Aegon Asset Management: 2025 Equities outlook

Authors | Neil Goddin, Robin Black, Claire Marwick, CFA. Audrey Ryan

Neil Goddin, Head of Equities, Aegon Asset Management

The bar has been set high for global equity markets going into 2025. Two years of strong returns could lead investors to question: is there any room to move higher? We think so, but it’s not as simple as just buying the market.

Divergences between regions and within industries means an active approach to capturing further upside and avoiding potential pitfalls is vital. Below, we outline some key considerations as we head into 2025 and then hear from three of our portfolio managers on how they see the backdrop affecting their respective strategies.

Looking at company fundamentals, we feel these are generally solid. Aggregate global earnings growth is progressing nicely and, whilst this has been led heavily by the Magnificent 7 this year, there are signs that this is broadening out, with the gap between these all powerful tech names and the rest of the market projected to be narrower next year. This would be a positive, as we believe having markets depend so heavily on a handful of stocks is neither healthy, nor sustainable. Corporate balance sheets also remain strong, with companies sitting on near record-levels of cash balances.

So whilst fundamentals look promising, the topic of valuations provides more of a conundrum. There is no doubt valuations in the US are punchy, but they deserve to be. The country boasts the best GDP growth in the developed world, high earnings growth and is home to the market darlings of the AI megatrend. Donald Trump’s second presidency also brings the prospect of lower taxes, deregulation and an America-first agenda, all factors that should provide a tailwind to US companies. In particular, small and mid-caps are likely to benefit most and have a good chance of reversing a couple of years of significant underperformance. That optimistic take does not come without risk though. As with Trump’s first presidency, policy unpredictability is likely to be a feature and if there’s one thing financial markets hate, it’s unpredictability. So, premium valuations and American exceptionalism can be justified but there is little margin for disappointment.

Everywhere else is cheap in comparison but it’s hard to make a strong case for that gap closing materially, except perhaps for the UK. It seems like every year we hear predictions that “this will be Europe’s year” but with its largest economy (Germany) in a dark place and its second largest (France) wracked by political strife, it would be a brave call to predict that 2025 will see the region’s equity markets take the lead globally.

Likewise, investing in China has been a painful experience for much of the past two years. Recent policy stimulus has sparked a relief rally but, we would argue, fallen short of what is needed to address the very deep structural issues with domestic consumption and the property market. The valuation discount on offer here compared to other markets is not enough to excite us and, with the potential of further trade tensions with the US, China could well continue to be a value trap in the short to medium term.

So, how are some of our equity PMs thinking about 2025?

Robin Black, Aegon Global Equity Income Fund:

Equity income investing should continue to be a great place to be in 2025. Global dividends are at record levels and share buybacks are not far behind. With further earnings growth forecast for next year and balance sheets in a good place, there is every reason to retain a positive view on total shareholder yield.

A note of caution though: while we concur that there is much to be optimistic about, we fear markets are not properly discounting negative risks. These include US fiscal or monetary policy missteps, further EU economic malaise, Yen volatility, a deepening Chinese real estate slump, geopolitical uncertainty and a derating of expensive technology stocks.

Not all of these issues will come to pass, but some will, hence a focus on high quality stocks; delivering steady dividends should provide investors with a nice balance between capturing further upside but also offering some insulation should things turn sour. It also offers diversification from the widely held and expensive mega cap stocks that pay little or no dividends.

Claire Marwick, Aegon Global Sustainable Equity Fund:

We invest in long term sustainable megatrends that we’re confident can power companies’ earnings and our clients’ returns. Looking into 2025 we’re excited about a diverse range of themes such as obesity treatment, artificial intelligence, investment in the electricity grid, US reshoring and clean water, each of which offer compelling structural growth opportunities.

Tactically, September 2024 brought a huge change for equity markets when US interest rates were lowered for the first time in four years. Rate cuts are good for the equity market, as long as a recession is avoided (our base case); they are good for growth equities; and they are good for small and mid cap stocks, three stylistic tailwinds for our investment approach.

Meanwhile, whilst the return of Donald Trump to the White House is likely to seriously hamper the development of renewable energy in the US, we believe other sustainable areas can benefit from his pro-growth policies, especially those related to building infrastructure.

Audrey Ryan, Aegon Ethical Equity Fund:

We see more catalysts for UK equities now than at any point in the past few years. Inflation appears to be well contained and interest rates are falling, providing a positive backdrop for both consumers and stock markets alike. GDP is in the pack with other G7 nations and, despite the rather unpopular employer national insurance hike in the recent Budget, the UK offers greater political stability than France, Germany or the US. This perhaps explains why flows into UK equity funds have been on an improving trajectory.

The UK has been cheap for a number of years but that discount to other markets now looks unjustified. Heightened levels of M&A activity back this view and provide an additional tailwind for investors.

The Ethical Equity Fund has strong exposure to domestically focused small and mid-caps – an area which we think stands to benefit most from the catalysts outlined above.