2025 Global Market Outlook - Investing during transition

Part III: Implications for investors

Disclaimer

This podcast is for general information purposes only and is not advice. Outside the United States, this episode is intended for investment professional use only. Please listen to the end for complete information.

Justin Thompson

So, we’ve had 15 years which have been dominated by one country, the U.S. Within that - one sector: technology. And within technology, a handful of outstanding corporations that have dominated returns. That is both a risk, in terms of index construction, in terms of how much money has those stocks have drawn other parts of the market. But it’s also an opportunity, because the opportunity is that markets can broaden from here.

Ritu Vohora

Welcome to The Angle from T. Rowe Price, a podcast for curious investors. Sharper insights on the forces shaping financial markets begin here.

I’m Ritu Vohora, a Global Capital Markets Investment Specialist, here at T. Rowe Price Associates. In this special edition of “The Angle”, we focus on our 2025 Global Market Outlook. I recently discussed the challenges and opportunities for the global economy and markets in the year ahead with some of our senior investment team. They included CIOs:

• Justin Thomson - Head of International Equity and CIO.
• Arif Husain - Head of Global Fixed Income and CIO.
• Sebastien Page – Head of Multi-Asset and CIO.
• Stephon Jackson - Head of T. Rowe Price Investment Management.
• and Blerina Uruçi – our Chief U.S. Economist, a regular on our podcast.

In this final episode of our 2025 Global Market Outlook discussion, my guests bring everything together to consider the potential implications for financial markets. Where do we see the greatest potential and where are potential areas of concern?

Ritu Vohora

So as we look ahead to 2025, what is the one risk that you’re most worried about, and where do you see the biggest opportunity? Blerina?

Blerina Uruçi

OK, so let’s start with the risk and end on a high and positive note. I would say fiscal is probably the biggest risk that I foresee because of the size of the deficit and the potential that this could have on yields in the long end if we don’t address the sustainable path of debt. And then the more positive note would be productivity growth. Steph already spoke about generative AI and how that can affect sectors other than tech. If this positive productivity shock shows up in the economy, it could have positive implications all around.

Ritu Vohora

And for growth as well, as you outlined. So coming to you now, Steph.

Steph Jackson

I would say the biggest risk is unexpected inflation, which could have an impact on incomes, which sort of bleeds into topline as well as in corporate earnings, being disappointing. Of course, small-caps do tend to be a good inflation hedge and are more insulated than large-caps. Tied to that, the potential for a momentum reversal. That is, momentum stocks have done very, very well over the last year. There is a risk that, if you study history, that that does not continue and likely leads to value outperforming growth in this momentum-driven market to slow down significantly.

In terms of opportunities, there are several areas we’re excited about. GARP stocks in general, which are growth at a reasonable price ideas at a lower beta but have reasonably good outlooks in terms of corporate earnings. And then there are several segments I talked about: small-caps and mid-caps, but I would zero in on energy. I would also highlight financials or banks, financial tech, as well as IT services, and then of course health care and select areas of software we still think are attractive.

There’s a bull case for several sectors—in particular, financials, where we think less regulation and the potential for loan growth that will be driven by an increase in economic activity will be very helpful to their bottom lines and also with less regulation comes the potential for more M&A activity, which tends to push premiums up for those financial stocks.

We think energy is going to be a particularly interesting area, and we think the outlook for liquefied natural gas-oriented companies is very good. And they also are an AI beneficiary, and so hopefully we’ll begin to see some of the benefits of all the spending begin to show up for several energy companies. We also expect increased drilling activity and so many oil field services companies should begin to do better.

Ritu Vohora

You’re bullish and bearish, but if you had to pick one risk and one opportunity, what would they be? Arif?

Arif Husain

I would say the for the opportunity, I’m going to go opportunity first, I’d say the volatility and dispersion will create lots of active return. If you asked me to pick one asset class, TIPS.

For me the biggest risk is, people talk about the fiscal deficits, and it’s almost an academic thing. People talk about bond yields being higher. Also almost an academic thing. What are the knock-on effects? What are the second-order effects of 10-year Treasuries getting 5%, maybe 6%? That is very poorly understood and very, lack of imagination.

Ritu Vohora

OK, so carry to watch. Seb?

Sébastien Page

I’m now very worried about the U.S. 10-year yield. I think that’s a risk to watch. In terms of opportunity, we, a lot of investors globally, have dry powder. We mentioned dry powder. There is a fair amount of money sitting in cash.

Now, if I give you a wonky way of saying this, I can say you want to add to risk assets on pullbacks. I think that’s the opportunity for the next six months all else equal. If I want a simpler way of saying this, be prepared to buy the dip.

Ritu Vohora

Well, as they say, volatility can be your friend. It’s not necessarily risk, it can be opportunity. And Justin?

Justin Thomson

In terms of in terms of risk and opportunity, for me they’re bundled into the same thing. So we’ve had 15 years which have been dominated by one country, the U.S. Within that one sector: technology. And within technology, a handful of outstanding corporations that have dominated returns. That is both a risk in terms of index construction in terms of how much money has those stocks have drawn other parts of the market. But it’s also an opportunity because the opportunity is that markets can broaden from here, internationally, into small-cap stocks, into other parts of the market that have been starved of capital over time.

Ritu Vohora

Great, well, thank you for your comments, that’s been great.

And if I could summarize, we still think U.S. growth is resilient, it’ll carry on from here, but the fiscal policy, the fiscal deficits possibly means higher long-term yields, so we need to think about steepeners, and of course inflation. We could see it reaccelerating, so having some protection, but encouragingly a broadening opportunity set.

So I think the key message is be active and be diversified, particularly with change.

Ritu Vohora

The year 2025 is shaping up to be one of transition marked by a clear broadening of investment opportunities. In this evolving world, curiosity is vital. Asking smart questions about new opportunities—within asset classes or major themes such as health care innovation, energy transition, or artificial intelligence—is the best way to source the insights on which smart investment decisions can be made.

We look forward to your company on future episodes. You can find more information about our 2025 Global Market Outlook and other topics on our website. Please rate and subscribe wherever you get your podcasts.

“The Angle” - Better questions, better insights. Only from T. Rowe Price.

Disclaimer

This podcast episode was recorded in November 2024 and is for general information and educational purposes only. Outside the United States, it is for investment professional use only. It is not intended for use by persons in jurisdictions which prohibit or restrict distribution of the material herein

The podcast does not give advice or recommendations of any nature; or constitute an offer or solicitation to sell or buy any security in any jurisdiction. Prospective investors should seek independent legal, financial, and tax advice before making any investment decision. Past performance is not a reliable indicator of future performance. All investments are subject to risk, including the possible loss of principal.

Discussions relating to specific securities are informational only, are not recommendations, and may or may not have been held in any T. Rowe Price portfolio. There should be no assumption that the securities were or will be profitable. T. Rowe Price is not affiliated with any company discussed.

The views contained are those of the speakers as of the date of the recording and are subject to change without notice. These views may differ from those of other T. Rowe Price associates and/or affiliates. Information is from sources deemed reliable but not guaranteed.

Please visit https://www.troweprice.com/en/us/insights/implications-for-investors.html for full global issuer disclosures. This podcast is copyright by T. Rowe Price, 2024.

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