In the latest edition of our Quarterly Market & Strategy Update:
Executive summary
Economy
The global economy has proved resilient in Q4, forcing the consensus to embrace the strong growth narrative for 2025. The US economy continues to stand out, even before considering the stimulative Trump policies.
The weaker EU economy should also see moderate improvements, particularly if fiscal purses are relaxed. China is also looking better, with the government’s explicit commitment to supporting the economy and asset prices. Trade policy risks persist but are unlikely to jeopardize the growth picture.
Global central banks have continued their coordinated rate cutting cycle, despite inflation being higher than expected. Their dovish stance is contributing to the expected economic strength, but also raising inflation risks for next year.
Equities
Resilient growth and dovish central banks make for an ideal environment for equities. The consensus is now fully embracing this positive view, with large US equity gains expected.
The resulting record inflows seen in the past month and high valuations make equities prone to a pullback, particularly if the USD and yields keep grinding higher. Taking advantage of the current positive seasonality and compressed volatility to hedge position is wise at this stage, with the objective of buying back into a Q1 correction, particularly mid-caps and cyclicals.
On the other hand, international markets have seen outflows and are cheap, making them susceptible to upward surprises as trade fears will likely prove exaggerated, past a first phase of tensions.
Bonds
US yields have rebounded significantly since the Fed started cutting rates, as growth and inflation surprised to the upside. Short to mid-term yields are now attractive again, supporting an extension of duration to 3-4 years.
The picture remains unfavourable for longer duration, due to inflation risks perking up and developed market financing needs. Budget deficit reductions or a hawkish turn by central banks would be needed to stop long yields from rising, but this is unlikely at this stage.
Taking on excessive credit risk is inappropriate at this stage given the tightness of spreads, as they approach record lows. EM debt in local and hard currency offer selective opportunities but are not extremely compelling given the rebound in US yields.
Currencies
The USD has rebounded strongly and should continue to benefit from favourable growth and interest rate differentials. The short-term will however be largely influenced by the announced trade policies, which could lead to a retracement in the USD if they prove milder than feared.
Commodities
Commodities have gone sideways despite improving growth prospects. Oil has been particularly weak given the threat of higher production from OPEC and the US, but stronger growth could see some upside in coming months.
With inflation a notable risk for 2025, maintaining exposure to commodities as a hedge makes sense for investors.
Precious metals
Gold has been consolidating in recent months as markets have reduced the magnitude of expected rate cuts. Investors should buy into a deeper rate-driven pullback, as central banks are likely to remain more accommodative than justified by the current economic environment.
To read our complete Market & Strategy Update
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