Key themes set to drive markets in 2025, from CMC Markets

From artificial intelligence to geopolitical conflicts and falling interest rates, there is a wide range of issues on the minds of investors heading into the new year, according to Kurt Mayell of CMC Markets. 

Equity market investors have seen through a volatile ride this year, but 2025 could prove to be every bit as exciting, with the potential for the bull market run to continue even as a multitude of risks loom in the background, says Kurt Mayell of CMC Markets. 

Interest rates and inflation are expected to remain the focus of investor attention next year as central banks strive for a soft economic landing. At the same time, the fate of US-China relations following the recent US election will also be on investors’ radar, next to a long list of geopolitical hotspots, even as markets try to gauge value in the evolving artificial intelligence landscape. 

“We are in a pretty unusual time,” Mayell, the trading platform’s head of distribution in Australia & New Zealand, says. “We do have some significant hurdles in the way, and it really comes down to economic management and politics in some of the most significant countries across the globe.” 

Trend #1: Eyes on the world’s central banks 

Global markets soared over the last year despite several speed bumps along the way, as investors anticipated major central banks embarking on their monetary easing cycle, and then rode the wave as the easing cycle got firmly underway, with several of the big developed-market central banks cutting rates late in the year. 

The CME FedWatch tool projects that US interest rates will fall to the 3.75%–4% range by December 2025. Australia’s big four banks similarly expect local interest rates  to ease down to between 3% to 4% in 2025. 

Mayell says none of this is certain, and the rate cut outlook is linked heavily to the path to inflation. 

“The real thing to watch out for is inflation. If central banks cut rates too fast or by too much, we could end up with something like a COVID-2.0 scenario where inflation starts rising again.” 

In an ideal soft-landing scenario, inflation will decrease while the economy keeps growing steadily. If that happens, lower rates could encourage the market to rise by impacting factors such as consumer spending and borrowing costs, he says. 

On the other hand, markets will respond negatively if rates need to be cut because the economy is slowing down or looks headed for a recession. That pattern could mirror the example of rate cuts in 2001 and 2008, which were both followed by global recessions. 

Trend #2: US, China and geopolitics

China is set to feature prominently on the radar for Australian investors, as its economic growth directly sways commodities prices. At the same time, its troubled relationship with the US casts a shadow on markets. 

Mayell says the recent Chinese economic stimulus is bullish to some extent but terms it “more like patching a leaky ship than building a new one” as the world’s second-largest economy struggles with longer-term uncertainty related to high debt levels and population decline. 

Still, even that limited economic package could benefit Australian markets because it is likely to boost demand for industrial commodities like copper, steel and aluminium and push up prices in the short term. 

“This stimulus may lead to inflationary pressures, supporting higher gold and precious metal prices, which would likely  be used as an inflation hedge,” Mayell says. “However, the long-term risk from rising debt and inflation could temper growth, potentially limiting the sustainability of industrial commodity price increases.” 

Meanwhile, the Asian giant’s strategic competition with the US heads the list  of looming geopolitical risks for 2025, especially after the change of administration in America. 

Mayell cites the Global Geopolitical Risk Index (GPR), noting that the historical chart of the GPR sat around 120 in November, compared to 300 in the aftermath of the September 11 attacks and 150 after Russia’s invasion of Ukraine. 

Similarly, BlackRock’s geopolitical risk indicator is at levels less than half of what they were during the pandemic or at the onset of the Russia-Ukraine conflict. 

While relatively low, these levels are still elevated compared to the past decade, mainly due to the potential for blow ups  in US-China relations, the Russia-NATO conflict, regional instability in the Middle East, and the potential for major cyber  or terror attacks. 

“Out of these, the US and China competition is probably the most significant for markets, given the sheer  size of both economies and how it touches everything from trade, technology and even military tensions around Taiwan,” Mayell says. 

This rivalry is also driving a ‘tech decoupling’ as both countries work to build independent ecosystems in critical areas like semiconductors to protect strategic interests, he added. 

Geopolitical shocks tend to have a short-lived impact, though. Investors scramble to other asset classes for a brief period, he says, before flocking back to equities to take advantage of capital growth potential that becomes apparent following the disruption. 

Trend #3: Catching up with the AI rally 

The other major factor behind the market’s rally this year – euphoria over artificial intelligence – will continue influencing investment trends. However, the gains  seen in 2024 may be difficult to replicate  even as the technology evolves rapidly,  Mayell predicts. 

The charge of the AI sector has been  led by the stratospheric rise in valuations for semiconductor chip maker Nvidia. Prospects remain bright for sector companies looking to raise funds and develop the technology. Still, as the cost  of doing this escalates, significant capital expenditure will increasingly be required that can only be overseen by companies already at the top of the stack, meaning the tech giants will likely continue dominating the field. 

There are enormous opportunities for investors, as AI’s impact could potentially surpass that of the computer, mobile phones or the internet, but the risks are  just as significant, he says. 

“There’s a real possibility that any new  AI play you invest in now could quickly become obsolete, wiped out by something better, or AI becomes so widespread and universally adopted that it becomes difficult for any company to profit from  it consistently.” 

Despite the complexities at play, Mayell says he remains positive on the outlook  for the market, which will continue to throw up both good and bad opportunities. 

“We see some interest rate reprieve for the average household, both in our own market and globally. And that we will be in a more positive situation than what is currently being felt.” 

For more information about ALPHA, head to  www.cmcmarkets.com/en-au 

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