The year 2025 is shaping up to be one of great uncertainty, with global politics driven by the incoming Trump administration likely leading significant market gyrations and increased asset class volatility.

Trump US exceptionalism is expected, but the actual policies used to generate "make America great again" are still the source of debate only a week from the presidential inauguration.

Many permutations and combinations for policy are possible and the medium-term impacts may be quite different to the "shoot first and ask questions later" moves of modern markets as we are seeing with US equities back towards election day valuations.

Expectations for continued earnings and growth are high after two exceptional years for risk assets, while longer-dated US fixed income yields have increased despite the US Federal Reserve and many other global central banks cutting interest rates in 2024.

This is historic in and of itself (usually rates fall as funding rates are lowered), driven by concerns about US fiscal spending and inflation impacts that continue an unsustainable pathway.

Will the change in the US government generate any fiscal prudence? Will the Department of Government Efficiency succeed in curbing excessive fiscal spending to reduce inflation fuelled by excessive government spending?

And what could be the growth implications of this withdrawal of government support from the economy?

These remain key questions for bond yields which, if they rise, could dampen the outlook for all asset markets by increasing the global cost of funding.

Australia finds itself heavily influenced by these global trends yet uniquely positioned between contrasting economic realities.

In the US, bond yields are increasing, with 10-year Treasury yields rising 66 basis points in 2024 to 4.57 per cent, reflecting expectations of pro-business policies, tax cuts and a market-friendly administration.

Meanwhile, in China, 10-year bond yields fell 89 basis points across the same period to just 1.67 per cent as the economy continues to struggle with low growth and disinflation. This divergence has continued in the opening days of 2025, further highlighting the US exceptionalism of the times.

Away from US markets, global growth looks tepid - no longer will a raising US tide lift all boats, meaning investors will need to place their bets selectively as asset performance across geographies will likely diverge significantly in similar asset markets.

In 2025, the volume of corporate debt requiring refinancing is set to increase significantly.

After locking in low rates during the Covid period, a significant proportion of loans and bonds now face repayment or rollover. This dynamic has the potential to add some spice to markets this year, as there will be some bad refinancing stories in the credit space after such a dramatic shift in the interest rate environment since the pandemic.

Private credit issues already are emerging in Australia, with a number of high-profile private credit investment managers citing issues around the sector.

However, the inherent lack of transparency within private credit means these challenges often remain hidden until the damage is done.

In some cases, junior or subordinated lenders in local deals have already faced complete losses.

As interest rates continue to exert pressure and delinquencies rise, we anticipate more such stories to surface, reflecting the sustained impact of a restrictive rate environment.

Private credit is a highly attractive asset class but its rapid growth has attracted many new participants who promote high returns with minimal perceived risk (and low market volatility because of infrequent asset revaluation).

This can be misleading, as high returns typically involve substantial risks that may not be immediately apparent. Investors require significant skill to identify who they are lending to, where they sit in the capital stack, who might run the workouts on distressed assets if required and how long this process may take.

These products typically require long lockups of capital, which increasingly will need to ride through heightened uncertainty. Returns must be exceptionally high to compensate for these factors.

The question is whether these challenges will escalate into a systemic tipping point, triggering broader market repercussions, or whether they will remain isolated incidents, wiping out the few unfortunate folks who didn't do their homework or ran the risk regardless.

The answer will likely depend on the scale and interconnectedness of the issues as they unfold.

The year looks set to be full of surprises.

We expect the Reserve Bank will cut interest rates early in 2025, as inflation continues to moderate with a significant lag to the rest of the world, and we expect other jurisdictions will continue cutting rates as economies slow.

Calibrating all of that with such significant policy uncertainty is difficult; investors will need to ride the developments and adjust accordingly.

As always, we think portfolio diversification is prudent into such uncertainty, as bold bets will likely be as lucky as they are smart.

Charlie Jamieson, Chief Investment Officer