For instance, government bonds have once again moved to a negative correlation with equities, providing relief to multi-asset investors looking for portfolio protection. Conversely, the Republican sweep unlocks the potential for even larger deficits and reflationary economic policies domestically. As such, we see good value in moving out of nominal US government bonds into inflation-linked treasuries. We will also look to other government bonds – from Germany to New Zealand – to gain portfolio protection while mitigating the risks of higher fiscal deficits and inflation.
Moreover, we believe that options-based and absolute-return strategies can respectively offer downside protection and diversification in portfolios even when bonds fail. These are increasingly valuable in an asset allocator’s toolkit given latent inflation risks.
These are just some of the variables we must account for through 2025 as the dust of the 2024 sandstorm begins to settle.
Our top convictions for 2025
- For the tactical asset allocator: US mid-caps offer a way to capitalise on the country’s positive earnings momentum while avoiding the higher valuations of the market’s biggest names
- For the income investor: Easing policy and high yields are good news for carry trades. But, given risks posed by US fiscal inflation, we are looking to non-US duration, CLOs, and short-dated high yield. Inflation-linked treasuries should also offer some protection
- For the thematic investor: A basket of future financials. The 2025 backdrop suits this asset class, and by putting together a basket that is future proof, there is the potential for long-term excess returns too
- For the drawdown-aware investor: Heightened use of options-based strategies make sense as this part of the cycle will increase realised volatility. Diversification and returns should be available through upping absolute return strategies
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Important information
This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The investment policy of these funds means they invest mainly in units in collective investment schemes. Fidelity’s Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates rise and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document (KIID), current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.
