At the start of every year market strategists from across the globe pen down their forecasts for the year. So, in keeping with this tradition, our first article for 2025 will aim to do as much for our readers. However, what we aim to present below are several non-consensus calls for 2025. They may seem controversial or far-fetched but our investment experience over many decades constantly reminds us that nothing is ever off the table.
The bull market will continue – expect double digit returns over the next 2 years
Global equity investors have now enjoyed two stellar years of double-digit returns. From January 2023 to December 2024 the MSCI All Country World Index (AUD) delivered +25.3% p.a., and the S&P/ASX 300 Total Return Index delivered +11.7% p.a. Most investors right now are pinching themselves over these returns and naturally feel uneasy at the prospect of this party (bull market rally) continuing.
To be fair, the threat of a recession in the U.S. and China’s failure to successfully stimulate its faltering economy are genuine risks. But what if the U.S. Federal Reserve does manage to navigate the U.S. economy towards a soft-landing despite raising interest rates aggressively over the past three years. Is there historical evidence of the U.S. Federal Reserve achieving such a feat? Yes. We would point investors to the 1993-95 period when the U.S. Fed raised the Federal Fund rate by 3.0% to 6.0% and kept the rate at elevated levels for approx. six years. Despite this, the S&P 500 Index double digit returns from 1995 (at the conclusion of the hiking cycle) to 1998. So, our first controversial call is that global markets, predominantly led by the U.S. market, will deliver double digit returns as the U.S. Fed delivers a soft landing like it did in the mid-1990s.
U.S. 10-Year Treasury yield will spike well above 5.0%
We agree this call is likely to be very controversial especially given how much bond yields have increased already. However, we believe there is a real possibility that U.S. 10-Year Treasury yield breaches the 5.0% level and may even momentarily threaten 5.5%. What is driving our thinking?
If the U.S. Federal Reserve does achieve a soft landing for the U.S. economy, then we believe year-on-year inflation in the U.S. will start to reaccelerate. However, we expect the U.S. Federal Reserve to feel intense pressure from incoming U.S. President Donald Trump to lower interest rates to support the economy (read as – he wants higher share prices) and support a lower U.S. dollar (both the President & his VP Vance has expressed views that the U.S. dollar should be lower).
With inflation reaccelerating, the U.S. Federal Reserve cutting rates to appease an erratic President and mounting U.S. fiscal debt, we expect the bond vigilantes will eventually step in and drive U.S. bond yields higher. Recall ex UK Prime Minister Liz Truss was taught a similar lesson by bond investors during her short tenure.
Gold’s spot price will hit US$3,500
Perhaps this is not the biggest non-consensus call, but some may be surprised by our price target. We believe global central banks will continue to diversify away from U.S. assets, such as U.S. Treasuries, which have in the past been used as safe-haven assets. However, with growing geopolitical tensions between major powers and threats of U.S. assets being used to enforce sanctions on countries, we see the demand for gold from global central banks continuing. Further, investors will also bid up gold as an inflation hedge and protection from U.S. fiscal largesse.
U.S. President Donald Trump and China President Xi Jinping call a truce on U.S./China trade war
Absolutely no one is expecting a turnaround in the highly fractured relationship between China and the U.S. Firstly, after starting the trade war with China in his first term, incoming U.S. President Donald Trump has doubled down on his tariffs threats against China coming into his second term.
He has threatened to impose as much as a 60% tariff on Chinese imports when he comes into office. China’s President Xi is expected to respond with their own retaliatory measures. But in our view, there is a good chance the tariff war does not play out as the market expects – that is, bringing the global economy down with it. President Trump’s tariffs threats are simply a negotiating tactic, and he will find common grounds to do deals with China.
Further, the Chinese economy is already facing numerous challenges – high local government debt, aging population, housing crisis – which it didn’t when President Trump first imposed tariffs on China. Therefore, the Chinese economy presents little threat to the U.S. In our view, President Trump has more pressing matters – fighting inflation / cost of living in the U.S. (adding 60% tariffs on Chinese imports is unlikely to help this!) and removing the U.S. from or ending the Russian-Ukraine conflict.
Natural Gas starts a bull run
As the world races to meet the surging energy demands of data centers, much of the attention recently has zeroed in on nuclear energy and Small Modular Reactors (SMRs) as the future backbone of this critical infrastructure. However, an overlooked yet readily available resource, natural gas (cheapest energy molecule on earth), stands as a compelling and practical option to power data centers. While nuclear and SMRs hold significant long-term promise, in our view they are still years away from widespread deployment due to regulatory, financial, and technological barriers (2027 at the earliest with majority near 2030).
In contrast, natural gas infrastructure is well-established and capable of providing a cleaner, reliable energy source with lower carbon emissions compared to traditional coal and as data center energy needs continue to expand at an unprecedented pace, natural gas presents an immediate opportunity for sustainable growth in this sector. Natural gas offers unique advantages in terms of flexibility and reliability (unlike renewable sources such as solar and wind, natural gas provides a consistent power supply, unaffected by weather conditions), which are crucial for data centers that demand continuous, high-volume power.
Additionally, advancements in combined-cycle natural gas plants have greatly improved efficiency, allowing natural gas facilities to generate more power with less fuel. Carbon capture technology is also making strides, positioning natural gas as a cleaner option within the fossil fuel category. Few key statistics (source: Equity research note by Goldman Sachs titled AI, data centers and the coming US power demand surge published 28th April 2024);
(1) By 2030, data center power demand is projected to drive ~3.3 bcf/d of incremental natural gas demand, representing a ~10% increase in gas use in the power market (~35 bcf/d today).
(2) The growth is tied to ~28.7 GW of new data center power capacity, with ~60% powered by natural gas and ~40% by renewables.
(3) Natural gas demand for data centers could grow rateably (~0.47 bcf/d annually), influenced by gas pricing, regional developments, and infrastructure build-outs.
