uncertainties

For global listed infrastructure, inflation-linked toll roads performed well in 2022-23 as traffic recovered from depressed levels. In 2024 however, cost-of-living pressures came into focus and rising tolls raised market concerns around potential political intervention.

Mr Meany cited the potential political risk facing the Sydney road network of Australian toll road operator, Transurban, as well as its French peer, Vinci, which has lagged on concerns for the rising popularity of populist political parties and on reports that the government was considering raising corporate taxes.

“The toll road sector has accordingly traded down to very appealing valuation multiples. But experience tells us that while political noise can periodically impact the toll road sector – and its share prices – the sector tends to shrug these off and maintain a steady upward trajectory over longer time frames.

“We believe the sector will continue its strong track record of protecting the economic value of their road network concessions and the tolling frameworks that apply,” he said.

Looking ahead, Mr Meany believes much of the political risk now appears to be reflected in share prices, with the scope for these concerns set to ease.

“We expect this will present an opportunity for investors in the year ahead. While valuation multiples have declined, the sector’s fundamentals have remained robust. Inflation-linked toll increases have little impact on demand. High operating leverage is proving supportive of earnings growth. Improvements made to toll road networks in recent years provide scope for further growth in traffic volumes.”

Senior housing tailwinds bolstering the property sector

Mr Hayes said that shifts in monetary policy commencing in late 2023 and into 2024 bolstered real estate markets and generated considerable returns across the listed property sector. Looking into 2025, he continues to be positive on key sectors of necessity, such as the senior housing sector.

“The senior housing sector continues to display strong property fundamentals – the net operating income growth continues to be sector-leading with both strong occupancy and rental rate growth. The strength of the ageing population tailwind is evident in the senior housing resident profile in the US, which is predominantly aged 80 years and up, and growing at a rate four times that of the average population growth. This growth is further supported by a low supply pipeline, indicating that the demand for senior housing will continue to strengthen in coming years.”

An integrative approach to ESG

“We need to shift our thinking from taking a narrow focus on ESG(2) factors to a more integrative approach. ESG by its very nature is interconnected, so addressing one element in isolation could undermine progress in another. In this context, investors will increasingly need to consider all the material sustainability-related risks and opportunities of their investments,” said Kate Turner, Global Head of Responsible Investment.

“For example, there was uptick in corporates starting to report in line with the Taskforce for Nature-related Financial Disclosure recommendations which the November Biodiversity COP16 highlighted. However, many are failing to make the connection to the unintended and heightened risks to human rights, particularly among First Nations peoples and local communities,” Ms Turner went on.

This disconnect was underscored by a recent First Sentier MUFG Sustainable Investment Institute’s paper on the ‘State of Nature-Related Disclosures’ which found that while the majority (60%) of the firms assessed were disclosing current and financial effects of nature-related issues, most firms did not demonstrate evidence for fully integrating engagement with Indigenous Peoples and local communities into the assessment and management of nature-related issues.

Ms Turner concluded, “The nexus between nature and human rights is just one example of the multiple interconnecting and intersecting risks and opportunities that investors need to consider when thinking about ESG factors. By expanding their focus, investors will be able to more meaningfully engage with investee companies, and ultimately make more well-informed investment decisions.”

Which ESG issues are our teams prioritising?

First Sentier Investors and its affiliate brands have long recognised the urgent need for responsible investing and actively work with portfolio companies and the broader industry to drive positive change.

Kristen Le Mesurier, Head of ESG in the Australian Equities Growth team said, “Climate change is likely to remain the most dominant ESG issue for investors in 2024, but the focus will be on company emissions and their exposure to the transition rather than targets and target setting. Listed companies are preparing for new mandated climate disclosures which come in to force on 1 January 2025, so we expect investors will have access to more detailed and comprehensive climate reporting from many companies listed in Australia in 2025, not just large companies or heavy emitters.”

She went on to echo Ms Turner’s comments regarding investors prioritising company relationships with traditional owners and corporate culture.

“Large Australian miners have been re-negotiating land use agreements with traditional owner groups since the destruction of Juukan Gorge in 2020 however, most of the focus to date has been on the protection of physical cultural heritage including artefacts, sacred sites and cave drawings. For First Nations people, intangible cultural heritage and the management of water are also critical. We expect to see a greater focus on companies’ relationships with traditional owners in this context in 2025.”

“We are generally seeing more interest in the ‘S’ in ESG because of an understanding that the poor treatment of workers, customers or other stakeholders can lead to significant underperformance, usually because of regulatory intervention or reputational damage. The new laws on psychosocial safety and the broad disclosure of gender pay gaps across corporate Australia has helped drive the resurgence of corporate culture in the minds of investors,” concluded Ms Le Mesurier.

Stewart Investors has focused on the extraction and trade of conflict minerals that are sourced from regions experiencing armed conflict and human rights abuses since 2021. Conflict minerals refer to minerals such as tin, tantalum, tungsten and gold that are commonly used in industries, including electronics, automative, aerospace and jewellery.

It launched a collaborative engagement using the UN Principle for Responsible Investment platform to try to improve disclosure and raise standards of traceability through the supply chain in 2021, attracting 160 signatories representing US$6.5 trillion of assets under management by the end of that year. In 2022, it went on to develop a relationship with the Responsible Minerals Initiative (RMI), the largest industry association in the minerals and electronic sector which provides companies with tools and resources to help members make responsible sourcing decisions.

This year, Stewart Investors became the first investment management firm to become a member of the Initiative for Responsible Mining Assurance (IRMA), an organisation addressing the global demand for more socially and environmentally responsible mining.

“Responsible mineral sourcing is a strategic imperative for companies and investors across sectors. We see membership and collaboration with initiatives like IRMA as a way to bring stakeholders together and leverage collective action to drive progress,” said Chris McGoldrick, Senior Investment Analyst, Stewart Investors.

“Over the next year, we have three key areas of focus, we intend to encourage more signatories to our collaborative engagement, encourage more investor members to join the RMI and IRMA, and continue to engage with semiconductor companies, particularly in Asia and Japan, to lift their disclosure and approach to conflict mineral traceability through the supply chain,” Mr McGoldrick explained.

Mr Latham pointed to Igneo’s five minimum standards with respect to responsible investment that it aims to implement in all its portfolio companies, including: health and safety, environment, diversity, governance and employee engagement, as ongoing focus areas.

He said more broadly, “There’s been a rethink in terms of what Net Zero means and we’re seeing investors take an increasingly pragmatic approach to energy security and reliability.

“We’re also witnessing the convergence of themes and the role of infrastructure to support structural trends. For example, as the most energy and water intensive infrastructure assets, data centres are increasingly looking for renewable energy and sources of water.

“We expect that water will be a long-term thematic that investors will need to consider the risks and opportunities for. Climate variability will continue to cause volatile conditions, emphasising the necessity for reliability and resilience,” Mr Latham said.

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