United States and China, the yin and yang of markets in 2025

January 2025 by Ana Carrisso

Whatever happens this year that has just begun, investors should remember one fundamental lesson: There is no crystal ball in investing.

The year 2024 saw a record number of electoral processes around the world and, although the political agenda will be less intense in 2025, uncertainty will remain on the table. Investors should pay close attention to events such as the elections in Germany – and their impact on the stock and bond markets –, the evolution of the political situation in France – which has been marked by instability and a widening budget deficit in 2024 – or how Donald Trump will implement his policies in his new term. They should also monitor commodity markets – gold hit record highs in 2024 – as they could be affected if tensions in the Middle East continue to rise. 

We predict that the return of divergences will be one of the major themes of 2025: divergence in policy, growth, inflation, interest rate trajectories and geopolitics. That is, we will no longer look at regions or asset classes as a single block, but rather at individual developments and where interesting investment ideas may emerge. 

We want to highlight the differences between the two great world champions of today: the United States and China. Authorities in these countries will tend to express very different concerns throughout this year that has just begun.

USA: Will inflation rise again?

The historic Republican victory, which returned Donald Trump to the White House with a majority in Congress and the Senate, resolved one of the big issues of 2024. Given the kind of promises Trump made during the election campaign (more tariffs, more public spending and stricter immigration controls), and with the precedent he set in his first term, we believe that the probability of inflation rising again in the United States in the next four years has increased. 

This could affect the monetary policy of the Federal Reserve, which began a cycle of interest rate cuts in the fourth quarter of 2024. It is worth remembering that a scenario of economic growth and rising inflation would not justify the need to lower interest rates, and could even suggest the opposite solution: new interest rate hikes to control prices if the economy “heats up” too much. 

Is China positioning itself to preserve or revive its growth?

On the other side of the scale we find China. The country has struggled to revive its economy after extending COVID-related restrictions on the population for much longer than other nations. In addition, they had to deal with the bursting of a real estate bubble of colossal proportions. The country’s authorities announced in September 2024 that they would launch a major stimulus package to pull China out of deflation and revive growth once and for all, but our view is that the country is positioning itself to preserve, rather than revive, its economic growth. This could be a problem, as market expectations are more optimistic, anticipating more fiscal stimulus and more interest rate cuts. 

Second-order consequences

This is an overview of how the geopolitical landscape could look in 2025. However, investors should also be aware of second-order consequences beyond the obvious. There are risks for some sectors arising from possible tariffs and new trade tensions between the US and China, but we expect reflation in the United States to contribute to higher profits for American companies. We are also monitoring the trend toward industry partitioning, a policy that has been supported by both Democrats and Republicans. In China, we prefer sectors that already occupy a prominent place on the government's political agenda, such as technology, high-end industry, consumption and healthcare. 

Whatever happens this year that has just begun, investors should remember one fundamental lesson: There is no crystal ball in investing. Any major event can occur at any time, so it is essential to do your homework: assess risks, review portfolio positioning and wait for opportunities to arise.