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WHAT ARE THE KEY FACTORS THAT WILL DRIVE INVESTMENT MARKETS IN 2025?

By Sam Eley

2024 was an excellent year for investment markets, with most major asset classes providing exceptional returns. Most positive returns were generated by optimism around slowing inflation, the likelihood of interest rate cuts easing the economic strain on households, and the boom of AI in global markets.

When looking at 2025, there are several factors that we expect will drive the performance of markets this year:

  • Geopolitics: With the US election cycle now finished and Donald Trump back in the Oval Office, the Trump administration will prioritise growth-positive policies such as corporate regulation and tax cuts. However, it will also look to disrupt global trade and US immigration, with tariffs potentially having wide-ranging implications for trade flows and global growth. Energy has become a key front, and China’s cheap low-carbon technology, such as electric vehicles, solar and batteries, is putting pressure on companies in other major economies.

    Markets have managed to perform well despite the ongoing conflicts between Russia-Ukraine and Israel-Hamas. However, they will be further tested by increasing geopolitical tensions and competition in areas such as AI, decarbonisation, and the infrastructure required to deliver it (e.g., data centres and electricity grids).
  • Inflation: Higher interest rates have largely had the desired effect on global inflation, with most major economies now closer to the target 3% inflation band. Most of the world’s banks are advanced in their easing cycles, while other central banks (such as the RBA) will be forced to keep policy tight until they are comfortable that inflation is back under control.

Increasing geopolitical tensions and fragmentation of world economies could be inflationary. While US initiatives such as rate cuts and tax cuts should be positive for corporates, they can also be inflationary. Restrictive immigration and tariffs could also cause inflation volatility, so while 2025 should see fewer inflation concerns than 2024, it will still be a key indicator for investment markets.

  • The Australian Economy: Australia would likely be in a recession without high immigration, government spending and trade. Higher interest rates have weighed on consumer spending, but tax cuts and cooling inflation should deliver some upside to consumer spending to reignite the economy. The real indicator will be when interest rates are cut, with some optimism that a cut could be as early as February, although we expect rate cuts will be gradual.
  • Risk Asset Pricing: Given the optimism that has built up in domestic and overseas markets, equity markets are sitting at or near all-time highs. This leaves little room for disappointment, and any news or data that deviates from expectations will likely add volatility and downside risk to portfolios. Other assets, such as property, are more heavily linked to the interest rate outlook—we expect property assets should react favourably to upcoming interest rate cuts and that the bottom of the office property cycle may already have occurred.

With this as our economic backdrop, we continue to advocate for a diversified portfolio that covers asset classes such as listed Australian and global equities, real assets such as property and infrastructure, fixed interest assets including bonds and corporate debt, and private equity to provide several different potential return streams, volatility reducers and avenues to protect capital if markets are not performing as anticipated.

Sam Eley
Senior Financial Planner
Authorised Representative No. 1234685

If you have any questions or comments, please email me at sam@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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