Looking ahead to the future, it is crucial to consider your strategic asset allocation and periodically reassess the forces in the system that result in structural trends. This is especially important as capital market history reveals that leadership often transitions from one decade to the next, driven by economic and political events. As part of our 2025 update of the Secular Outlook, here are the four capital market trends we see driving asset class performances for 2025 and beyond.
1. Store-of-value equities: Where the playing field is familiar
With the increase of geopolitical conflicts in a multipolar world, the investment opportunity set has shrunk. Investors should continue to favour real assets over nominal claims in jurisdictions where they are comfortable with the relevant political risk. In a multipolar world characterised by opportunistic manoeuvring on the geopolitical stage, which keeps macroeconomic and financial market volatility high, it is better for investors to focus on capital markets where the playing field is familiar and where the rules of the game are stable and known.
Even though we do not see a full-blown deglobalisation with unconditional reshoring activities coming into play, we reiterate our view that store-of-value equity markets should profit. We use the term store-of-value as an umbrella term for markets in countries where shareholder value and property rights are well protected and there is a strong institutional framework, sound governance, and efficient allocation of capital. Standout examples are the US, Sweden, and Switzerland, all of which have an exceptional track record of shareholder value creation.
2. Western sanctions bolster gold
Active industrial and fiscal policies, coupled with normalised interest rates, are significantly impacting public finances, which results in increasingly weak government balance sheets. Meanwhile, the current geopolitical tensions have prompted Western authorities to frequently use the centralised financial system for sanctioning purposes.
This benefits so-called ‘out-of-system’ assets, such as gold and Bitcoin, which are characterised by limited supply and insulated from potential Western sanctions. This is because in the current context, non-Western pools of capital may have decided to move some money out of that system. Quite simply, when investors are more concerned about the return of their capital rather than the return on their capital, the premium required to hold out-of-system assets, even if they are unproductive, shrinks. We therefore work with the hypothesis of increased structural demand for out-of-system assets, e.g. precious metals, led by gold, but also digital assets.
3. USD capital markets will continue to dominate
With the structural increase in demand for gold and other out-of-system assets, coupled with skyrocketing US government deficits, investors are wondering whether the current USD bull market is due for a reversal, or indeed, if this marks the beginning of the end of the dollar’s reign as the world’s reserve currency and, potentially, the fiat currency system at large.
While we acknowledge the merits of diversifying portfolios beyond the traditional USD based financial system, for the foreseeable future, no currency or alternative capital market appears poised to challenge the dominance of USD capital markets. As in the past, the current secular US bull market is underpinned by the strength of the US information technology sector, which boasts unrivalled growth and free cash flow generation.
4. US technology leadership and the innovation super cycle are here to stay
The innovation super cycle has important implications for asset allocation. Historically, accelerated innovation has always led to significant shareholder value creation among leading companies. The big question is where this new market leadership will emerge. Looking at the current situation, the answer is likely to be the same as before: within the US IT sector.
The US IT giants have been fundamentally undervalued for more than ten years. However, this is no longer the case. Today, their free cash-flow yield is slightly below that of the S&P 500, and their valuations fairly reflect their growth prospects and free cash flow generation. As such, investors like us, who have a fundamental growth DNA, are in a difficult position right now, as neither China nor Europe, which are burdened by structural issues, offer a viable alternative. In this context, we believe it is too early to underweight the major US technology stocks, especially given their profitability and the strength of their franchises. The leadership of the US tech sector is most likely to continue, even if its contribution to the outperformance of the US market is likely to be more challenging in the future.