Value investing could regain its appeal over Growth in 2025. However, if history from Trump’s first term is any guide, the technology sector remains a standout performer, poised to lead the way once again.
The geopolitical landscape continues to be both a risk and an opportunity for the macro environment and the financial markets.
The current macroeconomic dynamics vary significantly across global regions, with a predominant focus on the United States, where the economy has demonstrated notable resilience. This is despite tempered expectations for 2024. In contrast, the Asian and European regions face distinct challenges, as previously noted.
In the U.S., the start of 2024 was marked by uncertainty surrounding economic stability following the Federal Reserve’s aggressive rate hikes to curb inflation. However, last year’s data painted a more optimistic macro picture: consumption remained robust, American corporations—especially Big Tech—delivered stronger-than-expected earnings, the unemployment rate hovered at historically low levels near 4%, and inflation moderated, staying above the Fed’s target but reaching more manageable levels.
This combination supported real growth that exceeded projections, rewarding investors in equities and short-duration bonds while penalizing those positioned in long-duration instruments. The unexpected movement in yields—despite the central bank’s actions—reflected a market consensus that the Fed was adopting a too-dovish stance relative to the strong underlying economy, risking renewed pressure on inflation and potential overheating.
Currently, the situation has flipped: the economy remains solid but is slowing, while consensus optimism has been bolstered by Trump’s election victory and his pro-cyclical, disinflationary fiscal agenda. Nevertheless, the absence of a Christmas rally, typically a harbinger for January trends, raises concerns. Historically, January serves as a key barometer for the year.
Expectations for 2025 earnings appear overly optimistic, with analysts forecasting 17% growth alongside a US GDP increase of 2.2%—a combination that may prove unrealistic. Investors have priced in these lofty forecasts, pushing valuations to levels last seen during the Dot.com bubble, as indicated by elevated P/E ratios.
Credit spreads, which remain historically compressed, further reflect market complacency about credit risk. However, warning signs persist: manufacturing production has been contracting for over two years, construction slowed markedly in late 2024, and fixed investments have decelerated. While the labor market remains stable, cracks are beginning to show.
This confluence of factors, alongside elevated yields that tighten financial conditions, suggests limited upside for economic growth. While a recession is not imminent, growth may underperform expectations. Indeed, recession probabilities have decreased in recent months, but caution is warranted.
The Bloomberg Economic Surprise Index has been declining for some time, yet Treasury yields remain elevated, partially due to fears of an unsustainable deficit under Trump’s agenda. However, full implementation of fiscal policies in the U.S. remains challenging even with single-party control, as bipartisan concerns over the debt ceiling and federal deficit are likely to temper ambitions.
The European economy presents a different narrative, characterized by stagnation, particularly due to Germany, where growth is projected at a modest 0.4% for 2025. Structural issues persist, with German industrial output remaining subdued, evidenced by a -5.4% m/m drop in factory orders in November.
Euro Area inflation, driven by energy prices, has rebounded, while core inflation remains stubbornly high, particularly in the services sector.
This has put pressure on wages, complicating the ECB’s efforts to anchor inflation near its target.
Recent rate cuts by the ECB have faced criticism for being too slow amid clear economic deterioration.
In China, economic uncertainty prevails. While authorities have taken measures to stabilize local governments’ finances and bolster market sentiment, structural reforms have been limited.
Efforts to address non-performing debt, particularly in the real estate sector, have been minimal, and fiscal stimulus remains muted. The PBoC’s rate cuts have yet to meaningfully impact consumption and investment, as deleveraging dynamics persist. Markets increasingly fear a “Japanification” of the Chinese economy, with growth stagnating absent decisive policy action.
Globally, trade is slowing, with the Global Manufacturing PMI contracting in five of the last six months, while the Global Composite PMI shows continued expansion, driven by strength in services.
Key Considerations for 2025 Investors
- Geo-political tensions affecting raw material prices.
- Political changes, particularly in Europe, where populist shifts may emerge.
- Trade tensions, as tariffs risk regressive impacts on consumption and pricing
- US economic trends, including unemployment, consumption, and services sector performance.
Investments Outlook
- US Equities: Less attractive due to compressed risk premiums. Value may outshine Growth, with technology, defense, and utilities benefiting from Trump’s agenda.
- Bonds: Opportunity in long-duration bonds amid historically tight credit spreads. Investment Grade may be preferable to High Yield, with select opportunities in emerging markets.
- Europe: Favor high dividend payers and banks, particularly Italian ones, amid elevated rates.
- China: Prioritize firms reliant on domestic consumption over exporters, amid policy uncertainty.
In summary, 2025 will demand heightened focus on shifting macroeconomic conditions and policy developments across major regions. Diversification and adaptability will be essential in navigating a complex and evolving investment landscape
Original article published on Money.it Italy 2025-01-13 12:03:43. Original title: Le asset class su cui investire nel 2025
