The year has been good for risk assets; global equities are up 21% for the year to mid-December, and the S&P 500 has gained more than 28%. Gold, too, performed strongly in 2024, though bond returns were negative.
Despite macro uncertainties, factors such as ample liquidity, developments in artificial intelligence (AI) and a strong US consumer have allowed the global economy to remain resilient and supported markets, says digital wealth management firm StashAway in its 2025 macro outlook, released Dec 23.
The outlook, fronted by StashAway’s chief investment officer Stephanie Leung, notes “two key trends” that will materialise in 2025 and drive asset class returns for years to come: an increased focus on fiscal policy, and ongoing advancements in AI.
Great Monetary Expansion
Crises often trigger seismic shifts in popular opinion and policies. The Global Financial Crisis in 2007-2008, for example, marked the start of an era dominated by monetary policy. This refers to the economic tools used by monetary authorities like the US Federal Reserve.
This era of “Great Monetary Expansion” was characterised by low interest rates and quantitative easing, with central banks as the key drivers of the economic cycle, notes StashAway.
See also: StashAway sees ‘widespread adoption’ of AI in business in 2025
The most recent crisis, the Covid-19 pandemic, appears to have ushered in a period of elevated government spending, notes StashAway. This spending, along with taxation, is one of the key tools of fiscal policy. StashAway says this could be laying the groundwork for an era of “Great Fiscal Expansion”.
“As the global economy re-calibrated in the wake of the pandemic, we’ve seen that governments have increasingly relied on boosting spending to stimulate growth — especially as central banks ran into limits on monetary stimulus when interest rates were close to zero,” says StashAway.
One telltale sign is widening fiscal balances and increasing debt levels among most major economies.
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DOGE and Trumponomics
Fiscal expansion is key to Trumponomics, says StashAway. US President-elect Donald Trump’s proposed policy mix of tax cuts and increased spending suggests that the US fiscal deficit will remain “materially higher” than pre-pandemic levels.
The US Committee for a Responsible Federal Budget projects a central scenario where US debt could expand to nearly US$8 trillion ($10.87 trillion), or 143% of GDP, by 2035. “While we note that some of Trump’s proposals ultimately may not be approved by Congress, over 50% of spending increases come from the extension of Trump’s Tax Cuts and Jobs Act, which has high odds of passing given Republican control of the legislature,” notes StashAway.
The incoming administration has unveiled some plans to reduce the budget deficit. For example, Treasury secretary nominee Scott Bessent highlighted his aim to reduce it to 3% by 2028, and the proposed Department of Government Efficiency (DOGE) floated a target of cutting government expenditures by US$2 trillion by July 4, 2026.
However, StashAway’s analysis suggests that the scope for such deep spending cuts is limited. “The proposed US$2 trillion in cuts is more than the Congressional Budget Office’s projections of the US government’s discretionary spending of about US$1.8 trillion. That would suggest the government would need to dip into entitlement spending, [such as] Social Security and healthcare programs, a move that would be deeply unpopular among the electorate.”
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Instead, what is achievable for DOGE is a focus on deregulation and a reduction in bureaucracy bloat to make it easier for companies to do business, says StashAway. They could, for example, simplify the process of bringing new medicines to market.
Global shift in stance
This paradigm shift appears to be happening not only in the US, but in other major economies globally, says StashAway. “In the US, President-elect Donald Trump’s proposed policy mix points clearly to a more expansionary fiscal stance. But this shift is also happening globally — China’s leaders have reiterated more proactive fiscal measures to support its economy, while politicians in France and Germany calling for a relaxation of its strict spending rules have been gaining popular support.”
The latest signals from China point to “more proactive” fiscal policy in the year ahead, notes StashAway, which has been the “missing puzzle piece” in reviving its “ailing” economy. “But over the longer-term, more spending will also be needed to support its growth amid demographic challenges and global trade shifts.”
Meanwhile, the Eurozone is also showing signs of moving toward a looser fiscal approach. “Even in fiscally-prudent Germany, both voters and policymakers are urging the government to re-examine its strict spending rules to give the country more room to address longer-term challenges by upgrading its infrastructure or boosting defence spending, for example. In France, opposition from both left and right-wing parties over plans to rein in the deficit resulted in a dissolution of the government,” notes StashAway.
Inflation to remain elevated
These macro shifts are good for growth but may keep inflation elevated, says StashAway. “In an era of ‘Great Fiscal Expansion’, we would expect a more balanced role between monetary and fiscal policies to more smoothly manage the economic cycle,with governments taking a more proactive and direct role, alongside more data-dependent central banks.”
This dynamic has already played out somewhat in recent years. “In 2022, for example, as the Federal Reserve raised interest rates and began its quantitative tightening program, the US government simultaneously drew down its Treasury General Account (TGA). From a peak in May 2022 to a trough a year later, the TGA saw a drawdown of US$916 billion — more than offsetting the US$554 billion decline in the Fed’s balance sheet during the same period,” notes StashAway.
Trump’s immigration stance
The market has been focused on Trump’s threats of outsized tariffs. But StashAway thinks these are a starting point for negotiation with trade partners, and will likely be implemented in a “more targeted manner” to avoid stoking inflation and hurting the US consumer.
“Indeed, the top issues that American voters want Trump to focus on in his first 100 days in office are inflation and immigration,” says StashAway, citing post-election survey data.
Given this focus, StashAway believes the Trump administration enacting strict immigration policies is a bigger risk to growth.
“As of end-2022, the number of unauthorised immigrants [in the US] totalled an estimated 11 million people, or about 5% of the US workforce — largely concentrated in agriculture, construction and leisure and hospitality. A large-scale deportation of this population would mean an increase in labour costs and uptick in inflation, as well as a significant hit to GDP: the Peterson Institute for International Economics estimates that output could be up to 7.4% lower by the end of Trump’s term in 2028,” notes StashAway.
Bet on industrials, aerospace
At the December Federal Open Market Committee meeting, the Fed signalled for just 50 basis points (bps) of rate cuts in the year ahead, down from 100bps at its September meeting.
An environment of declining real rates, driven by falling nominal rates and sticky inflation, reduces the appeal of holding cash, and should encourage investors to seek higher-returning assets, says StashAway.
“Equities tend to perform well in this environment, as economic growth drives demand and higher prices support nominal revenues. Given [Trump’s] proposed policies, cyclical sectors like industrials and aerospace could benefit from increased infrastructure spending and capital outlays. We also see potential for rotations in US equities, from mega-cap tech to the broader market, as a revival in the manufacturing cycle benefits broader parts of the economy.”
Real assets, like gold and real estate, can help as hedges to inflation. “They also provide diversification benefits, particularly during periods of market stress and elevated geopolitical tensions, like we’re seeing today,” says StashAway. “Global central banks’ demand for gold should also be a steady source of support in the years ahead as they continue to diversify their holdings.”
Finally, given the low risk of a recession in the near-term, and prospect of wider deficits and increased bond issuance to fund fiscal spending, StashAway remains underweight on fixed income, particularly longer-duration bonds.
StashAway reminds investors to “focus on the signal rather than the noise”. “While a Trump administration 2.0 may bring the same headline-grabbing bluster as his first term, as long as the economy’s fundamentals remain solid, those headlines should remain just that — fleeting news without lasting impacts on markets.”
“What’s important is staying disciplined and aligned with your long-term strategy,” adds StashAway. “Focusing on the fundamentals, rather than reacting to short-term market movements, will allow you to navigate through the noise and capitalise on long-term opportunities.”
For more on StashAway’s outlook on AI in the year ahead, read “StashAway sees ‘widespread adoption’ of AI in business in 2025”.
Charts: StashAway
