„The capital markets in 2025 will be a balancing act for investors – fundamentally, the prospects are good, but they are clouded by political conditions“, says Frank Engels, Chief Investment Officer (CIO) and board member responsible for portfolio management at Union Investment.

„The global economy is growing moderately, inflation remains under control, and central banks are easing monetary policy," he notes. These factors support opportunity-driven investments such as stocks. However, Engels also sees challenges for the capital markets environment. „The uncertain geopolitical situation hangs like a sword of Damocles over the stock market next year“, the strategist warns. „Caution remains advisable.“ Overall, though, the opportunities will outweigh the risks.

Regarding the global economy, Engels anticipates moderate growth for 2025. „The US will remain the engine of the global economy – despite Trump“, he states. The effects of past government stimulus programs are still evident, with reindustrialisation in full swing, and rising investment activity. But the incoming US administration's policies are expected to dampen growth. In Engels' analysis, Trump's policy mix of restrictive immigration, tougher trade policies, and higher debt will fuel inflation while hindering growth. „The sequence of measures will be critical, as not all plans will be implemented at once, or immediately affect the economy. The longer this presidency goes on, the stronger the effects on growth and inflation will be.“

The policies of the new US administration will also impact Europe, particularly Germany. „With Trump’s re-election, Germany’s trade and security policies will face new challenges in the coming years“, notes Engels. „The export industry will have to adapt to new obstacles and difficulties.“ This development comes at a time when Germany’s traditional economic model is already under pressure. „Productivity in the German economy continues to decline, and growth momentum is expected to remain weak“, he says.

The market strategist does not anticipate further easing or significant tightening of inflation. „Inflation is unlikely to decrease much further but also won't spike again“, he suggests. In the US, he predicts inflation at 2.6% in 2025, remaining above the Federal Reserve's target. „Higher import tariffs and stricter immigration policies from the new administration are likely to gradually drive inflation upward starting midyear.“ In the eurozone, however, Engels expects inflation to drop to 2.1%, near the European Central Bank’s target, due to weak economic growth.

The major central banks are likely to gain more room for interest rate cuts. „Monetary policy remains restrictive at its current level“, observes Engels. „However, with inflation stabilising, central banks can adopt a slightly more accommodative approach in 2025.“ He forecasts that the Federal Reserve will reduce rates by a total of 75 basis points by mid-year. „Beyond that, the Fed will take a wait-and-see approach“, he predicts. According to Engels, the key factor will be which aspects of Trump's economic policies take effect first. „Some measures will restrain growth and inflation, while others may drive inflation higher. The timing and sequence of these actions will dictate the Fed's agenda and policy direction.“ In the Eurozone, weak economic growth will clearly dictate the ECB's approach. „We expect the ECB to implement five rate cuts in 2025“, he says.

He sees opportunities in equities. „The global economy is growing moderately, interest rates are gradually declining, and corporate profits are likely to continue rising modestly. This combination is favourable for stocks“, states Engels. He anticipates a double-digit increase in earnings at the index level, providing a solid foundation for further price gains. „Compared to previous years, we expect profit growth to expand across more sectors and companies. As a result, the stock market will no longer rely solely on the „Magnificent Seven“ but increasingly on the broader corporate landscape.“ Combining this with slightly lower valuations, Engels considers a mid-single-digit increase in global stock prices realistic. „Under another Trump administration, individual stock selection will become an even more critical success factor on the equity side than before“, he adds.

Engels anticipates that increasing US government debt will gradually push yields higher over the long term. He forecasts slight yield increases for 10-year government bonds, reaching 4.5% for the US and 2.5% for Germany. „Interest rates for longer maturities are expected to rise moderately, making it unlikely for secure government bonds to meet many investors' return expectations“, he notes. Instead, he advises focusing on bonds with yield premiums. „Corporate bonds from reliable issuers are especially attractive.“