This race will have “material implications” for financial markets, the asset manager noted.
State Street Global Advisors (SSGA) quantified the technological positions of major blocs using data from the Critical Technology Tracker by the Australian Strategic Policy Institute. The analysis assigned a cumulative quantitative score across eight categories, comparing the “two main antagonists”, the US and China.
“In a direct bilateral comparison, China is well ahead of the US in all eight fields,” SSGA stated in its Global Market Outlook 2025: Finding the Right Path.
However, it emphasised that the outlook “dramatically shifts” when US allies in Europe and Asia-Pacific are factored in. In this context, China leads in two domains: renewable energy and advanced materials, SSGA added.
The Critical Technology Tracker monitors research levels across eight fields: sensing, timing and navigation; quantum, energy and environment; defence, space, robotics and transportation; biotechnology, gene technologies and vaccines; advanced materials and manufacturing; advanced materials and manufacturing; advanced information and communication technologies, and AI technologies.
SSGA also noted that modern technologies are “profoundly different”, representing a “technological leap” rather than innovation, and some technological advantages could become entrenched.
“This overarching competition may be taking place in research laboratories, but it is being fought out in global channels that power the industrial-technological complex. These battles have material implications for financial markets,” the asset manager said.
The three main arenas of competition were identified as real (military) wars, trade wars, and fiscal “wars”.
“While one or other arena can go quiet for a time, the fundamental drivers of increased friction remain intact and are unlikely to dissipate in 2025,” it said.
Macro outlook
SSGA outlined its macroeconomic outlook, forecasting continued rate cuts and economic resilience in 2025, and reaffirmed its long-standing forecast of a US soft landing.
Reflecting on 2024, the asset manager noted that equity markets delivered strong returns against the backdrop of a resilient environment, while major central banks embarked on an easing cycle.
The rate cut cycle is expected to continue “for a while longer”, even though the Trump-led Republican US election victory could result in a change to the narrative in the latter part of 2025.
Moreover, according to SSGA, investors will need to navigate both short-term uncertainties and deeper structural shifts such as demographic changes, geoeconomic fragmentation, and the rise of transformative technologies.
While within global equity markets, the resilient economic backdrop provides support for earnings, particularly in the US. Outside the US, the picture will be “more nuanced but there are pockets of opportunities across markets”.
With Japanese equities expected to face potential volatility and Chinese equities struggling to sustain higher growth and strong performance, SSGA believes that US large caps will maintain structural advantage compared to the rest of stocks in developed markets.
Meanwhile, in emerging markets, investors will need to balance economic and earnings growth as well as inflationary pressures versus geopolitical risk and a strong dollar.
“As we enter 2025, we remain cautiously optimistic, with expectations of a soft landing in the US looking set to translate into reality,” Lori Heinel, global chief investment officer, said.
“While there are a range of uncertainties to contend with, investors may want to consider above target allocations to equities and should remain thoughtful about portfolio construction.”
Investors should also look beyond the traditional balanced 60/40 portfolio and consider alternative exposures from a diversification, risk mitigation and alpha generation perspective.
According to the SSGA’s outlook, private equity, private credit, real estate, and infrastructure infuse non-traditional elements to the traditional mix of assets, while offering higher returns, lower volatility, and enhanced portfolio diversification potential.
“The investment opportunities in private markets are vast, interesting, and growing. Because information on private market investments is not as widely available as in public markets there is potential to capitalise on more widespread market inefficiencies,” the asset manager stated.
“Yet, as the solutions and products are not publicly traded, illiquidity must also be an important consideration in portfolio construction, and a long-term perspective and careful selection of managers is key.”
Separately, the firm highlighted the emergence of the Gulf Cooperation Council region as an investment location worth greater consideration, as well as the disruptive power of transformative technologies such as generative AI and tokenisation.
