The past 25 years has produced impressive returns for those with the nerve to hold on for the long run. But after years of low rates and strong returns, 2025 feels anything but predictable. Ongoing wars, shifting trade relations, persistent inflation, and renewed market volatility have investors on edge. And it’s impact is being felt across all asset classes.

In this Q&A, two experts from Ostrum Asset Management – Xavier-André Audoli, CIO for Insurance and Institutional Asset Management, and Frédéric Leguay, Head of Fundamental Equities – answer questions based on some of the responses of our recent Global Survey of Individual Investors¹, to see if investor’s expectations align with our experts’ perceptions of equities and fixed income markets.

With 70% of investors that we surveyed saying the world feels unstable and they’re worried about their finances, what would you say to convince them to stay invested?

Xavier-André Audoli (XAA): Disoriented by a world full of geopolitical and macroeconomic uncertainties, some investors may be tempted to leave equities or bonds for less risky asset classes such as cash. This is understandable. Nevertheless, market volatility, which is the financial translation of this uncertainty, can be a source of investment opportunities. Potential low valuations periods can also be used as entry points or to strengthen an exposure.

Each investor's investment horizon is different, but equities, as a riskier asset class, have historically delivered high returns in virtually all market configurations over the long term. The S&P 500, for example, has gained 557% over the past 25 years, an annual increase of 7.67%, despite a whole series of market events: the attacks of 11 September 2001, the war in Iraq in 2003, the bursting of the Internet bubble, the Global Financial Crises, the sovereign debt crisis in the eurozone, the pandemic, the war in Ukraine and now the trade war. Provided they are prepared to withstand bouts of high volatility, investors will benefit over the long term from staying invested.

Total return in local currency and since 2000

Source: Bloomberg/Ostrum AM

Frédéric Leguay (FL): An individual should invest regularly to avoid buying at the top. We are coming out of a 45-year bull market in bonds, in which dollar-denominated bond assets accounted for the bulk of flows. We are now entering a period marked by higher inflation, perhaps structurally, and in which non-dollar assets, hitherto neglected by investors, could see renewed interest. Europe is undergoing changes, such as the evolution of Germany's budgetary doxa or the quest for regulatory simplification, which could attract investment.

Long-term return expectations have dropped from the 12.8% above inflation recorded in 2023 to 10.7% above inflation, but even moderate expectations still present significant risk. Where are you seeing longer-term opportunities and challenges in fixed income at present?

XAA: These return targets are very high and beyond the reach of a bond-only investor. Bond yields may have fallen, but they remain at historically high levels. We currently favour bonds over equities and, within the equity asset class, Europe over the US, given the expected impact of US President Donald Trump's policies. In a relative sense, the carry – such as in investment grade and high yield credit – should benefit from sluggish growth.

FL: Within the equity asset class, we favour defensive stocks such as consumer goods and the financial sector, which would benefit from any moves towards deregulation or consolidation. Until now, we have been underexposed to companies exposed to Asia for economic and geopolitical reasons. China is in a state of near-deflation, and we have no visibility on a way out of the crisis. We are therefore underexposed to consumer cyclicals, cars, beverages, luxury goods and capital goods.

What are your thoughts when we learn that 43% of investors are concerned about the potential for economic collapse, while another 41% are worried about prospects of a market crash?

XAA: The risk of a financial crash exists, but it is very low. This is not our central scenario. Nor is it what the financial markets are telling us. We are expecting a low economic growth and inflation closed to or slightly above the central bank targets, where the economy would be supported fiscally – and potentially monetarily – on both sides of the Atlantic, both by the German stimulus plan and the US fiscal policy, with central banks intervening if necessary. The impact of fiscal policies will be felt more in 2026.

FL: The transition requires major long-term investment. The Draghi Report submitted to the European Commission [recommending €800 billion of investment per year] has set out a roadmap. Its implementation could be positive for European businesses. Governments with deteriorating public accounts will need the private sector to implement their policies.

Inflation still tops investors’ list of investment concerns. Globally, just 41% of investors think elevated inflation is finally in the rearview mirror. What’s your view? And are there are other risks on your radar that should be more pressing for fixed income investors?

XAA:  Inflation has not disappeared. It is still there, but we need to distinguish US inflation from inflation in Europe. US inflation – 2.4% as of May 2025 – remains slightly above the Fed's target level. Inflation is forecast at 2.5% in 2025 and 2.7% in 2026. The US Treasury is expected to issue more Treasury bonds in view of the Trump administration's expansionary fiscal policy.

This increased volume of issuance will weigh on US interest rates. Donald Trump's migration and tariff policies may also exert inflationary pressure. Inflation is lower in the eurozone – 1.9% year-on-year as of May 2025 – and below the European Central Bank's target level.

We also need to keep an eye on oil prices, which have an impact on inflation. China is the exception in this inflationary environment, with negative inflation figures of -0.1% as of May 2025. US fiscal policy and plans to stimulate investment in defence and infrastructure in Europe will have more impact than inflation on interest rates, which are likely to remain relatively high.

FL: It is tempting for heavily indebted countries to use inflation to reduce their debt. States can resort to budget cuts, but this is more complicated politically. Letting inflation run a little to reduce debt has the advantage of being more socially acceptable than default. For individual investors, there is still the option of using real assets to protect themselves against inflation. 

Trump’s tariffs tantrum has led many to question their exposure to US stocks. Would you go as far to say then that he era of US exceptionalism is over, and that we could potentially see an era of European exceptionalism?

FL: I don't think this is the end of American exceptionalism, or the beginning of European exceptionalism. The policy of the new US administration has put diversification back at the heart of investors' concerns, whereas until now investors' US equity allocations were highly concentrated in the Magnificent 7. However, there are alternatives, both in Europe and in the US, to reduce the risk of concentration. The US has accounted for up to 70% of global equity indices. Europe accounts for half of what remains.

XAA: In my view, the current turbulence is calling into question what used to be considered a risk-free asset. For a long time, the world's risk-free asset was US debt. That status is now being called into question.

Written in June 2025