The divergence dividend

This is for investment

professionals only and
should not be relied
upon by private investors
Foreword

For 55 years we’ve helped investors navigate changing

markets. In times of transition, this experience and depth
of analysis become more valuable than ever.
As we look ahead to 2025, we find ourselves at an inflection point in the global economy. The
world has moved on from the single-minded focus on fighting inflation that defined the post-Covid
years. Profound changes are under way across a range of countries, asset classes, and sectors.
The coming year will reward investors who can identify and capitalise on these changes.
Our network of investment researchers and analysts across the globe provides us with deep,
first-hand insights into companies and markets. This research capability, combined with our active
management approach, allows us to identify opportunities that arise when markets begin moving in
different directions and offers our clients a distinctive advantage.
We look forward to partnering with you in 2025 and beyond.

Keith Metters
President
Fidelity International
 Contents

Outlook 2025: All change 4

Macro 6

Equities 9

Fixed Income 13

Private Assets 16

Multi Asset 19

3 Investment Outlook Fidelity International

Outlook 2025

All change
The year ahead promises a different environment for financial investors, but it is clear earnings in
many areas will improve and the global mood is positive.

Niamh Brodie-Machura Andrew Wells

Co-Chief Investment Officer, Chief Investment Officer,
Equities Fixed Income, Multi Asset and Private Assets

There is an inevitable divergence, J William economy. We are mid to late cycle, and not end
Fulbright noted at the height of the Cold War, of cycle, creating a volatile environment that
between the world as it is, and the world as should generally be good for risk assets but
man perceives it. For a long time over the past puts a premium on getting investment choices
couple of decades, most of us at least agreed right. Valuations of a number of past winners are
on the direction of travel. That is no longer the elevated, but the mood in general is positive.
case. But the resulting divergence in policies, As companies and consumers find their way
economic performance, and geopolitics present through the new landscape, on equities we
a strong range of opportunities for market conclude that reflation will boost earnings, easing
participants in 2025. fears over higher corporate valuations. A pro-
Most prosaically, growth, inflation and interest rates business, pro-innovation administration should
across the world’s biggest economies are liable prove helpful and lower interest rates should
to head in very different directions in the months benefit capital-intensive industries and help
ahead and there is far more doubt about those cyclicals outperform. Optimism prevails in Japan
paths. As our macro team lay out in their outlook, and India.
authorities in the United States, China, and Europe Our multi-asset team run through some of their top
are liable to have very different concerns over the picks, recommending we look beyond the previous
course of the year. stars to patches of the market that have been more
A landmark US election result raises the odds neglected in the enthusiasm for AI and tech. They
of an outright reflation of the world’s biggest highlight US mid-caps, for thematic investors future

4 Investment Outlook Fidelity International

financials, for income investors non-US duration, What China does on stimulus - and with its stock of
CLOs, and short dated high-yielding credit, and for US Treasuries - looms large. A stabilising Chinese
drawdown-aware investors the value of absolute economy is welcome news for Europe, but it will
return strategies. not lend enough strength to the continent to fully
Fixed income investors meanwhile face tight recover in the next 12 months, while the dollar is a
spreads that are priced for benign economic crucial factor for emerging markets.
conditions. With public sector deficits projected The need for a diversified portfolio to spread
to expand, the prospect of tariffs and trade risk also makes the case for private assets.
disputes, and ongoing geopolitical tension, there Going into 2025, with many markets still on the
is a case that less optimistic scenarios are being cusp of recovery, prices are low and there are
underpriced. This represents a potential source of opportunities for investment that could deliver solid
value in credit markets. returns in the medium to long-term.
We worry in general about the lack of a clear path In short, investors will need a flexible approach.
to slow the growth of public debt over the course Detailed, deep research into the businesses
of the next four years. Stagflation may yet still be and markets they invest in will be at a premium.
a threat. Politics likewise hang over a profoundly Divergence, as Fulbright said, is inevitable - and this
complex picture for currency markets. Donald year it will pay to watch the differences.
Trump has said he would like a weaker dollar, but
the market reading of his policy platform is it will
do the opposite. We will see if that holds.

5 Investment Outlook Fidelity International

Macro

US poised to reflate
A material shift in politics makes reflation of the US economy our base case for 2025.

Salman Ahmed
Global Head of Macro and
Strategic Asset Allocation

A resounding victory for the Republicans in believe public finances are fast reaching their
November’s election has shifted the economic limits and that above-target inflation is likely to
outlook for 2025 meaningfully. The US soft- become the least costly option for an orderly
landing scenario that we confidently held as our resolution to the problem of debt sustainability.
base case for most of 2024 should give way to Beyond the changing policy mix in the
reflation as we move deeper into 2025, but an developed world, we also have to keep a close
economy whose exceptional growth propped eye on geopolitical developments both in the
up the rest of the world in recent years may also Russia-Ukraine war and in the conflict in the
now turn inward and become more protectionist. Middle East, which could create headwinds for
Growth-supportive policies propped up by the overall global macro environment.
more fiscal easing should push inflation
higher, reducing the risk of a US recession and US exceptionalism
recalibrating our assessment of the current Expansive fiscal policy and significantly higher
business cycle to mid-to-late stage. But other tariffs are likely to be the centrepieces of a second
major economies, and in particular Europe and Trump presidency. The economy is in good shape:
China, will have to navigate a shift in US trade a strong consumer, solid private sector balance
and industrial policy that is likely to weaken sheets, and a labour market that has softened
their own growth prospects and put downward but is historically strong have reduced the risk of
pressure on domestic inflation as external recession. Against that backdrop, the changes
demand slows. the new administration has set out meaningfully
Put together, these divergences will support increase the odds of outright rises in US inflation
US growth in 2025, but rising government debt from the second quarter.
burdens is the underlying, longer-term trend. We

6 Investment Outlook Fidelity International

Four scenarios
Four scenarios forfor
US US in 2025
in 2025

Scenario 1: 4%+
Reflation
50% 3 Reflation 1
3% Stagflation
Scenario 2:

Inflation rate
Soft landing
20%
Scenario 3:
2% 2
4
Stagflation
Recession Soft landing Goldilocks
20%
Scenario 4:
<0%
Cyclical recession
<- 2% 0% <2% 3% 4%+
10% Growth (GDP per annum)

Note: Inflation rate measured by US Core Personal Consumption Expenditures Price Index.
Note: Inflation
Source: rate
Fidelity measured by November
International, US Core Personal
2024. Consumption Expenditures Price Index.
Source: Fidelity International, November 2024.

We assume that the much-discussed tariff rates form of an easing cycle as we enter 2025, at least
(60 per cent for China and 20 per cent for the until the impact of tariffs, any significant changes
rest of the world) are maximalist rates aimed in immigration, or the fiscal policy expansion
at negotiations that may take place if the new becomes clearer.
administration presses ahead with its protectionist
goals. The rates that emerge may well be Europe’s structural challenge
lower, but their impact on an economy that has The Eurozone economy has been almost stagnant
consistently outperformed expectations over the since 2023 and it faces a range of cyclical and
next year would be substantial. structural challenges. For 2025, we expect a
On the fiscal policy front, we think that the cyclical upswing as falling inflation and lower
extension of Donald Trump’s Tax Cuts and Jobs interest rates help resurrect corporate capex and
Act (TCJA), along with additional tax cuts, may consumer confidence. Stronger real disposable
expand the deficit to an extraordinary 8 per cent income and easier financing conditions should
of GDP. That should drive nominal GDP growth start releasing elevated excess savings to spur
significantly above trend and aid the headline consumption growth.
numbers next year, but its longer-term sustainability However, potential tariffs from the US are a
is more questionable. Especially if tariff policy is downside risk, particularly for the auto sector,
more aggressive and front-loaded than we are and the resulting trade uncertainty could reduce
assuming, the risk of stagflation in the quarters that growth by up to half a percentage point. Germany
follow grows. Reduced net migration could add in particular would be hit while facing additional
to these risks by dampening growth and exerting uncertainty from snap elections that may come as
upward pressure on wages and services inflation. early as the first quarter.
That said, recession only returns as a serious risk if, We expect the European Central Bank (ECB) to cut
in the face of an inflation shock, the Fed pivots to a rates quickly to 2 per cent, followed by gradual
hiking cycle. The likely terminal rate for the central easing to 1.5 per cent by the end of 2025. More
bank’s easing cycle is now higher than before aggressive tariffs risk provoking additional and
the election. We expect we will still be in some

7 Investment Outlook Fidelity International

accelerated easing, although the central bank will One big question is whether the levels of
need to keep one eye on any currency weakness growth China needs can be delivered if the US
against the dollar. simultaneously burdens companies’ biggest sales
Facing similar headwinds, the UK has slightly market with heavy tariffs. The manufacturing
outperformed the Eurozone in 2024, and we expect sector is steadily upgrading, especially in new
this momentum to strengthen in 2025. The Labour and emerging industries, providing support for
government’s more expansive budget is likely to overall growth both from rising capex and external
be boosting growth already and the UK economy, demand. Domestic consumption, however, has not
being more services-oriented, is less exposed to yet picked up significantly. While the policy moves
the risk of a trade war. With a tight labour market, may help stabilise the property market, we do not
improving growth, sticky wages, and now less expect the return of strong growth in 2025. Rather it
restrictive fiscal policy, we expect the Bank of may move to a new, lower equilibrium.
England to go slower on rates than the ECB. Other drivers of growth are emerging and may
receive more policy support. An urbanisation
China’s policy pivot push should include improved infrastructure and
China’s quest for a slower but more sustainable connectivity among cities. The energy transition
model of growth focused on domestic consumption is a priority, with incentives for energy saving in
and higher-end manufacturing is advancing, but everything from home appliances to electric vehicles.
not without bumps in the road. The policy pivot Lastly, Beijing may devote more effort and resources
by the politburo in late 2024 signals a decisive to resolving local government debt issues, freeing
move to resolve the issues that have depressed authorities to do more to support households.
domestic demand, namely the property sector, As ever, we will be well into next year before the
local government debt, a lacklustre equity market, authorities publish the growth target for 2025, but
and poor consumer confidence. All eyes will be on the consensus of market forecasts is below 5 per
the progress of the broad moves announced at the cent, even after the boost from stimulus.
time of writing, as well as whatever the authorities
The spillover of the new measures may vary across
follow up with over the months to come.
different economies, with some emerging markets
Shoulder to the wheel benefitting more than others from lower-value,
Chinese monetary support continues to grow higher-quality imports from China. In general, the
6% 7%
country may continue to export deflation if the
4.5% 6%
policy easing delivered to the economy remains
3% 5% contained and moderate. If additional US tariffs are
1.5% 4% imposed, past experience also tells us that Chinese
0% 3% companies are likely to prove agile in response,
-1.5% 2% softening the impact on corporate earnings. Beyond
2012 2014 2016 2018 2020 2022 2024 2026
CPI Policy rate (RHS)
that, macro stabilisation policies will be crucial in
deciding China’s economic fate over the next year.
Source: Bloomberg, Fidelity International, November 2024.

8 Investment Outlook Fidelity International

Equities

New avenues
A decisive US election, political ructions in Europe, and the first signs of Chinese fiscal action spell
more volatility for stock markets in 2025. And new roads to returns.

Niamh Brodie-Machura Ilga Haubelt Marty Dropkin

Co-Chief Investment Head of Equities, Head of Equities,
Officer, Equities Europe Asia Pacific

Top convictions for 2025

■ US stocks will outperform rest of the developed world on earnings
■ Japanese shares still a strong bet as reforms improve returns
■ Nerves over valuations make the case for income

Pound for pound, macro and monetary policy exceptionalism. Even before November’s poll,
should deliver a positive environment for stock we expected US corporate earnings to increase
markets going into 2025. The business cycle will by 14 per cent in 2025, beating most other
enter a new stage - but the year will also see regions and the global average in terms of
geopolitics resound ever more loudly. growth, return-on-equity, and the level of net
The trends we have seen dictate recent price debt. The election has fanned optimism in the
moves may have further to run. But we can market that the coming year will prove pro-
expect new directions and a broadening of business, pro-growth, and pro-innovation. There
areas of growth in markets. These are exciting are risks to some sectors from potential tariffs
times for equity investors. and further trade frictions between the US
and China, but at least some of any resulting
Global trends reflation will be helpful for earnings and ease
fears over higher corporate valuations.
For good or bad, a landmark Republican
election victory is likely to reinforce American

9 Investment Outlook Fidelity International

Nevertheless, investors will have to be more potential to change the game in areas well beyond
discerning in where they look this year. The the small list of healthcare index constituents
AI trend is a case in point. On the one hand currently profiting. There are already hints of knock-
there is a debate about valuations of the big on effects in how people use hospitals and gyms,
tech companies; Nvidia and others are still and other use cases are developing.
hitting record highs and there may be further Healthcare has another notable structural driver:
to run, but our attention is also turning to the global population aged over 65 will double by
which companies are next in line to benefit. 2050 and the proportion of incomes we spend on
Those who facilitate the use of AI are one keeping ourselves healthy will continue to grow.
obvious group but ultimately many less directly
related industries and consumers will also An ageing world
be beneficiaries. Apple made a fortune from Demand for healthcare will grow strongly in the
decades to come
smartphones, but their arrival fuelled growth
100+
across a wide range of existing and new 95-99
90-94
businesses. Less than a third of companies have 85-89
80-84
so far embedded AI and machine learning in 75-79
their operations, but more than 70 per cent plan 70-74
Age cohorts

65-69
to: its impact on the economy will broaden. It is 60-64
55-59
an area where American leadership is crushing 50-54
45-49
and unquestionable. 40-44
35-39
30-34
Regional views 25-29
20-24
Aggregate earnings growth estimates through 2026 15-19
10-14
5-9
20% 0-4
800 0 800
Millions
15%
World in 2000 (millions of people)
World in 2050 (millions of people)
Growth, YoY

10%
Source: Fidelity International, HSBC, UN Population Database, February 2021.

5%

0%
Homeshoring
While it’s widely expected that the Republicans
-5%
Global US Europe APxJ Japan EMEA/ may repeal some areas of President Biden’s
LATAM
2024 2025 2026
Inflation Reduction Act including electric vehicle
credits, manufacturing incentives should be more
Source: Fidelity International, November, 2024.
protected given a large proportion of investments
The other big structural trends of this decade will are located in Republican-held districts. The
continue to play out in 2025 and will be worth onshoring trend has gathered momentum and has
watching. The breakthrough in anti-obesity drugs is bi-partisan support. We are seeing manufacturing
significant but, like AI, Ozempic and others have the activity driving growth and investment in middle-

10 Investment Outlook Fidelity International

America and our research shows it will add 2-3 On the other side of the developed world,
percentage points to the base growth rate of fixed there are significant challenges. Recent profit
investment in coming years. warnings by European industrial and automobile
The picture for small-and-mid-cap segments may companies, as well as lacklustre sales by consumer
prove more complex. An ongoing rally has put discretionary names, signal that doubts over
straight much of the discrepancy in valuations Chinese demand could weigh heavy on these
with the top end of the market, but the coming shares. Our macro team’s modelling also suggests
year will provide different impulses. Tax cuts a partial implementation of the tariffs floated
would benefit small businesses, as would lower by Republicans would knock as much as half a
financing costs. But the latter will evaporate if percentage point off German and Eurozone GDP.
price rises force the Fed to change tack and On the flip side, the arrival of a concerted
immigration and tariffs bring threats to growth campaign of monetary loosening should in theory
and spending on the ground. be helpful for European cyclicals, but the cheaper
In general, both the soft landing or reflationary and more defensive bet currently is income: returns
scenarios outlined by our macro team for the from dividends and share buybacks combined in
months ahead bode well for earnings of early some areas of the market are running at as much
cyclical stocks. And if the new administration reflates as 8 per cent and are better priced.
the economy and reduces regulation it should bode
Asian potential
well for US financials and value sectors.
In China itself, we prefer sectors that are already
Trade risks high on the government’s policy agenda:
Going into 2025, we see sentiment and technology, high-end manufacturing, consumer, and
fundamentals metrics as supportive of Japan. It healthcare. We’re conscious that Chinese equities
remains on track for reflation with strong wage can be volatile, and that many companies have
growth, and capital expenditure and shareholder rebounded from depressed to fair valuations on
returns will increase steadily over time. The the policy pivot. The good news is that there’s no
percentage of Topix companies outperforming shortage of stocks with clear paths to earnings
the index has also been on the rise, as investors growth in this massive market.
scout for beneficiaries of the country’s corporate China is positioning to preserve, but not reignite,
governance reforms. economic growth. Policymakers recognise the need
One caveat is that a strong yen combined to stabilise home prices; they are not about to
with higher interest rates could hurt earnings jeopardise the hard-won progress they’ve made in
later in the year, especially in the consumer reducing debt by reflating the housing market. An
discretionary sector, where overseas sales incremental recovery in Chinese equities is the most
outweigh domestic demand for carmakers and likely outcome.
durable goods exporters.

11 Investment Outlook Fidelity International

Elsewhere in emerging markets, Indonesia has Earnings are everything
good growth and earnings momentum, but banks’
No one can know with certainty the future of US-
dominance makes the market vulnerable to
China relations, or predict commodities’ trajectory
interest rate cuts. While liquidity is much thinner for
precisely, should conflicts in the Middle East
global investors, the Asean region widely stands
escalate further. But with volatility comes both risk
to benefit from the secular trend of supply chain
and returns.
diversification and an increasing share of foreign
direct investment from across the world. The outlook for earnings growth globally remains
robust and our view on equities going into 2025 is
India will again be a bright spot for long-term
generally positive. However, with valuations high,
investors. Although some foreign flows are taking
smart money will be looking for the right homes
profit after the recent rally, and extreme weather
as the economic cycle turns. Our approach is to
is disrupting agriculture, the country’s prospects
stick to the fundamentals, while staying vigilant
remain solid, underscored by advantageous
and disciplined on valuations. This will guide our
demographics and investments in infrastructure
thinking through 2025 and beyond.
and manufacturing. And that’s why domestic
investors are still buying.
Fixed income

Rates make return journey

After navigating an interest rate hiking cycle, fixed income investors face a completely different
challenge in 2025.

Steve Ellis
Lei Zhu
Global Chief Investment Officer,
Head of Asian Fixed Income
Fixed Income

Top convictions for 2025

■ Defensive US dollar investment grade - to shelter from recession risks
■ Global short duration income - to lock in decent all-in yields
■ Asian high yield - to capture attractive carry and spreads compression

A dominant theme for fixed income markets Fed dot plot shows policy pessimism
in 2025 will be where US interest rates find 6
themselves at the end of this rate cycle. 5

Investors’ estimates of where the terminal rate will 4

trough have proven volatile. For example, when
3
the Federal Reserve cut rates by 50 basis points in
2
September to 5 per cent, surprising many who were
expecting only 25bps, the market’s assessment of 1

the terminal rate went up rather than down. The 0

Jul '20 Jul '21 Jul '22 Jul '23 Jul '24
logic was that by doing more to address growth US Treasury 2y2y forward yield
risks sooner, the Fed wouldn’t need to reduce rates Median FOMC assessment of appropriate federal
funds rate at end of Year 3
by as much overall.
Source: Bloomberg, Fidelity International, October 2024.
As the chart shows, this put the market at odds
with Fed policymakers’ more dovish outlook for
rates over the next two years.

13 Investment Outlook Fidelity International

Any new tariffs are likely to push inflation higher, If US growth does deteriorate over the next
making a case for the terminal rate ending up 12 months, the Fed may have to cut more
above what the market is pricing in at the time of aggressively than expected, meaning a lower
writing (around 3.5 per cent), as does the expected terminal interest rate. With credit spreads
increase in the US fiscal deficit next year. currently tight, there is a risk-reward case for
There are, however, other forces in play. adding US duration with a bias towards holding
higher quality credit.
US recession looks underpriced
China: waiting for more
Investors looking for value in fixed income
should note that the market struggles to price A big focus heading into next year is the timing
things like geopolitical risks, which have clear and extent of China’s stimulus measures, and
potential to hurt economic growth. their potential to boost growth domestically
and across the wider region, but also to export
The recent hiking cycle has also been unusually inflation. As we wait for Beijing’s next move,
benign for credit issuers. Corporate net interest and any response to US tariffs (if and when they
costs have actually gone down for those who happen), it’s worth considering the picture facing
locked in lower rates on their debt when yields credit investors in 2025. For example:
were at multi-year lows and then benefitted
■ China’s property sector now makes up around
from parking their cash balances in short-term
5 per cent of the JP Morgan Asia Credit Non-
deposits or money market funds, earning high
Investment Grade index, down from over 30
interest rates. Where issuers have felt pain,
per cent at its peak. This is a stronger, more
distressed exchanges have accounted for most
balanced index.
defaults so far this year (54 per cent in the year
■ The average rating of Asian high yield bonds is
to end-September1), lessening the impact on
now BB, with rating upgrades likely to continue,
investors. But at some point, issuers who locked
particularly in frontier Asian economies and in
in lower rates will have to refinance, a fact
the BB category, where some rising stars are
that will weigh increasingly on investors’ and
emerging.
policymakers’ minds as 2025 progresses.
■ Asian high yield spreads are attractive at over
The US has also just had an election in which 68 500bps, above their 20-year average, leaving
per cent of voters told exit pollsters the economy room for compression. With an average duration
is “Not so good/Poor”.2 Whatever economic of just two years, Asian high yield bonds are
indicators might imply, Americans clearly don’t also less sensitive to interest rate moves.
feel well off.

S&P Global: Default, Transition, and Recovery: The Pace Of Global Corporate Defaults Slows, October 2024.
1

ABC News: Exit Polls for 2024 US Presidential Election: Results & Analysis, November 2024.
2

14 Investment Outlook Fidelity International

These factors create a favourable environment was evident when it followed up its bumper
for Asian high yield credit, especially if we see September cut in November with a further
continued Fed easing as well as more monetary 25bps, although it may yet be constrained by
easing and stimulus from China. resurgent inflation. There is a strong possibility
Investment grade Asian bonds also look good. of stagflation in the US, in which case the
The supply of Asian US dollar investment Fed might have to prioritise growth. The
grade bonds has shrunk significantly, with European Central Bank also has an eye on
issuers reluctant to borrow in dollars at high stickier wage and services inflation, although
interest rates compared to local markets, while structural economic weaknesses in the Eurozone,
investor demand remains high. Expectations of particularly in Germany, make a case for being
a stronger dollar in 2025 would be unlikely to overweight duration here.
reverse this trend. Further Fed cuts would free central banks in
China, Korea, and Indonesia, for example, to go
Monetary policy outlooks further in cutting their interest rates, supporting
The next 12 months should see a jump in fiscal Asian bonds. Alternatively, a less dovish Fed
spending from the US and China. Markets may policy would give the Bank of Japan more room
have greeted this prospect with euphoria, but to normalise policy following its first hike in 17
it’s a sign that all is not well with the underlying years in March 2024.
growth picture – one that is further threatened In practice, central banks will all have to run
by increasing geopolitical tensions. their own race. Keeping pace with each one
To address these concerns, we expect the will be part of the challenge for fixed income
Fed will want to be the most proactive about investors in 2025.
bringing rates down to a neutral level. This
Private assets

Time to diversify beyond public markets

Investors would do well to counterbalance their public holdings by increasing exposure to
private investments.

Noa Shoham
Neil Cable
Head of Research and
Head of European
Co-Portfolio Manager,
Real Estate Investments
Private Assets

Top convictions for 2025

■ Private equity is still the largest raising asset class, and given how quiet the IPO markets have been we
believe mid-market provides the best risk-return options
■ Infrastructure is likely to provide more opportunities as growth in digital infrastructure and renewable
energy assets is supported by the supply-demand imbalance across both sectors
■ Senior direct lending continues to offer interesting options for exposure to secured private loans, with
interest rates expected to stay at relatively raised levels for longer
■ European office space is on the verge of recovery and with prices currently low has potential for strong
returns over the next two to three years

Private assets are on the cusp of a new cycle with extraordinary growth over the last five
and we expect the first half of 2025 to offer years. The range and sophistication on offer
up attractive prices for what promises to be a to investors – no matter what their strategic
strong vintage of investments. priorities – are reaching a new level
It will be a cycle where private markets of maturity.
come into their own. The asset class has
conclusively left its niche reputation behind,

16 Investment Outlook Fidelity International

Alternative AUM by asset class higher level of deal-making. We’re already
US$30trn seeing this in the US, and we expect to see it in
more heavily-regulated Europe too, even though
US$25trn
it tends to be more defensive, particularly across
US$20trn software, technology, and services sectors.
US$15trn Any uptick in new private equity-backed buyouts
US$10trn
will of course also improve the prospects for
direct lending funds that finance and sponsor
US$5trn
these M&A deals, and for the buyout funds that
US$0trn already make up the majority of the private
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
equity market.
Private equity Venture capital Hedge funds
Private debt Real estate Infrastructure Direct lending has enjoyed plenty of attention
Natural resources Secondaries /
funds of funds in recent years thanks to high interest rates.
Although that backdrop is likely to shift in 2025,
Excludes funds denominated in Yuan Renminbi. Does not include secondaries in private debt. Data
for 2023-2028 is forecast. Source: Preqin Global Report: Real Estate 2024; Fidelity International, all of the European and US general partners
November 2024
(GPs) we’re speaking to report their direct
lending funds are still growing. Returns are
As in the public markets, investors can build their
fading from the 10-11 per cent that was offered
private portfolio based on their own risk-return
a year ago when liquidity was more stretched,
profile. Growth-oriented investors can opt for
but direct lending GPs’ returns are holding at
high allocation to private equity funds - whether
around 7-9 per cent - clearly still very compelling.
buyout, growth, or even venture strategies - while
an income-focused investor will tend to add Given the diversification now offered in the private
private credit or core infrastructure exposure that credit universe there is certainly a strong case for
will provide a steady return of distributions. A its inclusion in a portfolio. Some 96 per cent of
diversified private assets portfolio can combine European companies with revenues over USD $100
all asset classes. million remain unlisted3, while globally the median
age of a company at IPO has shifted from four
A turnaround story years in 1999 to 12 years in 2020.4
We anticipate that 2025 will be a good year For those investors looking for further ways
for private equity. After years in which buyout to diversify, the increasing maturity of the
activity has been stymied by global volatility, secondaries market may be interesting in
the pent-up demand for new deals and strong 2025. Once a speciality product used only by
financing bid are all likely to contribute to a

3
For companies with last 12-month revenue greater than $100 million by count to April 2024; S&P Capital IQ
4
IPO Data, Jay R. Ritter

17 Investment Outlook Fidelity International

distressed sellers, secondaries has now become There are questions about how the energy
a huge market that offers access to holdings transition programme will develop in the US
of previous vintages. GP-led transactions have under the new administration, but given that
become more common here - now making some of the biggest planned projects are in red
up around half of the market globally - and states, we do not expect these to be cancelled
are likely to continue in 2025 across private altogether. Europe still has a much stronger
equity, credit, infrastructure, and real estate, focus on the transition, whereas midstream and
as managers roll their holdings into different traditional energy continues to play more of a
vehicles to release any available financing. role in the US market.
The turnaround in private assets in 2025 is
likely to be most noticeable in European real
We have particularly strong estate. Now is a wise time to get into the
conviction in the prospects for market given there are low prices and plenty
the offices sector, especially in of assets available. The growing importance
the brown-to-green strategy of of logistics has been well documented, and
renovating buildings to become rightly so: the widescale adoption of online
more carbon-neutral. shopping, accelerated by lockdowns, and the
nearshoring of supply chains will boost demand
for warehouses across the year. But we have
particularly strong conviction in the prospects
Strong and steady
for the offices sector, especially in the brown-
Elsewhere, if an investor is looking for more to-green strategy of renovating buildings to
stability in a portfolio, infrastructure and real become more carbon-neutral, and in particular
estate offer long-term investments with attractive for those portfolios that do not already hold
entry prices available in the first half of 2025. office assets.
The two big drivers of the infrastructure market Although both the US and European markets
at the moment are digital assets and the energy are dislocated going into the new year, the
transition. The increase of data consumption level of oversupply in US offices has been far
will be further enhanced by AI and by growing higher, and the market there for this subsector
renewable energy demand, while the evolution of looks less attractive than Europe. But we do
AI also means more data centres (and so more also expect to see more demand for residential
infrastructure opportunities) and further investment assets across both Europe and the US due to
in private equity-backed software firms. structural undersupply.

18 Investment Outlook Fidelity International

Multi Asset

Late cycle with a twist

We are positive on risk assets despite being later in the cycle.

Matthew Quaife Henk-Jan Rikkerink

Global Head of Multi Asset Global Head of Solutions
Investing and Multi Asset

Top convictions for 2025

■ For the tactical asset allocator: US mid-caps offer a way to capitalise on the country’s positive earnings
momentum while avoiding the higher valuations of the market’s biggest names
■ For the income investor: Easing policy and high yields are good news for carry trades. But, given
risks posed by US fiscal inflation, we are looking to non-US duration, CLOs, and short-dated high yield.
Inflation-linked treasuries should also offer some protection
■ For the thematic investor: A basket of future financials. The 2025 backdrop suits this asset class, and by
putting together a basket that is future proof, there is the potential for long-term excess returns too
■ For the drawdown-aware investor: Heightened use of options-based strategies make sense as this
part of the cycle will increase realised volatility. Diversification and returns should be available through
upping absolute return strategies

We’ve been here before. It’s normal for markets to All this amounts to an encouraging backdrop
act more erratically during the later stages of the for risk assets, even if it promises turbulence
cycle. Yet beneath the market’s jitters is a generally too. Our message is this: stay invested in
positive environment of continued economic equities, seek carry trades, and be prepared to
expansion in the US, and signs the Chinese take advantage of market volatility.
government is committed to deploying broad-based
stimulus in an attempt to support its economy.

19 Investment Outlook Fidelity International

Financial conditions look supportive demographics, economic reform, and a shift
1250 102
in production away from China will continue to
underpin select equities for years to come in
1000 100.8
places like India and Asean.
750 99.6
Transition materials are also of interest to
Basis points

500 98.4 long-term investors, acting both as a key

250 97.2 to decarbonisation efforts and an inflation
hedge. For 2025, it will be difficult to separate
0 96
2020 2021 2022 2023 2024 their fortunes from the situation in China. If
US HY OAS (LHS)
the country’s stimulus programme exceeds
EM Hard Debt OAS (LHS)
GS US Financial Conditions Index (RHS) expectations, it’s likely to bolster the green
Note: OAS = option adjusted spread. Source: Macrobond, Fidelity International, October 2024. energy market and boost metals’ value – and
vice versa.
The US’s continued resilience should serve as a Elsewhere, selected REITs (real estate investment
tailwind for equities, but there are some areas trusts) have attractive valuations, and our
we particularly like. One is mid-caps. These bottom-up research analysts envisage a biotech
avoid the higher valuations of big technology upswing after a tough few years.
giants, while offering decent profits and the
chance to benefit from late-cycle reflation. Carry on trading
It’s not just the US either - the earnings cycle
Easing policy in both the US and China,
appears to be broadening and should revive
combined with a contained default environment,
other mid-cap names in places like Japan and
creates a positive backdrop for credit and
Europe too.
‘carry trades’. However, with credit spreads
Likewise, within individual sectors, the prudent approaching the most expensive valuations seen
approach is to look beneath the shiniest stars. historically – priced for perfection, just like the
Take AI: undoubtedly huge potential, but Magnificent Seven – we will be selective.
investors cannot ignore the sky-high expectations
There are some high real yields on offer in
priced into the Magnificent Seven stocks. The
emerging markets, where investors display much
risk is that market capitalisation-weighted
less optimism. We believe several EM central
portfolios become overly concentrated and
banks could move rates lower than markets
exposed to disappointment. We prefer to look
expect. That means we like high-yielding local
at the picks and shovels underpinning the trend
debt markets and select EM FX, such as Brazil
- smart grids and data centres, for instance -
and South Africa.
where valuations look more reasonable.
In developed markets, given the positive
Nor do you need to look to the tech giants
fundamental backdrop but rich valuations,
for the world’s best structural growth. Positive

20 Investment Outlook Fidelity International

we look for relatively high yields and lower even larger deficits and reflationary economic
sensitivity to movements in credit spreads. Our policies domestically. As such, we see good
research analysts are positive on shorter-dated value in moving out of nominal US government
high yield, the illiquidity premium embedded in bonds into inflation-linked treasuries. We will
CLOs, and high-quality bank credit. also look to other government bonds – from
Germany to New Zealand – to gain portfolio
How to position for the unknown protection while mitigating the risks of higher
An air of uncertainty still surrounds expectations fiscal deficits and inflation.
heading into 2025, especially in light of Moreover, we believe that options-based and
the change in administration in the US. In absolute-return strategies can respectively
circumstances like these, our approach is to offer downside protection and diversification
position portfolios to take advantage of the in portfolios even when bonds fail. These are
current conditions while making them able to increasingly valuable in an asset allocator’s
weather a range of different scenarios. toolkit given latent inflation risks.
For instance, government bonds have once These are just some of the variables we must
again moved to a negative correlation with account for through 2025 as the dust of the 2024
equities, providing relief to multi-asset investors sandstorm begins to settle.
looking for portfolio protection. Conversely,
the Republican sweep unlocks the potential for
Contributors

Patrick Graham
Outlook Editor and Lead Writer

Nina Flitman
Toby Sims
Noah Sin
Ben Traynor
Investment Writers

Mark Hamilton
Edition Designer

Oliver Godwin-Brown
Graphic Designer

Fiona O’Neill
Fraser Hope
Strategy and Planning

Henk-Jan Rikkerink
Investment Editor

Seb Morton-Clark
Content Director
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