Last week in a nutshell
- Donald Trump signed his first executive orders, and announced plans for a "Stargate" computing system.
- European Flash PMIs improved by more than expected due to manufacturing and despite slower services activity.
- The Bank of Japan raised its overnight policy rate to 0.5%, responding to inflation driven by a weak yen and higher import costs.
- Netflix and Procter & Gamble posted strong earnings, while others faced demand challenges. In Davos, global leaders called for collaboration on inequality, climate change, and geopolitical risks.
What’s next?
- The Fed and the ECB will take centre stage. The first is expected to hold rates steady but the latter is likely to cut rates. The press conferences will provide additional insights.
- The Q4 earnings season will gather speed as Microsoft, Meta, Tesla, and Apple will report, dominating the tech sector. In Europe, LVMH, SAP, Roche, and Novartis stand out. Energy giants Exxon Mobil, Chevron, and Shell will reveal insights into global energy trends.
- US Q4 GDP is projected to continue to show robust expansion, at 2.6%. Europe will release GDP data for major economies, while Canada’s November GDP will wrap up the economic activity updates.
- Euro zone flash CPI for January will highlight disinflation trends, with Spain, Germany, and France in focus. Japan’s Tokyo CPI, along with labour market and industrial data, will offer clues on inflation momentum.
- The Chinese New Year, also known as Lunar New Year, will begin. The Year of the Snake is said to symbolise renewal, transformation and growth.
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. But improving retail sales, defensive fiscal measures, 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. It was a relief that the new administration did not announce any immediate tariffs measures on China.
Risks
- 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.
- Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
- Tariff-related disruptions could reduce global trade volumes, weaken investor confidence, and amplify currency volatility, creating 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 with a focus on the United States amid supportive fundamentals. We recently upgraded our views on the euro zone, bringing the broader region to a neutral equities allocation.
- The US is driven by robust, above-potential, economic growth and resilient corporate earnings. In the short term, uncertainty is slightly higher as 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, neutral 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 the ECB will lower its rates further. 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.