KevinChen:Top 10 Global Financial Market Predictions for 2025

As the year 2024 draws to a close, the global financial market has faced significant challenges and considerable development. At this time of year-end review, I hope to reflect on last year's predictions and provide a framework for global investment in 2025 for discussion and criticism.

I remember that more than twenty years ago, when I graduated from the University of Lausanne with a Ph.D. and joined Morgan Stanley on Wall Street, I would learn from the Chief US Economist, Byron Wien, about his top ten global economic predictions for the following year. The intellectual sparring between him and the then Chief Economist, Steven Roach, on macroeconomic issues was immensely beneficial to us.

In recent years, major institutions in the United States have been promoting young people, including many "top leaders" who are now from the post-70s and 80s generations. Many ministers in the new US government next year will also be from the post-80s generation, and I believe there will be a lots of new developments in economic policy, market regulation, and financial innovation.

This is my ninth analysis from a macroeconomic perspective, making ten predictions for the global economy in 2025.

• On the micro aspect, this year I had the honor of joining the boards of several NASDAQ-listed companies, which are engaged in financial technology, health food, and energy development, observing their frontline operations and management.

• On the macro level, I was honored to be accepted as a lifetime member of the Council on Foreign Relations in the United States, and our Horizon Financial has become the New York State representative of the National Small Business Leadership Council, giving us the opportunity to participate in more macroeconomic and political exchanges and dialogues.

We have also begun in-depth cooperation with local regional small and medium-sized banks in New York to help businesses meet their international financial needs.

These predictions are the result of exchanges with top buy-side and sell-side financial institutions on Wall Street, analysis of a large amount of financial data, and discussions with leading academic institutions.

These views are not intended as investment advice but serve as a reference for market information. We welcome criticism and correction. Of course, this forecast has also been assisted and supported by our colleagues and partners at Horizon Financial.

1. Review of the Top Ten Predictions for 2024

Out of the ten predictions made at the end of 2023, three were incorrect, and seven were accurate. The overall accuracy rate can be considered 70%, which is just passing. There is a saying on Wall Street: "Forecasting is very difficult, especially about the future." Many people in 2023 did not anticipate that inflation in the first half of this year would far exceed expectations, nor did they foresee that Trump/Republicans would win by a landslide in the second half of the year. In fact, both events have had a huge and far-reaching impact on the global financial market.

Another macro research master at Morgan Stanley, Barton Biggs, once said: The logic behind predictions is more important than the conclusions themselves. It is possible that the logic is correct, but the conclusion is wrong. The person likely to become the US Treasury Secretary next year is a macro hedge fund manager who once traded European stocks and the yen exchange rate under Soros. His decision-making ability on fiscal policy and economic growth will likely be greatly tested next year.

2. Top Ten Predictions for 2025

Byron Wien once said that when making predictions, one must consider events that are low-probability but have a significant impact, such as the UK's Brexit in 2015, which was predicted to be low-probability but had a huge impact on the UK and European economies. Below are my top ten predictions for 2025. In addition to the predictions themselves, I hope to list the analysis logic for everyone to discuss and study. Especially, about three of them are low-probability events but could lead to significant impacts.

1. The Federal Reserve Ends the Interest Rate Cuts Early

The US monetary policy led by the Federal Reserve has a huge impact on the global financial market. This year, the Federal Reserve began to cut interest rates much later than expected, and the magnitude of the cuts was also lower than expected. Last year, Wall Street expected the Federal Reserve to start cutting rates in March of this year, with a total of 200-250 basis points.

In fact, due to the high inflation rate, the Federal Reserve did not start the rate-cutting cycle until September 18th of this year. The first rate cut of 50 basis points before the election caused a lot of controversy over "political rate cuts." The Federal Open Market Committee (FOMC) decision in September was also the first time in twenty years that a governor voted against it. It can be said that the Federal Reserve's repeated policy on interest rates has confused the financial market.

Chairman Powell made a very hawkish speech in Dallas, Texas, after the US election. He has already begun to guide the market to reduce expectations for rate cuts. In the past two months, the long-term US Treasury bond yields and mortgage rates have risen rapidly, and the two-year CD rate has also unprecedentedly increased during the rate-cutting cycle. It is clear that the Federal Reserve wants to convey a message: interest rates will not return to the previous low levels.

St. Louis Federal Reserve Bank's interest rate expectations for the next 5 years

If we refer to the current St. Louis Federal Reserve's expectations for the federal funds rate, the expected federal funds rate by the end of 2025 is currently 3.4%. That is, from now until the end of next year, there will only be a total of 100 basis points of rate cuts. Next year, there will be at most four rate cuts, and in fact, it is very likely that there will be only three.

My personal analysis is that this round of the Federal Reserve's rate-cutting cycle will end in May next year. The overnight rate will bottom out in the third quarter of next year, and long-term interest rates will bottom out in advance in the second quarter of next year. Many people in the financial market are now counting on the Federal Reserve to cut rates to reduce funding costs. This logic needs to be adjusted.

2. A Significant Development in US Stock IPOs and M&A

There is a lot of discussion on Wall Street now about Trump 2.0 trading. This 2.0 trading refers to the Trump 1.0 trading during Trump's first term as President of the United States from 2016 to 2020, and then "pressing the fast-forward button." The core of the Trump trade has many specific operations, but it is very simple: tax cuts + reduced regulation. Due to very strict regulation, the period from 2022 to 2023 was a low point for the U.S. capital market. The number of initial public offerings (IPOs) and the number of mergers and acquisitions both reached a twenty-year low.

With Trump moving into the White House, the chairs of the two mountains pressing on Wall Street and Silicon Valley (the US Securities and Exchange Commission and the Federal Trade Commission) will have new officials taking office. These two agencies should become relatively friendly towards listings and mergers and acquisitions.

Number of initial public offering companies in the US, 2000-2024

Annual total number of mergers and acquisitions by US companies, 2000-2023

This autumn, the author attended the 50th anniversary celebration of the Federal Reserve's Shadow Money Market Committee in Silicon Valley, where I met with many senior executives from large technology companies in Silicon Valley. Their general sentiment was one of frustration with excessive regulation, which has hindered their ability to complete strategic mergers and acquisitions. Data also shows that the total number of mergers and acquisitions in 2023 was the lowest since the global financial crisis of 2009. It can be said that the Democrats' defeat in this year's elections was also due in part to Silicon Valley's antipathy of suppression, leading to support for the Republicans.

3. The Booming Private Credit Industry

If there's one thing that's hot in the US financial market right now, it's not hedge funds or private equity, but undoubtedly private credit. The significant growth of private credit funds is due to both demand-side and supply-side reasons. On the demand side, many small and medium-sized enterprises in the US are unable to secure loans from banks. Over the past decade, the US banking industry has increasingly focused on trading and mortgage loans, offering limited services for commercial loans. On the supply side, a large number of high-net-worth individuals and institutional investors are looking for returns higher than bank deposits while also wanting to control risk.

The growth of the management scale of private equity debt funds from 2010

Private credit funds began to grow on a large scale starting in 2021, surpassing the $1 trillion mark for the first time in 2022. Firms like Blackstone, Apollo, and KKR have all created large-scale private credit funds. It is expected that 2025 will be another year of significant growth for the private credit market. In fact, due to expectations of reduced regulation under the Trump administration, many medium to large U.S. asset management companies plan to expand their private credit financing scale next year. Many alternative asset management firms believe that in the face of increased market volatility next year, the appeal of private credit funds to investors will also rise. Some authoritative institutions now predict that the total size of the U.S. private credit industry will reach a plateau at $3 to $3.5 trillion.

4. Significant Correction in the US Stock Market Starts in the Q225 $.SPX(.SPX)$ $.IXIC(.IXIC)$ $.DJI(.DJI)$

The US stock market has been in a bull market overall this year, especially after Trump's election victory, with the three major stock indices setting a monthly gain record for over a decade in November. The current valuation of the US stock market is already at a high level. The main reason for the surge is the expectation of tax cuts and reduced regulation for next year. After Trump returns to the White House, he is expected to push for tax cuts. During his campaign, he proposed reducing the corporate tax rate to 15%. However, facing the current high fiscal deficit and high debt, it is difficult to implement large-scale tax cuts. It is likely that he will slightly reduce corporate taxes, leading to market disappointment. Musk and Vivick will reduce some regulations through the newly established temporary agency "Department of Government Efficiency (DOGE, nicknamed the Doge Department)." These factors can drive investor sentiment and push up the stock market in the coming months.

After 2024 US election, the US stock market surged while other countries' fell. Data source: MSCI

Considering seasonal factors, after Trump's 100 days in office, namely the second quarter of 2025, the U.S. stock market will cash in all the good news and enter a period of adjustment. Depending on the extent of Trump's tax cuts and deregulation, the adjustment range of the US stock market will also be different. However, a direct decline of 10% to 30% should be expected. This should also correspond to a possible intensification of economic recession in Europe and Japan, affecting the fundamentals of US listed companies. About 50% of the revenue and profits of the S&P 500 index components come from Europe and Japan. The US economy is unlikely to be immune, and the US stock market cannot maintain a stable increase in profits.

5.The $USD Index(USDindex.FOREX)$ Will Experience Box-Shaped Volatility

As the cornerstone of the world's trade and monetary system, the Bretton Woods system, which reconstructed the US dollar after World War II, is now full of holes. The trend of the US dollar has a fundamental impact on the stock markets, bond markets, commodity markets, and of course, exchange rates of various countries. There are many factors that can lead to the depreciation of the US dollar, and there are even more factors that can lead to the appreciation of the US dollar. Factors that can lead to the depreciation of the US dollar include the long-term twin deficits of the United States: huge fiscal deficits and huge trade deficits. Under the Biden administration in recent years, the U.S. fiscal deficit has soared, leading to a rapid increase in the national debt as a percentage of GDP. Currently, the US national debt to GDP ratio has reached 123%, a new high since the end of World War II. The continuous rise in debt will eventually lead to currency devaluation. Moreover, according to research from the International Monetary Fund, a debt ratio of 120% is a red line. Once exceeded, due to interest expenses exceeding the growth of GDP, technically, it begins to enter a vicious cycle, with the debt ratio continuously rising until default.

US National Debt Balance /GDP，2014-2024

The proposed US Treasury Secretary, Basset, has also expressed a very clear view on this. He said that the United States needs to start controlling the deficit immediately and reduce the debt ratio through growth, which is also the "last chance to get out of the debt vicious cycle." On the other hand, one of the core policies of the Trump White House in 2025 is to increase tariffs. Increasing tariffs will naturally lead to the appreciation of the U.S. dollar. Trump's plan to cut taxes for American companies will also lead to foreign capital inflows into the United States, appreciating the US dollar.

Finally, the EU, the UK, Japan, and various emerging market countries all have serious debt problems. In this world of "beggars can't be choosers," excessive money issuance and diluting debt problems through inflation should be a common choice for all countries. Relatively, the hawkish monetary policy of the Federal Reserve will only lead to the continued appreciation of the US dollar. Considering these factors, the author believes that the US dollar will experience volatile trends in 2025, and it is difficult to achieve a one-way appreciation. It should also be mentioned that these analyses do not take into account the small probability events of some economies suddenly devaluing significantly. If such events occur, the possibility of a significant appreciation of the US dollar and a sharp drop in the US stock market is high.

6. Japan is Very likely to Enter an Economic Recession

In 2025, Japan is very likely to enter an economic recession, which will have a negative impact on global economic growth. According to OECD data, in 2022, Japan's main export destinations were: the United States (18.8%), China (18.6%), South Korea (6.98%), and other Asian countries and regions. This means that most of Japan's exports go to China and the United States, followed by South Korea and other Asian countries.

Classification of Japanese export products and countries, Data Source: OECD

In terms of product categories, Japan's largest export products are passenger cars (12.2%), machinery products (5.29%), integrated circuit cards (5.06%), and other electronic products. In recent years, China's automobile manufacturing industry, especially the production and export of electric vehicles, has risen sharply, and the export of electronic products is also growing rapidly. These will have a huge structural impact on Japan's traditional core export categories. After more than 30 years of zero interest rates and deflation, Japan began to experience inflation in 2022. To cope with inflation, the Bank of Japan started raising interest rates, which is a suppression of domestic consumption in Japan. Japan's imports and exports, consumption, and investment are currently facing huge challenges. If faced with the test of yen appreciation, in 2025, it is very likely that they will overlap and trigger a Japanese economic recession.

7. Ceasefire Between Russia and Ukraine, and Reconstruction of Europe

The year 2025 will mark the fourth year of the Russo-Ukrainian War. November 19, 2024, is the 1000th day since the outbreak of the Russia-Ukraine military conflict, and media reports indicate that the cumulative personnel and property losses on both sides are extremely painful. United Nations statistics show that both sides have suffered about one million casualties. Ukraine's economy shrank by about one-third in 2022. Despite growth in 2023 and so far this year, its scale is still only 78% of the pre-invasion level. The latest assessments from the World Bank, the European Commission, the United Nations, and the Ukrainian government found that as of December 2023, Ukraine's direct war losses have reached $152 billion, with housing, transportation, commerce, energy, and agriculture being the most affected sectors. They estimate the total cost of Ukraine's reconstruction and recovery to be $486 billion. According to the Ministry of Economy's data, this figure is 2.8 times Ukraine's nominal GDP for 2023. As Ukraine is one of the world's main food sources, its export disruptions have also led to soaring food prices and social unrest in some countries in the Middle East and North Africa. After being subjected to economic sanctions from many countries, Russia's stock market plummeted by 50%, its currency significantly devalued, and its sovereign rating was downgraded to junk bonds, preventing Russian companies from financing normally. Some institutions estimate that Russia's current daily military expenditure on the war is about $500 million to $1 billion, with daily casualties ranging from 1,000 to 2,000 people. These figures far exceed any conflict since World War II.

Russian Stock Index RTS, February 24, 2020, Data Source: Investing.com

From the perspective of both Russia and Ukraine, the losses in terms of personnel and economy have drained both countries' vitality. Internationally, following the US election, Trump took office. He has expressed a strong desire to achieve a ceasefire as soon as possible. It can be said that after the ceasefire, trillions of dollars will be needed for reconstruction. These funds will come not only from multilateral international financial institutions such as the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development but also from a large amount of private enterprise investment. Undoubtedly, this will be a huge challenge and a huge opportunity for Europe's economic development and EU economic integration.

8.The Middle East Attracts Global Funds, Becoming a Hotbed for Investment

Although the Middle Eastern countries suffer from geopolitical risks, they also have unique opportunities. During Trump's first term as President of the United States, he promoted the Abraham Accords, which led to the mutual diplomatic recognition between Israel and the United Arab Emirates, the first Arab country to establish relations with Israel since 1994. Subsequently, Bahrain, Sudan, and Morocco also signed the Abraham Accords with Israel. It is very likely that the Abraham Accords will continue to expand to other Arab countries. After the signing of the Abraham Accords, a large amount of Israeli technology and businesses have flooded into the UAE's member states such as Dubai and Abu Dhabi. Funds from the UAE have also been heavily invested in Israel. Currently, with much uncertainty in Sino-American relations, many Middle Eastern countries have become relatively neutral regions that can attract funds, technology, and trade increments from both the United States and China.

Top 5 stock exchanges in the middle east-Arab countries by market capitalization: Riyadh, Abu Dhabi, Dubai, Kuwait, Casablanca, Data Source: Forbes

What's more, Dubai has become one of the core cities for global digital currencies. Due to Dubai's inclusive and open attitude towards digital currencies, many global digital currency exchanges, trading funds, and talents are concentrated in this city. The Trump administration's attitude towards digital currencies is in stark contrast to the previous Biden team. His proposed Secretary of Commerce is the CEO of a top Wall Street institution engaged in digital currency investment banking business. The significant development of cryptocurrencies in 2025 will also help the Middle East, especially Dubai and the UAE, attract a large amount of speculative capital.

9. Significant Development of Digital Currencies

Digital currencies have been seriously regulated by various countries, especially the United States, for over three years, making many headline news. With the FTX case's judicial proceedings gradually coming to an end, many harmful elements in the digital currency industry have been cleared out. The new generation of Silicon Valley tycoons, represented by Musk, highly advocate for digital currencies, and they are also core members of the Trump team. Trump's Vice President, Vance, once established a venture capital fund in Silicon Valley and is an industry insider in the cryptocurrency circle. Their presence in Washington will undoubtedly help the digital currency ecosystem achieve significant development in 2025. Musk has a particular fondness for Dogecoin, so much so that the Department of Government Efficiency he is about to head is even abbreviated with the nickname of Dogecoin: Department of Government Efficiency, DOGE. The surge in Dogecoin, along with Bitcoin reaching historical highs, has brought it close to $100,000, which can be said to be a booming popularity in the cryptocurrency market.

Musk's favorite Dogecoin (DOGE)

Of course, this is not just about Dogecoin's rapid rise under Musk's close attention. Trump's criticism of the fiscal policies of the past few years leading to high inflation, and Musk's support for decentralized currency issuance, are very likely to create a perfect storm for cryptocurrencies in 2025, which is a surge followed by a severe that hits leveraged long stop-loss positions.

10.Artificial Intelligence Fully Enters Various Industry Applications

In recent years, artificial intelligence has made rapid progress in both hardware and software fields. The application of artificial intelligence requires a large amount of energy. For example, a search on ChatGPT consumes about 50 times the energy of a traditional search engine. However, constrained by insufficient energy supply and environmental regulatory constraints, the construction of many large data centers in the United States has been delayed this year. After the US election, the uncertainty about energy supply and environmental regulation has ended, and many data centers have started construction. The biggest takeaway from the recent Federal Reserve Dallas Energy and Economy Conference that I attended is that both traditional and new energy sources require large-scale investment in construction. In the future, the United States will invest heavily in natural gas power generation, photovoltaic power generation, wind power generation, and nuclear power station construction. Many data centers will be built directly near power stations to achieve efficient computing.

Tesla humanoid robot in front of an electric vehicle

With the expansion of computing power, the comprehensive application of artificial intelligence will also be rapidly advanced. Recently, the number of daily passengers carried by driverless taxis in San Francisco has exceeded that of traditional taxis with drivers. In the field of medical health, the medical diagnostic capabilities of artificial intelligence have also surpassed traditional doctors in many tests. The year 2025 should be a year of significant development for the introduction of artificial intelligence across various industries.

In summary, the year 2025 should be a year of great ups and downs for global risk assets. The opportunity cost of cash is too high, and it cannot hedge against the erosion of inflation. Investors need to allocate a portion of risk assets, especially US dollar risk assets. However, due to the high interest rates that will remain high, leverage will still be a double-edged sword. Investors should remain cautious about high-leverage industries and projects with high financial costs. Investors can use the barbell strategy to allocate both high-risk and low-risk assets, rebalance according to market development situations, achieve low buy and high sell, and steadily increase the value of the overall asset portfolio.