Q1 2025 Asset Allocation Views | Manulife Investment Management

Key global themes
Asset allocation views
Near-term opportunity
Asset class returns
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^{Multi-asset solutions team}

Our latest asset allocation views

January 2025

Asset allocation views: balancing U.S. equities and trade risks

As we head into 2025, U.S. trade policies take center stage amid the economy’s stronger fundamentals compared to peers.

Key global themes

Heading into a dynamic environment: while most central banks globally will continue to ease rates, evolving U.S. policies could bring new complexities.

2025 may begin strong, but brace for possible turbulence

Growth, while positive, will be below trend across most major economies in 2025, driven by pressured consumers and high borrowing costs. Financial conditions are expected to remain balanced, avoiding extremes that could either slow down the economy or reignite inflation.
We expect key central banks to continue easing monetary policy. However, dynamics will vary: Europe and Canada are likely to ease due to weak growth; the United Kingdom also faces weak growth, along with high inflation, while the United States may have a slower easing cycle amid healthy growth and policy uncertainty, affecting dollar-dependent emerging markets. Japan and Brazil are outliers and are expected to continue tightening monetary policy.
These conditions are expected to be favorable for risk assets like equities as we enter 2025 but be prepared for turbulence as government policy uncertainty could lead to volatility.

The United States remains the favored investment choice

U.S. equities will continue to lead, driven by favorable monetary policy, a still fulsome labor market, and stable inflation within a resilient economy. Policy uncertainty, particularly around trade, could also trigger a flight to safety. While valuations are high, we believe they are to some extent supported by comparatively robust earnings growth and promising prospects for U.S. investments.
Additionally, U.S. markets may benefit from pro-growth economic policies, such as corporate tax cuts and deregulation. While broad-based tariffs pose a potential risk, we expect a more targeted and strategic approach to trade negotiations.
Further, continued positive economic growth and broader earnings strength could create more diverse market opportunities beyond the handful of equities that led the U.S. markets in 2023 and 2024. Undervalued areas such as cyclical sectors and small-cap stocks are potentially attractive investment options.

Position portfolios for the potential of a steepening yield curve

The U.S. Federal Reserve (Fed) is expected to further cut rates in 2025 to stimulate growth as near-term inflation concerns decrease. This will likely lower short-term interest rates while deficit spending and inflation expectations could raise longer-term rates.
We anticipate increased fiscal spending, additional tax cuts, and deregulation under the new administration, similar to the period following the 2016 presidential election. This could lead to higher growth and inflation expectations, resulting in elevated long-term yields.
In this environment, potential investment opportunities include financial stocks, shorter duration bonds, and strategic allocations to inflation-sensitive assets such as commodities, real estate investment trusts (REITs), and private real assets.

Source: Manulife Investment Management, January 2025. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed.

Active asset allocation views

Asset class overview Broad equity Regional/sector-specific equity Fixed income Private markets

Asset class overview

For 2025, we favor equities over fixed income due to a resilient economic backdrop, strong earnings growth, and potential pro-growth economic policies. With the election behind us, we anticipate a more stable environment that promotes market growth and boosts investor confidence; however, policy uncertainty remains a key risk. Longer term, we see opportunity within fixed income, particularly on a risk-adjusted basis.
We have a strong preference for U.S. equities, as we believe the U.S. market will continue to outperform with leadership across various market capitalizations. We remain vigilant in seeking global diversification opportunities and are prepared to reduce exposure when potential risks arise.

Broad equity

We remain overweight in U.S. equities, supported by accommodative monetary policy amid a moderating labor market and stable inflation. Despite high valuations, U.S. equities continue to gain support from strong earnings growth compared to other developed markets.
Our outlook on Canadian equities remains neutral, given the risks surrounding trade policy with the United States and the potential for tariffs. However, improving earnings growth and favorable valuations compared to other developed markets make Canada attractive. The Bank of Canada’s cautious approach to rate cuts amid declining inflation could be beneficial.
Our stance on developed international equities outside North America has shifted from neutral to underweight. Despite the valuation discount compared to the United States, muted forward earnings growth, lower economic productivity, tighter fiscal policies, and political instability pose near-term risks.

As of December 31, 2024, Manulife Investment Management’s Multi-Asset Solutions Team has an overweight stance on U.S. equities, underweight stance on non-North American developed market equities and a neutral stance on Canada and emerging market equities. — Source: Multi-Asset Solutions Team, Manulife Investment Management, as of December 31, 2024.

Regional/sector-specific equity

The economic recovery in Europe is slowing as core countries are still facing challenges such as domestic political instability, fiscal concerns, and a weak economic boost from China. Additionally, new threats of U.S. tariffs are creating uncertainty and affecting the outlook for risk assets. Despite the presence of healthy shareholder yields and attractive valuations, it’s difficult to identify positive catalysts in the near term.
We see Japan as a preferred market, but we have a neutral stance due to currency fluctuations. Uncertainty surrounding U.S. monetary policy and potential normalization by the Bank of Japan is affecting the USD/JPY exchange rate and Japanese equities; however, positive corporate governance reforms bolster our long-term positive outlook and the potential for improved valuations.
We’re neutral on Asia equities overall but see opportunities in ASEAN markets that are more domestically focused. For Chinese equities, growth in policy-supported sectors and exports is offset by weaknesses in real estate and domestic consumption. Trade tensions and limited policy stimulus will pose challenges.
We’ve adjusted our position on emerging Latin American equities from neutral to underweight due to a decline in economic activity and a less optimistic outlook for growth and earnings. Additionally, currency weakness is creating uncertainty around inflation expectations, particularly as Brazil embarks on an aggressive tightening cycle.

Taking a regional and sector-specific view, as of December 31, 2024, Manulife Investment Management’s Multi-Asset Solutions Team has an overweight view on U.S. small-cap and infrastructure equities. It has a neutral stance on equities in U.K., Japan, Mainland China, Hong Kong, non-Japan Asia-Pacific equities, real estate investment trusts and commodities equities. The team is underweight on non U.K. European and emerging Latin America equities. — Source: Multi-Asset Solutions Team, Manulife Investment Management, as of December 31, 2024.

Fixed income

We maintain a neutral stance on investment-grade bonds overall, but we prefer mortgage-backed securities due to several key factors: the high duration typically found in investment-grade credit, our inclination toward lower duration investments, the historically tight credit spreads in the investment-grade sector, and the limited prepayment risk currently present in the mortgage space.
We believe leveraged loans provide a better risk/reward balance than U.S. high yield and should also benefit from limited rate sensitivity. Within high yield, there is potential for spreads to remain narrow for an extended period.
Within Asia, we prefer high-yield debt over investment grade due to more attractive valuations with favorable spreads compared with historical averages. Default rates are likely to normalize after years of credit stress. Non-China high-yield debt presents resilient and solid fundamentals.
We still maintain an overweight stance in emerging-market debt driven by strong fundamentals, limited default expectations, and favorable economic conditions increasing the likelihood of benefiting from high yields. That said, spreads have tightened and global trade uncertainties are a risk.

Private markets

We’ve upgraded our view on U.S. real estate to neutral, as the Fed has started its easing cycle; however, uncertainties around government policy and the potential for stickier-than-expected inflation could pose challenges.
We’re optimistic about global infrastructure as strong trends like digitalization and decarbonization are driving high demand for data centers and renewable energy. This is further boosted by substantial government support, despite rising geopolitical risks and challenges in developing power supply infrastructure.
Private credit continues to be attractive as banks remain selective amid tight lending conditions. This asset class is growing and broadening across sectors typically financed by public markets with smaller borrowers favoring its lower borrowing costs, flexible terms, and quick execution.
We anticipate some near-term challenges in private agriculture due to high input costs, lower commodity prices, and geopolitical uncertainties. However, the long-term outlook is positive, driven by strong demand from population growth, favorable supply-and-demand dynamics, and improved trade relations.

Asset class focus

Enhancing portfolio resilience through real assets

Amid increased volatility in investment markets and lingering inflation concerns, investors can turn to real assets as an effective hedge within diversified portfolios.

Real asset investments, such as commodities, real estate, commodity-linked equities, and infrastructure, have historically offered protection against rising inflation. While global inflation has receded, easing monetary policy, potential tariffs, and geopolitical risks could apply upward pressure. Inflation trends have resembled those of the 1970s in the last decade, and these factors pose a risk of continuation. Markets may also be underpricing the term premium in fixed income, and historical equity fixed-income dynamics could potentially break down.

In such a scenario, investors may want to consider other assets in their portfolio as insurance.

In recent years, markets have been driven higher by a handful of technology-focused companies. This has led other sectors like energy, infrastructure, and REITs to be undervalued. While valuation is historically not a strong predictor of near-term performance, a strategic allocation to these sectors could allow investors to benefit from their favorable valuations.

In addition to their inflation-sensitive qualities, there are several other arguments in favor of real assets. The growing power generation needs to support artificial intelligence benefit energy, infrastructure, and metal and mining companies. Geopolitical risks and central bank buying also make gold and other commodities attractive. Meanwhile, the fundamentals in the real estate market remain strong, especially outside of the commercial sector. These factors can make real assets a compelling addition to a well-diversified portfolio.

U.S. Inflation in the 1970s vs. Today

Will the double-inflationary wave of the 1970s be repeated?

This line chart compares the inflation of the last decade to the double-inflationary wave of the 1970s and early 1980s, hinting that current building inflationary pressures could lead to a repeat of the double-wave trend. — Source: Bloomberg, FactSet, 12/31/24.

Asset class returns

Asset class returns comprise the Multi-Asset Solutions Team’s expectations of how different asset classes may perform over a 5-year and long-term (20-year-plus) time horizon.

Expected returns

^{Source: Multi-Asset Solutions Team, Manulife Investment Management, as of January 31, 2025. Not all asset classes with forecasts are represented in every portfolio managed by the Multi-Asset Solutions Team. Data shown in the tables reflects the most recent data available. Asset class forecasts comprise inputs driven by proprietary Manulife Investment Management research and are not meant as predictions for any particular index, mutual fund, or investment vehicle. To initiate the investment process, the investment team formulates 5-year and 20-year plus risk/return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight. Assumptions are then adjusted for a number of factors. This chart contains forecasts reflecting potential future events and is only as current as of the date indicated. There is no assurance that such events will occur, and the actual asset class return may be significantly different than that shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly into an index. Past performance does not guarantee future results.}

Multi-Asset Solutions Team

Nathan W. Thooft, CFA

CIO, Multi-Asset Solutions Team, Global Equities

Robert E. Sykes, CFA

Senior Portfolio Manager, Head of Asset Allocation, U.S., Multi-Asset Solutions Team

James Robertson, CIM

Senior Portfolio Manager, Head of Multi-Asset Solutions, Canada, Head of Tactical Asset Allocation, Multi-Asset Solutions Team

Luke Browne

Senior Portfolio Manager, Global Head, Multi-Asset Solutions Team, Head of Multi-Asset Solutions, Asia

Geoffrey Kelley, CFA

Senior Portfolio Manager, Global Head, Systematic Equity Solutions, Multi-Asset Solutions Team

Benjamin W. Forssell, CFA

Client Portfolio Manager, Global Multi-Asset Team, Multi-Asset Solutions Team

Eric Menzer, CFA, CAIA, AIF

Senior Portfolio Manager and Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team

Related viewpoints

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2025 market outlook: navigating bull-, bear-, and base-case scenarios

Macan Nia, CFA, Co-Chief Investment Strategist Manulife Investment Management

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October 25, 2024

Asset allocation views: a variable growth outlook

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Latest asset allocation views from the Multi-Asset Solutions Team at Manulife Investment Management.

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