2025 is likely to be the year of the global easing cycle. Falling policy rates shall support trends like economic growth in the Eurozone and the United States, but not boost demand to an extent that it reignites inflation. According to Kavan Choksi, in China, policymakers seem set on making sure that growth stabilizes, particularly in response to the increased likelihood of higher U.S. tariff rates.
Kavan Choksi Sheds Light on Easing Global Policy
A large number of central banks across the world are cutting policy rates, including every G10 central bank outside of Japan. Policymakers are likely to nudge rates lower in 2025. The bond market pricing in the United States implies an easing cycle that ends in the first quarter of 2026, with the policy rate close to 3.5%. Investors anticipate policy rates falling below 2% by the end of 2025 in Europe. Even with the pivot in central bank policy, longer term bond yields have gone down just marginally over the span of last year. However, there is still a lot of value in fixed income, especially if weaker growth were to materialize. This can be particularly critical in the European markets, where the overall growth outlook is not as good as it is in the United States.
In the United States corporate credit and municipal markets, all-in yields still tend to trade above 5% on a tax-equivalent basis. Rate hikes have had a limited impact on the broad economy in the most recent cycle. Rate cuts can also have a similar muted impact. The global easing cycle is likely to support risk economic growth, as well as risk assets like high-yield bonds and stocks. They, however, are unlikely to spark a surge in borrowing that can push inflation and growth to an above-trend rate.
As per Kavan Choksi, as central banks around the world ease monetary policy, a large number of investors may feel inclined to increase their exposure to EM or emerging markets. Rate cutting cycles have historically strengthened EM assets through stronger growth, increased capital inflows, and weaker currencies that enhance export competitiveness. It is expected that the developed market (DM) equities will outperform EM equities in 2025, continuing a trend seen in eight of the past ten years.
The outlook for equities in developed markets, particularly the United States and Japan, appears increasingly attractive. The profit margins in the United States stay stable at record highs, with S&P 500 companies returning nearly 75% of annual earnings to shareholders through dividends and net buybacks this decade, up from 50% in the 2000s. Even though the heavy concentration of market value in major tech firms is a concern, every sector in the index is projected to show positive earnings growth in 2025, which is a milestone not seen since 2018. The combination of robust earnings growth and high valuations in large-cap United States markets could yield strong returns. Declining interest rates and a less stringent regulatory environment can help sustain a promising revival in dealmaking, which had been essentially frozen since 2021.
