As we approach the end of 2025, the global economic outlook is characterised by slowing growth, with the US economy losing steam due to consumer fatigue and China continuing to struggle due to weak domestic demand. In contrast, Europe sits in a sweet spot of growth, inflation and monetary policy, although in our view, the effective implementation of various fiscal initiatives will be critical.
The US economy is facing challenges, including softer job growth, the impact of tariffs, and policy uncertainty, which are weighing on consumer spending. US consumers are responsible for about 70% of US GDP growth.
This backdrop, together with the growing confidence that any tariff-induced inflation spike will remain transitory, will potentially allow the Federal Reserve to respond with several interest rate cuts into the year-end and first quarter of 2026. As the yield advantage shrinks, the US dollar would thus be likely to resume its downward trend again.
Although we are likely in the later stages of the current equity bull market, we remain optimistic about the prospects for equities and believe investors should stay invested. While valuations are no longer cheap, market sentiment and investor positioning have yet to reach excessively optimistic levels.
As leadership differs across global markets, it is important to build an internationally diversified portfolio.
Within the US, the top performers are still a small group of exceptional companies with robust earnings growth, particularly those in the artificial intelligence space. Notably, the Magnificent 7 tech stocks continue to outpace the broader S&P 500 index in terms of capital expenditure growth.
We would focus on unique segments in the US that cannot be replicated elsewhere. Meanwhile, after any short-term rallies in US equities, we would use the opportunity to rebalance and diversify further into equities elsewhere with more compelling valuations and more attractive growth prospects than their US counterparts.
EUROPE IN SPOTLIGHT
Increasing exposure to Europe is one way investors can enhance portfolio diversification.
We believe European equities stand to benefit from a brighter economic outlook for the continent, supported by additional fiscal stimulus measures. We favour value- and domestically-oriented cyclical sectors, which are well positioned to gain from improving local growth prospects and are less exposed to tariff and currency risks.
German equities are particularly attractive due to their cyclical tilt, with mid-caps offering more compelling valuations and greater potential to benefit from fiscal support. Pro-growth policies from Germany's new government further support the outlook for German share prices.
Our outlook for Japanese equities remains positive, supported by continued progress with regard to corporate reforms and heightened corporate activity this year. The gradual return to normality with interest rate hikes also supports this positive view.
Dividend growth is set to accelerate, alongside a record pace of share repurchases. While we favour high-quality Japanese stocks, some of these -- particularly exporters -- may face short-term headwinds due to trade tensions. We highlight three key opportunities: information technology leaders, domestic champions, and businesses undergoing significant structural transformation.
Although ongoing trade talks may cause volatility in Chinese markets, more supportive domestic policies should partly mitigate this. We remain constructive on Chinese equities, as fundamentals such as profitability, shareholders' returns, and liquidity conditions are improving.
We continue to like high-dividend Chinese stocks and now expect A shares to catch up with H shares, as the A-share premium nears a new low and onshore market liquidity improves.
On the other hand, the new 50% tariff on imports of Indian goods to the US threatens to significantly erode the country's export competitiveness. However, despite the near-term uncertainty regarding tariffs, equity fundamentals as well as structural drivers and resilience of the Indian economy suggest a positive long-term outlook for Indian stocks. We see tailwinds from double-digit earnings growth, monetary policy easing and consumption tax cuts.
CURRENCY PICKS
Regarding foreign exchange, we believe the beneficiaries of a weakening dollar are the euro followed by the yen due to further policy normalisation.
The British pound may also strengthen, driven by its high carry potential versus European peers. Driven by safe-haven demand, central bank buying and a weaker dollar, gold is expected to reach new highs going into 2026.
In summary, despite cyclical clouds on the horizon, our investment stance remains constructive. Momentum in global stock markets is strong and favours investors who shift gears into active participation.
Going forward, we expect any episode of weak macroeconomic data that triggers a broader sell-off will be seen as an entry point rather than an exit signal.
Ultimately, a diversified portfolio that takes into account the complexity of the global economic outlook is likely to be the best approach.
Kean Tan is Managing Director, Senior Advisor and Head of Investment Solutions at SCB-Julius Baer Securities Co Ltd in Bangkok.