Top 3 concerns of fund managers in 2025

Endowus conducted a market outlook survey with over 50 fund management companies in December 2024, in hopes of sentiment and pulse of what risks and opportunities lie ahead in the next 12 to 24 months. Among the questions asked were their expectations on Trump’s administration and policies, inflation and growth of the two largest economies – the US and China in the face of the regime shift, as well as whether a smoother rate-cutting path of the US Federal Reserve will be coming. 

Read Part II here about asset classes, equity and fixed income opportunities, as well as thematic investing. 

New and old concerns: Inflation, Trump administration, and Geopolitics

2024 marked a year of elections, with more than 50% of the world’s population participating in selecting their next leaders. The outcomes of these elections gave rise to risks and concerns among portfolio managers.

One of the most closely watched elections was the presidential election in the US, which took place in Nov 2024. The internal political strife in recent years, with both ends of the political spectrum witnessing a rise in extreme views, had already been weighing on the political reality. The potential consequences of these political dynamics have become a source of worry for fund managers, as they navigate an environment where moderation and consensus-building may be harder to achieve.

As Donald Trump started his second term on 20 January as the US President, his “America First” policies and ongoing trade tariff negotiations continue to create uncertainty around inflationary pressures – which came back as the biggest fear that haunts our fund managers according to our survey results. Policies implemented by the new US administration came a close second. 

Geopolitical tensions remain a recurring concern, with ongoing conflicts in the Middle East and Russia's invasion of Ukraine, which is now spanning three years. These unresolved issues further contribute to the overall sense of uncertainty and risk in the global market.

The US Fed: Far from leaving our minds

Central bank policy missteps were on the minds of fund managers in the past two years of survey results, arising from doubts about the institution’s ability to navigate through the persistently high inflation without triggering a severe economic downturn. 

As we have seen throughout 2024, the challenge of “raising interest rates just enough to stop an economy from overheating without causing a severe downturn” and “reducing rates slow enough to not induce an inflation flare-up” is equally daunting. 

The US Fed began reducing interest rates in September 2024, but at the same time has signalled a slower pace of easing in the new year. The strength of the US dollar has persisted, and any missteps in the central bank's policy could have detrimental effects on the economy, such as higher levels of debt and credit defaults.

Concerns that also take the mindshare of investors include the weakening state of the US labour market, a no-economic landing, and increasing company default rate – all pointing to the health of the US economy. Despite these concerns, however, it seems that the base case scenarios of fund managers do not include an imminent economic recession. 

US economy: Is hard landing behind us?

Recession is ranked as the bottom concern. An overwhelming majority (86%) of the respondents expressed confidence that the US will be able to avoid a recession entirely in 2025 and 2026. The remainder believed that a recession would likely take place in either Q4 2025 or 2026.

It is interesting to compare this to last year’s survey results, where the consensus call among managers was split – almost half (46%) of the respondents thought the US would be able to avoid a recession entirely and the rest believed it’d happen in 2024 or 2025. 

The follow-up question is the number of rate cuts fund managers expect in 2025. The majority of the managers (92%) believed the US central bank may put rates lower by between 25 and 75 basis points throughout the year. This follows the Federal Reserve cutting rates by a total of 100 basis points in 2024, bringing monetary policy to a somewhat less restrictive stance. 

Based on the current Fed funds rate of 4.25-4.50%, fund managers who expect deeper cuts are seeing rates to reduce to 3.50% - 3.75% by the end of 2025. Those who believe the Fed will moderately adjust rates expect rates to stand at 4.00-4.25%. 

Rate-cut cycle: How many more fed funds rate cuts will there be in 2025?

Answered by Endowus fund manager partners in December 2024

In a broader sense, markets have reacted to recent moves and have started anticipating a shallower Fed rate path. Timeline-wise, as of 21 January, the futures market is trading that the Fed is likely to stay put in the first FOMC meeting of the year, eight days after the inauguration of the new President. Rate cuts will likely resume from March 2025, though, the data on CME Group shows. 

The odds aside, what garnered greater market attention is President Donald Trump’s repeated view that the president should have a greater role in the Fed’s monetary policy decisions.

Regardless of whether and how the incoming president is reforming the Fed to exert more power from the White House, the caveat for investors is that the way one invests should not change with what the Fed does. Fed’s actions are an outcome and a response to macroeconomic fundamentals of growth, inflation and employment, not a predictor of the future. 

Rate expectations and their actual outcomes constantly change – as seen in how futures traders bet differently based on delaying rate cuts in 2024, for example. This serves as a constant reminder that investing is about first figuring out what your investment goals and needs are and what you need to do to get there. 

US exceptionalism, America-First policies: What’s next for GDP growth?

US exceptionalism – the undisputed global equity market leader, an economic growth that repeatedly surprised to the upside, and a strong greenback – anchored investor belief that the US continues to outperform on multiple fronts. 

With Trump’s “America First” policies, banking sector deregulation and tax cuts could continue to buoy corporate earnings, ultimately benefitting US equities. Meanwhile, the uncertainty around potential tariffs against certain economies could disproportionately weaken ex-US equities, pulling further the gap between the US and other markets. 

The forecasted US GDP growth for 2024 is coming in stronger than previously estimated. Full-year economic growth of the US has been adjusted upward to stand at 3.0%, based on a model-based projection of GDP growth provided by the Atlanta Fed as of 17 January 2025. That is likely to imply that the US economy, again, defied expectations and pulled off a robust expansion way higher than the widely used long-term projected growth rate of 2.0% for the country.

For 2025, the outlook for the US economy remains more or less optimistic. From our fund managers, after two strong years, US GDP growth expectations for 2025 clocked in at 2.3% on average or ranged between 1.5% and 3.5%. The average forecast is narrowly above the IMF projection of 2.2%.

On the other hand, the average 4.4% forecasted GDP growth rate for China is also in alignment with the IMF’s estimate for China’s growth in 2025. 

A prolonged property market downturn, mounting local government debt, and subdued consumer confidence are cited to be the main culprits that have hampered growth. While the central government pledges to implement a more proactive stimulus package to revive growth, fund managers are providing lacklustre forecasts ranging between 3.8% and 4.8%. This is below the 5% growth level that the country leader strives to deliver. 

The 2025 forecast for China has been revised downwards from the range of 3.5% to 5.5% that we collected a year ago, which had a wider range of potential outcomes with a bias towards the higher end.

Expectations for global growth rose to about 3.0%, up from 2.6% from a year ago. The forecast barely falls short of the IMF’s projected growth rate of 3.2%. 

A time-tested strategy for a wild range of outcomes

We are very good at predicting the future, except for the surprises—which tend to be all that matter.

– Morgan Housel, the author of The Psychology of Money

Predicting the future is an inherently challenging endeavour. Whether it pertains to interest rates or economic growth, accurately forecasting outcomes has proven to be a formidable task. 

Base-case, best-case, worst-case scenarios corroborated by fund managers are not immutable but are meant to provide managers and their teams of analysts with a benchmark for decision-making and reflection of the market pulse. Yet, they do not rigidly adhere to these cases, and neither should we blindly follow.

For long-term investors who are building our pots of capital for goals from liquidity to longevity and to legacy, global diversification and low-cost investing are time-tested strategies that remain key throughout the storms that are yet to come. 

Diversification is a strategy that plays out over a long period of time, and gives you a greater chance of achieving your goals without having to predict how the future will turn out. By choosing low-cost investment options, investors can maximise their potential returns by minimising fees and expenses.