Brace for weaker returns in 2025: Analysis

After two years of superlative returns in global equity, fixed income and alternatives strategies, investors have been warned to brace for a likely moderation next year.

“It is time to prepare for a more realistic world of more moderate returns punctuated by occasional setbacks,” writes Stephen Dover, chief investment strategist and head of the Franklin Templeton Institute (FTI), as part of the researcher’s Global Investment Outlook 2025.

Investors, however, will be able to capitalise on strong momentum in infrastructure, digital infrastructure and sustainability themes, among others, that present opportunities for durable returns as a result – or even in spite – of the incoming Trump administration’s policy agenda.

‘Preparedness’, the FTI declares, is the overarching theme for 2025, with Dover calling for a “greater emphasis on portfolio construction”.

He notes that the “fundamentals for growth, inflation and interest rates, as well as the absence of significant imbalances or credit misallocation”, offer favourable preconditions for continuing positive returns next year across most asset classes and regions.

However, Dover warns of two caveats for investors. Firstly, the ‘narrow leadership’ evident in US equities – with top 10 stocks accounting for the vast majority of market cap and returns – typically serves as a bellwether to broader market weakness.

“Narrow leadership must give way to more balanced returns,” he said. That rotation has been underway, albeit haltingly, for the past six months. Durable rotation is now required.”

Secondly, investors must brace for weaknesses in supply side economies, particularly if the promised tariffs and immigration restrictions of the incoming Trump administration are enacted, leading to reduced foreign inputs of goods and labour supply.

“The support equity markets have garnered from falling inflation and falling interest rates could erode over the next 12–24 months. That is a risk factor we think investors should consider across equities and fixed income portfolio holdings.”

Investment themes for 2025

Dover proffers five key investment themes for the upcoming year, highlighting opportunities for durable sources of excess return, and potential quagmires, based on long-term social and economic trends.

Firstly, on infrastructure, Dover notes several drivers of investment in this rebounding asset class, including key themes of population growth in emerging markets, technological advancements, and climate change.

“Momentum in infrastructure projects like rebuilding the US electricity grid or creating a more secure European energy sector is unlikely to slow, even as political pendulums swing,” Dover wrote.

“These investments benefit sectors like basic materials (e.g., copper, steel, and cement) and industrials, while technological advancements in smart roads, smart grids, and rural internet also position tech companies to gain.”

Secondly, Dover sees ample opportunities in digital finance – well beyond the current hype around cryptocurrencies.

Advances in digital finances represent a transformation in how assets are originated, distributed, and held, FTI notes, including the enhanced efficiency and security of emerging digital platforms, particularly for trading and managing financial assets, and emergence of new fiat digital currencies.

“Opportunities initially lie in the technology sector, but the ripple effects will extend to banking, investment management, and insurance, driving sustainable profitability through innovation and efficiency,” Dover said.

Dover also underscored the continuing relevance of sustainability assets – despite the incoming Trump administration’s more carbon-friendly policy agenda.

He notes that sustainability is often narrowly associated with ESG investing, arguing for a broader perspective.

“Climate change is not merely an ESG criterion; it’s a present and future challenge that also offers investment opportunities,” he writes.

“Research indicates that annual climate change costs could reach double-digit percentages of global GDP by mid-century.”

Opportunities for investments addressing issues like water scarcity, plastic pollution, and pollination challenges, alongside climate change are growing.

“Data providers and analytics firms that offer clear metrics on sustainability will likely be key winners,” he adds, noting the growing demand for transparency in carbon emissions and workforce diversity.”

Further, continuing on the data theme, he argues for a more nuanced approach to artificial intelligence investments.

Rather than chasing existing AI leaders, Dover calls for a more active approach to identifying companies that effectively integrate AI into business models and client experiences.

“The next stage of AI’s investment potential lies in industries leveraging the technology to enhance operations and innovation,” he explained.

Finally, demographic forces – including ageing populations of the West and in East Asia, contrasted with the youthful populations of South Asia, Africa and LatAm – must be factored into investment decisions.

“Ageing societies require transformative solutions, from automation in agriculture to tailored financial products for retirees,” Dover said.

“Governments and financial institutions will need to address these challenges with innovative tax codes, savings incentives, and investment products.”