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Image: Outlook 2025 : no room for improvisation

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Outlook 2025 : no room for improvisation

Divergent Opinions in External Articles - The opinions expressed in articles from external sources do not necessarily reflect the views of Renalco SA and are shared for informational purposes only.


As we start the year, uncertainty regarding the policies that will be implemented by Trump and their effects on inflation is worrying markets, not only because of Trump's unpredictable and impulsive nature but also due to the lack of alignment of his program with the basic rules of economic gravity.​

While the global economy is just emerging from an unprecedented inflationary cycle that has lasted for several decades, Trump is considering raising tariffs, deporting millions of migrants which would cause labor shortages and a sharp increase in wages, and increasing fiscal stimulus.​

It seems unlikely that he will be able to deliver on his program, especially if he wants to maintain a majority in Congress in the 2026 midterm elections. However, his stubbornness on the issue of tariffs may mean that markets will have to go through a period of "fear" before returning to an upward trajectory, with Trump possibly backing down on these controversial issues.

Beyond the uncertainty surrounding Trump, the fundamentals are strong in the United States. Real growth between 2.5% and 3%, coupled with inflation around 3%, implies earnings growth per share of about 15% in 2025.​ The latest employment figures for December remain very well oriented and supportive for household consumption. The unemployment rate has stabilized slightly above 4% and wage growth was in line with consensus expectations.

But this earnings growth is already priced by the market, and the valuation of U.S. stock is currently very high. We estimate that to return to a more sustainable forward price/earnings ratio (i.e., 19x versus the current 22x), the S&P 500 would need to pause this year while delivering on earnings growth expectations.

Below we reiterate our six key calls for 2025, though they are not written in stone. Trump being highly unpredictable will require a lot of flexibility in managing portfolios in our view.

#1: Expect higher volatility in US equities as Trump comes with risks on the back of a controversial trade agenda.

  • Buy protection while it’s cheap, while staying long US equities
  • Stay long US banks, autos, consumer discretionary

#2: Long European equity sectors exposed to the US: travel & leisure, medias, health care.

The European equity market incorporates global companies that have the potential to leverage stronger growth conditions in the US. The above-mentioned sectors are the most exposed to the US in terms of revenues and profits. While media and travel & leisure are linked to consumers, health care has experienced some turbulence around RFK Jr.’s nomination as Secretary of Health. Yet, he is quite controversial and looks unlikely to be confirmed by the Senate, which would eventually prove supportive for the sector.

#3: Expect softer budget constraints in Germany to fund infrastructure spending (OW construction materials in Europe).

Germany will hold federal elections in late February. Depressed economic conditions call for fiscal stimulus and infrastructure is in our view the segment which may benefit the most.

#4: Manage bond duration risk with US high yield to leverage buoyant economic conditions in the US (i.e. low default rates).

In bonds we keep preferring exposure to the credit than the duration risk premiums in light of Trump’s potentially inflationary agenda.

#5: Stay long Italy in EGBs for the carry and the dovish bias of the ECB.

We expect borrowing costs in the euro area to keep falling in 2025, with the ECB deposit rate expected at 2% by end-2025. Italy delivers a higher carry than other EGBs but also involves higher credit risk with public debt near 140% of GDP. Political stability under Meloni is a positive but growth has decelerated and reducing deficits could become more challenging under such conditions.

#6: Overweight hybrid notes, subordinated financials and insurance Tier2 bonds in European credit.

These market segments are riskier than investment grade credit and are an alternative to high yield, which they consistently outperformed in recent quarters. Insurance Tier2 bonds are somewhat exotic but benefit from the sector’s inherent credit strength, with an average solid rating of A3/BAA1 for the notes, and the strong demand for longer-duration bonds. Corporate hybrid bonds also remain attractive, with the extension risk still low, combined with a market environment that is expected to remain supportive for further issuance and refinancing activity.

Week ahead: US inflation for December will be the key data to monitor given current market concerns. It is expected to stay near 3%. Retail sales and industrial production will also be available. The Q4-24 earnings season will start with financials. In Europe, inflation in the UK will be closely monitored following the recent surge in sovereign yields. In China, December industrial production and retail sales will be released, as well as GDP for Q4-2024.


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