We have just closed a very positive 2024 for global financial markets, driven by a combination of key factors, including the start of the interest rate cycle in the US and Europe, US economic strength, solid corporate earnings, and significant investment enthusiasm for the technology sector and artificial intelligence. The US election, with Trump's Republican victory, added to this backdrop, boosting stock markets, while favouring the dollar's appreciation against other currencies such as the Euro. Thus, the S&P 500 stood out with a return of 23.31%, far exceeding the 8.28% of the Eurostoxx 50, reflecting a historical differential between European and North American stock markets.

On the other hand, fixed income also had a favourable year, marked by constant changes in inflation and monetary policy expectations. High yield corporate bonds led returns thanks to increased demand for risky credit and the narrowing of credit spreads. In government debt, the 10-year US bond closed the year with a profitability of 4.57%, while the 2-year German bond ended with a profitability of 2.077%.

Looking ahead to 2025, despite multiple uncertainties, global growth is expected to remain resilient, with clear leadership from the United States. In contrast, Europe and China will show signs of relative weakness.

Inflation and monetary policy

• Global inflation will continue to slow, in particular in Europe and in sectors such as basic services and underlying components.
• This environment will allow central banks to continue with expansionary policies, with additional rate cuts in Europe, the United Kingdom, Canada and other developed economies. Conversely, future policies of the new Trump administration in the United States could generate more inflation (tariffs, aggressive immigration policies) and therefore delay the Federal Reserve's rate-lowering cycle.

Risks

• Conflicts in the Middle East, Ukraine and Russia, and US-China trade tensions are key factors that could alter the economic outlook.
• The Trump administration introduces additional uncertainty, especially with aggressive tariff and immigration policies.

Regional perspectives

United States

• This country is expected to be the main driver of global growth, where we expect above-trend activity and an economy at an advanced stage of the cycle, but not at the end of the cycle.
• Fiscal policies and reduced regulation under the new Trump administration are providing support to the market.
• Risks: Changes in trade and migration policy could increase business costs and limit labour supply, with moderating effects on growth and pressure on inflation.

Europe

• Growth is expected to be below trend for an extended period, penalised by low productivity, high dependence on foreign trade and risks arising from possible US tariffs.
• Along with China, Europe could also be the main victim of any tariffs or policies introduced by the new US administration.
• The proximity to conflicts such as Ukraine-Russia and the challenges of the Monetary Union accentuate structural weakness. This scenario is combined with political instability in Germany and France.

China and emerging countries

• Structural challenges in China persist: demographics, high levels of debt in the real estate sector and other areas, as well as the seeds of mistrust that have been sown over the last five years, both among consumers and companies.
• Despite this structurally disadvantaged environment, significant government stimulus at fiscal, monetary and regulatory levels is expected to counteract domestic weakness and provide cyclical momentum.

Financial assets and investment strategies

Equity

• In principle, a scenario of resilient growth and moderate inflation with expansionary monetary policies is favourable for risk assets. Along with macroeconomic factors, shares are heavily supported by healthy earnings growth.
• Overall valuations are high, but this is mainly due to the impact of the big tech companies (“the magnificent 7”), which show a strong concentration of returns. When these large companies are excluded, the market is in line with historical valuations and offers interesting opportunities.
• We start the year with a neutral exposure to equity assets, focusing in particular on cyclical sectors that benefit from deregulation in the US.

Sector and regional

• In the US, preference for sectors such as finance, industry, consumer discretionary and small and medium-sized enterprises that benefit from deregulation and onshoring.
• In Europe, although weak growth is expected, opportunities could be found in peripheral markets (southern Europe).
• Monitoring emerging markets such as China with attractive valuations to enter if the government supports the economy with a significant aid package.

Fixed income

Interest rates

• US interest rates are expected to remain volatile in the near term, driven by a highly data-dependent Federal Reserve and additional uncertainty stemming from the new Trump administration's policy decisions. This, in combination with tax cuts and immigration policies, will make the outlook more complex.
• In Europe, we are concerned about the US trade policies of the next administration, which add downside risks to the eurozone economy. Any significant weakening in growth and the labour market could even lead to below-target inflation. Market prices suggest a 2% terminal rate for the ECB in this cycle, keeping the 10-year Bund yield anchored around current levels. Despite the increase in economic tail risks, we maintain a constructive medium-term view on the asset.

Credit

•  Investment grade credit (EUR IG) spreads have fallen below their long-term historical average, although in Europe they are not as tight as in the US.
• Credit will be a year focused on "carry".
• High yield credit spreads (HY) are tight and do not include less favourable scenarios.
• As far as duration is concerned, considering the possible volatility, we prefer to be in the 3-5 year range.

Conclusion

2025 is expected as a year of moderation in global growth and adjustment in valuations of risky assets. Flexibility and a neutral vision with tactical options in less traditional markets will be key to taking advantage of opportunities in an environment of uneven growth and uncertainty.