CIO outlook

Navigating market challenges 

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Article Type
Insights
Topics
Macro, Long-Term Outlook, Opinion
Published
March 24, 2025
Read time
5 mins
Author
Stephen Jones
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The market landscape over the past month has been characterized by volatility and a reassessment of valuations. Valuations reached high levels in the last half of February with very tight credit spreads, equity market indices at, or near, all-time highs and volatility measures low. Much has changed in sentiment terms since then, mainly driven by policy announcements and retractions in the USA, and reactions to them in other jurisdictions. 

 

Current market overview

 

The Federal Reserve's recent decision to maintain the target range for the US federal funds rate at 4.25% to 4.50% reflects ongoing concerns about inflation and economic stability over the longer term and that the latest economic data so far remains reasonable.  Whilst US Fed Chairman Powell repeatedly used the word “uncertainty” in his press comments post, at the most recent US Federal Open Market Committee meeting, fresh data, be it industrial production, service industry confidence surveys or measures of ongoing employment growth all remain sound. Despite this, and perhaps as insurance against a future slowing economy, the Fed has signalled a loosening of monetary policy by slowing the pace of its balance sheet reduction.  This move aims to support continuing economic growth amid the rising trade uncertainties likely to come through in April when we will see more US action on trade tariffs.  

 

In Europe, the European Central Bank has been ahead of the curve cutting rates as inflation slows and German economic growth struggles.  We believe the ECB is pretty much finished on their rate cutting cycle now given the fiscal stimulus around defence spending and infrastructure investment that has been announced in response to the policy announcements and approaches coming out of the Trump Presidency.  With Europe borrowing to defend itself and grow, it stands to reason that economic activity will run a little hotter than previously thought and supports the need for higher interest rates. 

 

Economic indicators


Recent economic data still indicates a growth outlook. The Organisation for Economic Co-operation and Development’s latest report projects global GDP growth to moderate only slightly from 3.2% in 2024 to 3.1% in 2025. Inflationary pressures persist however, with headline inflation expected to remain elevated in many economies. In the US, jobless claims have inched up slightly, but the labour market remains healthy. In Europe there is an uptick in forecast growth on the back of recently announced significant fiscal stimulus and China is emerging from its property crisis now willing to look more at proactive and broader growth measures supporting business and consumption.  Re-affirming growth ambitions of a 5% GDP increase this year is a good sign that things will improve in the Middle Kingdom. 

 

Geopolitical developments


Geopolitical tensions have escalated, particularly with the renewed conflict in Gaza, which has resulted in significant casualties and heightened regional instability. Additionally, the ongoing war in Ukraine continues to influence global markets, with recent US diplomatic efforts highlighting a shift in geopolitical dynamics and a change in known operating norms.  This is adding to uncertainty, and sentiment shifts, but is not yet showing up in market-impacting data releases.  Energy prices, obviously impacted by geopolitical tensions, remain at the lower end of trading ranges with limited volatility seen.  

 

Market movements


The S&P 500 has experienced a correction, with a decline of approximately 10% from its peak. Technology stocks, particularly those in the AI sector, have been under pressure, with notable declines in companies like Nvidia and Tesla. Gold prices have surged to record highs, reflecting increased investor demand for safe-haven assets.  Fixed interest markets have moved lower in yield in the US, but higher in yield on Europe, an unusual combination. 

 

Investment outlook


As we navigate this period of market turbulence, it is crucial to remain vigilant and opportunistic. We believe the current environment presents opportunities for active managers to capitalize on market dislocations. 


We continue to favour high-quality credit spreads, short-duration bonds, and diversified multi-asset strategies. The resilience of our products, particularly in the European ABS and CLO markets, remains a key strength.  


Within private markets the focus on insured or investment grade covenants with reduced leverage, and backed by good covenants, remains important.  Tensions do exist in over-indebted business models funded in the loan markets and some weakness in investment returns is to be expected in leveraged finance going forward. 

 

Strategic positioning


Our focus remains on maintaining a balanced and diversified portfolio. We are positioned to benefit from any widening credit spreads and rising yields, which enhance the attractiveness of fixed income products. The volatility in equity markets underscores the importance of active asset allocation and risk management.

 

Risks and considerations


Whilst not yet apparent or forecast, the primary risk for investors remains the emergence of a potential recession in the US, driven by declining consumer and business confidence on the back of poor or erratic policy implementation. The geopolitical landscape, particularly the conflicts in the Middle East and Ukraine, adds an additional layer of uncertainty. We must also monitor the impact of inflation on consumer behaviour and corporate earnings.  


While the above are not insignificant risks, it remains our view that a recession in the USA is a tail risk in the distribution of likely outcomes - there is plenty of scope for stimulus to be applied to help a slowing US economy in the form of interest rate cuts, or just more predictable and benign Presidential policy delivery.  In Europe and elsewhere, fiscal stimulus is being applied or is available to help offset any slowing growth patterns. 

 

Conclusion

 

While the market environment is briefly challenging, it also offers significant opportunities for those who are prepared and want to capture a pullback in valuations. This valuation pullback is more apparent in US equities than in other assets. Spreads are a little wider in credit markets, but not significantly so and are still at very tight levels.  This perhaps reflects that the outlook is not as disrupted as some think. We believe our strategic positioning and focus on high-quality assets will enable us to navigate these uncertainties effectively. We remain committed to delivering value to our clients through disciplined investment management and proactive risk mitigation.

 

Disclosures

Author

Stephen Jones
Global Chief Investment Officer
Stephen Jones is Aegon AM’s global chief investment officer.  
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