Waiting for Trump 2.0

European equities: Rate cuts and slowing inflation, a boost for the markets

European equity markets ended the last month of the year on a positive note. The positive market trend was mainly driven by rate cuts and slowing inflation over the course of 2024.

Europe is still plagued by a political vacuum in both France and Germany, which doesn’t bode well for the European economy specifically. The European Central Bank maintained its 25 bps pace of easing in the face of a significant loss of growth momentum and improving inflation prospects.

Separately, military conflicts in the Middle East and in Russia are far from over and continue to weigh on investor confidence.

In terms of performance, the style trends observed over the past four weeks since the last committee were not clear.

From a sector perspective, there was no clear performance dispersion between cyclical and defensive sectors. The interest rate-sensitive sector of real estate was the main underperformer, followed by materials and utilities.

The best performances across all sectors came from energy (due to the turmoil in the Middle East) and information technology, thanks to semiconductors. Finally, financials slightly outperformed the broader market.

Earnings expectations and valuations

Ahead of the start of a new earnings season, fundamentals remain reasonable for European equities. Positive earnings revisions have been supportive for the European market. 12-month forward earnings growth is now close to 8%.

Consensus expects information technology, consumer discretionary, communication services, industrials and materials to be the biggest contributors to growth. Conversely, energy and utilities remain the only sectors dragging down expected earnings, with expected growth negative in the coming months.

European markets are trading at the lower end of their historical range when looking at the 12-month forward price-earnings ratio of 13.3. Information technology and industrials are the most expensive sectors, while energy and financials are the cheapest.

Several changes in European grades

During the Committee meeting, we proposed the following changes:

• Real estate: we downgraded the sector to neutral from +1. Given the uncertainty on long-term interest rates, we don’t want to stay overweight. Therefore, we decided to go back to neutral and wait for more visibility on rates. We still favour some niche segments (logistics, student houses and retirement homes) and avoid shopping malls and commercial properties.

• Finanziari: abbiamo mantenuto il rating del settore a neutrale, rivendendo però al rialzo le banche da -1 a neutrale. Poiché riteniamo che l'evoluzione dello scenario dei tassi di interesse possa beneficiare il sottosettore, preferiamo non mantenere una posizione sottopesata.

In the meantime, we have kept our +1 on the healthcare sector, as fundamentals remain well oriented and the US dollar exposure will be a tailwind. 

We also remain convinced that a cautious approach is still warranted, and this is expressed by the recent changes and our neutral grade in, among others, consumer discretionary and industrials, and a bias towards defensive sectors, such as utilities and consumer staples.

US equities: A temporary consolidation

US equity markets have shown some hesitation in recent weeks, following a strong performance after Donald Trump’s re-election as President of the United States. Looking ahead, investors are awaiting his inauguration to gain a clearer perspective on what to expect from the new administration, particularly regarding potential tax cuts, supportive fiscal policies and further deregulation.

In this environment of rising long-term rates, small caps have underperformed large caps. From a sector perspective, defensive stocks outperformed cyclicals. As expected, the interest rate-sensitive real estate sector was the weakest, followed by materials.

The best-performing sector was energy, buoyed by rising oil prices over recent weeks, followed closely by healthcare. However, consumer staples were a notable exception, with the sector underperforming strongly.

Q4 2024 earnings season kicks off

In the coming weeks, investors will closely monitor sector-specific trends and valuation dynamics as earnings reports unfold, with a particular focus on energy, healthcare and the broader impact of higher rates on equity performance. The S&P 500 is on track to report its highest year-on-year earnings growth rate in three years, with an estimated Q4 growth rate of 11.7%, according to FactSet Research.

Energy and healthcare are expected to be the primary drivers of this growth. The energy sector has benefited from rising oil prices in recent weeks, providing tailwinds. Conversely, consumer staples remain a weak spot. This sector has struggled due to a cloudy earnings outlook, a continued market share increase for private labels, a heightened awareness and demand for healthier food and concerns over potential import tariffs.

Despite the optimistic earnings outlook, valuations remain a focal point for investors. Higher long-term interest rates have put pressure on above-average equity valuations. While valuations appear elevated, they are not excessively high and are supported by strong earnings expectations.

No strategic changes

We have not implemented any major strategic shifts in our sector exposure. We continue to favour cyclical sectors, maintaining positive ratings for:

• Industrials: positioned to benefit from ongoing reshoring trends, potential tax cuts following Trump’s re-election and expectations of a stronger economy. Within this sector, we maintain a slight preference for capital goods.
• Financials: poised to gain from looser regulation, increased M&A activity, higher long-term interest rates and potentially more shareholder-friendly initiatives such as dividend payouts and capital returns. Valuations remain attractive, supported by solid earnings growth.

However, we made a targeted adjustment within information technology, downgrading our exposure to software to neutral from +1. We underestimated the impact of higher long-term rates and prefer to be a little more cautious, as software is the most interest rate-sensitive subsector in information technology.

Emerging equities: Challenges persist but selective opportunities present attractive investment prospects

Emerging Markets (EM) had a mixed performance in December, trading sideways with a marginal decline of -0.3%, following a volatile year marked by significant global and regional challenges. The MSCI EM index recorded a modest gain of +5.0% for 2024, underperforming Developed Markets (DM), which were up +23.4% for the year. Most of EM’s underperformance occurred in Q4, erasing earlier gains due to heightened geopolitical tensions and a strong dollar.

The return of Donald Trump as the US President amplified trade and tariff concerns, impacting global growth expectations. However, Trump’s transactional approach provides some scope for negotiation.

In China, limited fiscal and monetary stimulus and ongoing US trade tensions weighed on investor sentiment, despite signs of stabilisation in key economic indicators. India’s market corrections and revaluation of growth prospects have created selective opportunities, while Argentina’s reform-driven optimism continues to attract investment.

• China: Despite supportive measures for the property sector and targeted fiscal interventions, the lack of decisive, large-scale stimulus tempered investor enthusiasm. The ongoing geopolitical standoff with the US and concerns over domestic demand add to the cautious outlook. However, the AI and EV sectors demonstrated resilience, with Xiaomi’s successful EV launch being a notable highlight.
• India: After market corrections in 2024, India’s recalibrated expectations and structural growth opportunities offer long-term investment potential. Infrastructure investments, supply chain diversification and rising consumption remain key drivers. Recent stock-market gains were driven by select sectors such as technology and real estate.
• Latin America: Argentina continues to shine with pro-market reforms under Javier Milei’s administration. Conversely, Brazil struggled with political and fiscal uncertainties, dampening investor confidence despite attractive valuations.
• Korea and Taiwan: Taiwan benefited from robust demand in the semiconductor sector, driven by AI acceleration. In contrast, Korea faced political instability, hampering confidence in key industries like technology.
• AI and Technology: AI remains a cornerstone theme for EM. Taiwan’s semiconductor industry and Korea’s collaboration with global tech giants highlight the region’s pivotal role in the AI supply chain. Nvidia’s partnership with Reliance Industries in India and the growth of AI infrastructure underpin this trend. Emerging markets are well-positioned to benefit from the global shift to generative and agentic AI.

Outlook and drivers

We maintain a cautiously optimistic stance on EM equities. While challenges persist, selective opportunities aligned with structural growth themes, such as AI and sustainability, present attractive investment prospects.

Positive Regions and Sectors:

• Taiwan Technology: Supported by strong AI and semiconductor demand.
• Eastern Europe Financials: Stable macroeconomic fundamentals and attractive valuations in countries like Poland, Turkey and Greece.
• ASEAN: Need to be selective. Small scale and vulnerability to a strong USD limit its appeal.
• China: A better-than-expected approach from the incoming US administration, with supportive policies anticipated in the coming months. Light investor positioning and attractive valuations further bolster the case for increased exposure.

Neutral/negative Regions and Sectors:

• India: Attractive structural LT growth drivers. However, cyclical concerns ST and rich valuations. Stock-picking market.
• Brazil: Political and fiscal uncertainties outweigh attractive valuations, for now.
• Mexico: national security concerns in the US suggest the potential for higher tariffs. The Trump administration is addressing issues such as immigration and fentanyl.

As we move into 2025, EM’s role in global economic growth remains significant despite ongoing challenges. AI, sustainability and infrastructure development will be pivotal in driving long-term performance. A balanced and dynamic approach, leveraging regional and thematic strengths, will be key to achieving robust, risk-adjusted returns in the evolving landscape.

Positioning Update

China

In the short term, President Trump appears to be focusing more on Mexico and Canada, particularly regarding national security issues like immigration and fentanyl. Regarding China, his approach has been unexpectedly dovish, even before his inauguration. Notably, he has delayed imposing new tariffs on Chinese imports, opting instead to direct federal agencies to investigate trade deficits, unfair practices and currency manipulation. This softer stance, possibly driven by inflation concerns or internal policy disagreements, has fostered a more supportive environment for Chinese markets. Improved relations with China are evident in key developments, such as Trump’s intervention in the TikTok discussion (now back online with a deal expected in the coming months), his recent call with President Xi Jinping, and China’s representation at Trump’s inauguration. Trump has also hinted at visiting China within his first 100 days in office. Given current expectations, valuations and market positioning, China is being moved to an overweight allocation in portfolios, with recent increases already reflected in funds. President Xi Jinping’s proactive policies, emphasising stability, technological self-reliance and deeper reforms, signal more details to come in March. While structural concerns persist, these developments offer tactical opportunities that could evolve into a more sustained trend after Chinese New Year and further policy announcements (expected in March).

India

Moving India to a neutral position. Capital flows are expected to shift toward China, reflecting improved sentiment and positioning. India faces cyclical challenges, with a particularly disappointing earnings season highlighting the need for valuation adjustments. These factors, combined with stronger prospects for China, justify reallocating exposure to capture better opportunities in the near term.

Sectors

We are upgrading sectors where China holds a dominant position, particularly Consumer Discretionary (Alibaba, Meituan, and JD.com) and Media (Tencent).