Trade wars, inflation and equity concentration are set to challenge investors this year, according to the latest investment sentiment survey by Asset Risk Consultants (ARC). Despite an uptick in optimism towards equities, the survey highlighted several critical risks to watch.
The quarterly ARC Market Sentiment Survey, which gauges the 12-month outlook on major asset classes, revealed a significant rise in net sentiment towards equities, climbing from 21 per cent to 56 per cent over the past year. However, responses from 98 CIOs pinpointed the three primary risks for 2025:
Trade wars topped the list of concerns at 23.8 per cent, highlighting fears of escalating protectionism and its potential disruption to global supply chains. Inflation, cited by 20.7 per cent of respondents, remains a key worry, reflecting ongoing uncertainty over persistent price pressures and monetary policy decisions. Sovereign debt levels, at 15.0 per cent, signal growing apprehension about fiscal imbalances as governments navigate post-pandemic borrowing challenges. Meanwhile, equity sector concentration, noted by 14.3 per cent, underscored concerns about high valuations and the dominance of a few key sectors or companies, posing potential systemic risks.
- Trade wars: Concerns about escalating protectionism and its potential disruption of global supply chains.
- Inflation: Persistent price pressures and the uncertain trajectory of monetary policy responses.
- Equity sector concentration: Worries over the dominance of a few sectors or companies, which could pose systemic risks if valuations falter.
Diverging sentiments across markets
The survey also highlighted diverging regional outlooks. Sentiment towards UK and European equities has declined, with European equities slipping into negative territory. Bonds have similarly fallen out of favor, with net sentiment dropping to +5 from +43 in the previous quarter. Conversely, small-cap stocks and private equity are enjoying increased enthusiasm from investors.
[See also: Choosing the right private client wealth management for you]
Content from our partners
Risks and opportunities intertwined
Dr James Cooke, Deputy CIO at ARC said: 'Trade wars, coupled with a slowdown in China, could heighten tensions around Taiwan and disrupt advanced semiconductor manufacturing, which would impact major tech companies like the "Magnificent Seven". Meanwhile, persistent inflation could force central banks to tighten monetary policies, eroding returns on risk assets.'
But Cooke did note potential silver linings. 'There is still substantial cash in money market funds — what we often call "dry powder". This could lead to heightened investor optimism, increased mergers and acquisitions (M&A), and a possible broadening of equity market participation, particularly benefiting smaller companies.'
[See also: ARC: The company so good their client bought them out]
Looking ahead
While uncertainties loom large, the prospect of a more dynamic market fuelled by M&A activity and broader equity engagement could offer opportunities amid the challenges. As 2025 unfolds, investors will need to navigate carefully, balancing these risks and rewards in their portfolios.
