FTSE Russell’s latest Global Wealth Research report landed this week. Apart from a couple of seasonally appropriate jump scares, there’s reason for optimism as the end of 2025 draws near.
Top of the list is a big hairy question facing the U.S. Federal Reserve and other central bankers — what to do with an inflation rate still above 2% and slowing economic growth. “U.S. tariffs continue to impact growth and inflation across the world,” according to the report. “Global GDP forecasts for 2026 have declined. Expectation of slowing growth is exacerbated by the fact that most developed markets have little fiscal space to boost growth, given higher public debt-to-GDP ratios globally.”
This week’s policy rate cut by the Fed sends a clear signal about where its priority lies. “Inflation is higher than where they would like,” said Indrani De, head of global investment research at FTSE Russell, in an interview this week. “But given that it has come down so significantly, it is not the burning crisis it was two years back, or immediately post-Covid. Now they are more concerned about the labour market and the underlying economy.”
A 2% inflation-target is central bank orthodoxy, but the U.S. and other countries find themselves in a tricky environment right now. It’s a whole lot easier to get inflation down from 3.5% to 3% than it is to go from 2.5% to 2%. Those last few basis points can turn weak economic growth negative if they overstep.
“This is the trade-off for the Fed,” said De. “Which is the higher-priority goal seems to have shifted in the last couple of months, and that obviously has had a direct impact on financial markets.”
I felt a bit of a negative nabob asking her about stagflation, which she is not forecasting. De didn’t rule it out though. “Stagflationary, potentially,” she said. “Not stagflation.”
Markets growing uncorrelated
The report also highlighted the importance of diversification, as international markets become less correlated.
“In today’s environment of high volatility and uncertainty … it makes sense for investors to have a more diversified portfolio,” said De. “There is a much greater payoff to diversification today, given that asset class correlations have dropped so much.”
That includes equities in developed markets outside the U.S. and emerging-market stocks and bonds.
“We first started seeing emerging-market outperformance in the fixed-income world,” she said. “Fixed-income markets pick up trends a little earlier because there’s more institutional money [there]. Then you started seeing it in equity markets this year.”
That’s despite tariffs. De pointed to Asian and Latin America markets — Brazil and Mexico, for example. Their performance under the stress of a global trade war has impressed investors.
“Emerging markets have become much more resilient over the last decade. Their fiscal situations are far healthier,” De said. “There are essential strengths in the emerging markets that are gradually getting priced in.”
Two other highlights from the report: Yield curves are steepening in Canada and other G7 countries, and the greenback is unlikely to strengthen in the near term.