Last week in a nutshell
- “DeepSeek”, a Chinese artificial intelligence (AI) programme, triggered a sell-off in the AI ecosystem.
- The Federal Reserve’s decision to pause cuts widened the rate differential with the European Central Bank, who responded to economic fragility by cutting rates.
- US GDP expanded by 2.3% in Q4, with strong consumer spending offset by weaker investment and a drag from inventories while the euro zone GDP growth stalled.
- The Q4 earnings season highlights brought beats on revenue from Meta and a boost in services for Apple and SAP but weaker guidance from Microsoft and disappointment from LVMH.
What’s next?
- Both the nonfarm payrolls report and preliminary Michigan Sentiment Index will offer insights into the strength of the US consumer at the start of the year.
- Investors will further scrutinise the earnings reports from Tech giants Alphabet and Amazon.
- The newly imposed tariffs on imports from Mexico, Canada, and China are expected to lead to higher prices for American consumers. In response, Canada and Mexico have announced retaliatory tariffs on US goods, potentially escalating trade tensions.
- Euro zone preliminary inflation reading and CPI will be closely watched as markets assess the ECB’s recent rate cut while German and French industrial production, factory orders, and trade data will provide additional insights into the region’s economic momentum.
- The BoE will announce its latest policy decision amid diverging central bank approaches. While inflation has been cooling, the BoE may remain cautious about cutting rates too soon.
Investment convictions
Core scenario
- In the US, expectations for 2025 point to robust economic growth. We anticipate 2.6% GDP growth, driven by strong labour market dynamics, robust consumption, and increased investment in technology sectors. Consumer spending remains a vital driver, buoyed by rising disposable incomes and relatively low unemployment rates.
- The euro zone’s expected GDP growth of 0.9% in 2025 reflects structural challenges, including sluggish productivity and demographic headwinds. Supportive monetary policy and targeted investments in green energy and infrastructure offer glimmers of optimism to maintain an expansion.
- Emerging markets, especially those closely linked to China’s economy, face challenges as the US shifts toward protectionist policies. Until now, it was a relief that the new administration did not announce any immediate tariffs measures on China.
Risks
- Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
- Rising bond yields, closely linked to the risk of inflationary measures via higher tariffs and lower immigration-linked labour market supply, constitute a risk to our central scenario.
- Beyond the impact on inflation, tariff-related disruptions could reduce global trade volumes, weaken investor confidence, and amplify currency volatility, creating therefore headwinds for growth.
- Diverging central bank policies worldwide could exacerbate asset price volatility, driven by differing inflation trajectories and monetary strategies.
Cross asset strategy
- We start Q1 2025 with an overall slight overweight stance on global equities. Our approach is increasingly geographically balanced as the competition for leadership in the Artificial Intelligence is fierce and the euro zone may benefit from a weaker currency.
- In addition, the new administration has yet to announce tariffs, including magnitude and target.
- We have a particular focus on the cyclical sectors that are expected to benefit from stimulative domestic policies.
- Following years of underperformance relative to the US, improving business sentiment indicators, a cheaper currency, a dovish central bank, and a better profit growth outlook have created a more favourable setup for European equities at the turn of the year. While structural challenges and political uncertainty persist, the combination of cheap valuation and historically low investor positioning imply that euro zone equities deserve a more balanced allocation.
- Ahead of the Chinese National People’s Congress "Two Sessions" scheduled in March, we are neutral Emerging markets equities.
- The stance on Japan is neutral.
- In fixed income, the divergence in monetary policies between advanced and emerging economies adds complexity to the global financial environment. While rate cuts in developed markets enhance liquidity, emerging economies face tighter monetary conditions due to currency pressures and inflationary risks. This dichotomy underscores the importance of selective positioning in fixed income markets.
- On sovereign bonds:
- We are slightly long duration in Europe.
- We are slightly short in the US.
- We have a neutral allocation towards emerging market debt.
- On credit:
- We remain overall neutral on Investment Grade and High Yield, as spreads are tight while very few defaults are expected to occur.
- Alternatives play a crucial role in portfolio diversification:
- Gold is favoured for its protective qualities against market volatility and geopolitical risks, despite recent pressure from a stronger dollar and rising US real interest rates.
- In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
- The outlook for the US dollar remains complex, as domestic policy dynamics may both support and limit its appreciation. For now, we hold a long USD position.
- The Japanese yen may appreciate in response to global economic stabilization and its safe-haven status.
Our Positioning
As we move further into Q1 2025, financial markets continue to demonstrate resilience, supported by ongoing global growth, accommodative monetary policies and strong profit growth in the technology sector. In this context, we keep an overall slight overweight stance on global equities with a focus on the United States amid supportive fundamentals and a recent upgrade on euro zone equities. Regarding fixed income, we keep our preference for duration in core Europe (Germany) as we expect low growth for 2025 and further ECB rate cuts. Conversely, we are negative on US duration: The risk for US yields remains on the upside, and the future will depend on the policies of the new administration. We remain long US dollar and Japanese yen.