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Each month, LBP AM deciphers market news in video. Today, Sebastian PARIS HORVITZ, Head of Research at LBP AM, looks back at the trends and challenges that will mark the year 2025.
Donald Trump has been elected President of the United States, and the Republican Party will also control Congress. The president-elect's agenda is pro-business but also, more negatively, strongly protectionist. At this stage, there is significant uncertainty about the measures that will be implemented and their timeline. Some may be introduced in 2025, while others could emerge later.
In this context, it is not easy to outline economic prospects for the coming quarters with high confidence.
What we know is that the current economic climate is already full of contrasts. Global growth remains relatively weak, but the U.S. economy continues to surprise with its resilience, while the Eurozone stays in a weak dynamic, and China struggles to recover. On the inflation front, it continues to decline, though more slowly in the U.S. than in the Eurozone.
As a result, central banks have continued to lower their key interest rates. We maintain the view that the ECB will stay on its current path in 2025, while the Fed may adopt a more cautious approach.
What does the persistence of growth, supported by central banks, mean for market outlooks, especially as we face numerous uncertainties in 2025?
In the short term, pro-growth optimism seems likely to persist, reflecting particularly in the performance of riskier assets. However, moving into 2025, greater caution will be required.
For government bonds, given the recent sharp rise in long-term rates, we remain relatively constructive, especially in the Eurozone. The continued lowering of the ECB's policy rates remains a strong support factor. In the U.S., Donald Trump's expansionist policies could, in our view, continue to weigh on U.S. bonds.
European credit markets have benefited from the strength of corporate balance sheets and the persistence of growth as the ECB has begun its monetary easing. We are overweight on this asset class, particularly in the higher-quality segment. We remain exposed to high-yield bonds but in a highly selective manner, especially given the demanding valuations.
U.S. equities have recently performed strongly, pushing valuations to high levels. Trump's promises, particularly the promised tax cuts, are obviously a driving factor. We remain exposed but mindful of these demanding valuations. As for European equities, they should be supported by growth prospects, but concerns about protectionist measures prompt us to exercise some caution. In contrast, emerging markets could be hit harder by the depreciation of their currencies and potential constraints from global trade barriers. We remain cautious here as well.
Ultimately, the coming year promises to be filled with significant uncertainties, requiring considerable agility in portfolio adjustments to mitigate risks and seize opportunities.