PERSPECTIVES
MARKET AND ALLOCATION
Our experts monthly overview
Notre scénario central
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST ASSET MANAGEMENT
USA 1, Europe 0
With the Republicans’ having won both houses of Congress and with Donald Trump’s having nominated the first members of future team, the political and economic horizon is gradually taking shape in the United States. After nominating some rather atypical figures, Trump’s pick of Scott Bessent as Secretary of the Treasury reassured markets that a form of fiscal orthodoxy would prevail. Things are now less clear in Europe, and its ability to speak with one voice has been cast into doubt.
For, the euro zone’s two largest economies are caught in a political storm. In Germany, the fall of the coalition and early elections in February will block visibility on its economic policy for several more months. This matters even more as Germany is facing headwinds on its growth. In France, the fall of the government and the “balkanisation” of its National Assembly has shut out any political visibility for several more months just as France is facing a challenging fiscal trajectory.
Europe and the US are likely to continue to diverge in the short term. On the central bank front, the Fed is likely to lower its key rates less than previously expected and stop doing so sooner than expected in 2025, in contrast with the ECB, which could go further and lower than expected. On the long section of the yield curve, the 10-year US yield could rise, thus steepening the curve, and perhaps revisit its highs of 2023 before becoming a buying opportunity. In contrast, the 10-year German yield is likely to head downwards. Any upward surge driven by its correlation with US Treasuries would be an opportunity to increase weightings. In France, the OAT/Bund spread, which has already priced in a likely downgrade of French debt to “A”, is likely to remain volatile around current levels, barring a huge political surprise.
Regarding risky assets, Corporate America is likely to continue benefiting from the measures announced in Trump’s platform, including tax cuts and deregulation. We therefore reiterate our overweight stance on US equities. That being said, everything has its price, and lots of good news may have, in fact, already been priced in, with potential disappointment once the new measures begin being implemented in the first months of next year. The same goes for Europe, where much of the bad news may already have been priced in, which is why we reiterate our neutral stance on European equities. All in all, political risks should subside in 2025, along with perhaps even some geopolitical risks, beginning with Ukraine. That would be a good opportunity to switch some equity exposure from the US to Europe. Of course, nimbleness and responsiveness will remain essential.
OUR VIEWS AS OF 06/12/24
The month’s events made no change to the projected rate-cut cycles of the ECB and the Fed. Bond markets ended the month in positive territory, driven mainly by declines in government bond yields and swap rates. We had raised our cursor on government bonds last month. After bond yields fell in November, we reduced duration, but we are sticking to a very slight long bias on interest rates. Against this backdrop, corporate bonds are holding up well, and we reiterate our neutral stance on investment grade and high yield credit, albeit with possible risks of a widening in spreads. As with the moneymarket, we continue to see structural carry opportunities in corporate bonds. We are adjusting our stance, moving from BBB rated issuers to A or BB.
Valuation gaps should naturally lead us to prefer Europe to the United States. And yet, given the stubborn gap in momentum between the two regions, we prefer Wall Street, although we are aware that any artificial intelligence-related disappointment on the earnings of a tech giant would have significant repercussions on US markets. In Asia, we still believe that China, and the rest of Asia, remain at attractive levels. That being said, and although December is traditionally favourable to the equity markets, we are still convinced that volatility will continue, given the international and domestic French political environments, which could cause some dips that can be exploited to expand weightings, as was the case in August during the Japanese “flash crash”.
In November, the dollar gained about 3% vs. the euro. The dollar rode anticipations of Donald Trump’s policy plans, which theoretically will be favourable to the dollar. It also got a boost from the weakness of the euro, which was hit by political uncertainties in France and Germany. We remain bullish on the dollar, which could also benefit from its safe haven status.
MACROECONOMIC VIEW
TRANSATLANTIC DIVIDE 2.0
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT
THE NEW US ADMINISTRATION IS TAKING SHAPE
Pending the 20 January inauguration of the new US president, the markets are trying to keep up with the statements of Donald Trump and the persons who will be on the front lines of his administration, while trying to assess their potential economic and financial repercussions. Two names have stood out in particular – Elon Musk and Scott Bessent. Musk will head up the Department of Government Efficiency, whose purpose will be to cut spending and deregulate. Bessent, the Treasury Secretary appointee, has spent his career in finance and the US media as a defender of the “rule of 3” (3% GDP growth, 3% public deficit, and 3 million more barrels of oil produced). This reassured the (government bond) markets on the management of public finances.
IN THE MEANTIME, THE US ECONOMY CONTINUES TO HOLD UP WELL
Flash fourth quarter 2024 data suggest that consumption continues to expand robustly at between 2.5% and 3.0% (annualised). Robust domestic demand is also expected to be driven by investment, on which leading indicators remain strong. And in 2025, less strict financing conditions will remain a positive factor, not to mention the tailwinds that the new administration could bring with it.
THE NEXT KEY RATE CUTS STILL LOOK SAFE
For the moment, the Fed is sticking to a scenario of disinflation without a marked deceleration for the economy. Inflation did rise slightly in November (from 2.4% to 2.6% for total inflation, and from 2.1% to 2.3% for the PCE deflator), but this uptick was due to technical factors (unfavourable base effects and the method for calculating certain components), and not demanddriven price increases. The conditions are right for the US Federal Reserve to continue gradually lowering its key rates, although the rate cuts could be spread out in early 2025, barring any bad surprises on the job market.
BUT CONFIDENCE IN SLIPPING IN THE EURO ZONE
The reasons for this are fears arising from external risk factors such as protectionism, and domestic risk factors such as political uncertainty in France and Germany. The decline in confidence seen in business surveys now seems to be spreading to services companies, which were the main drivers of economic activity in the euro zone.
A persistent slump of confidence could undermine consumption and the recovery in investment that is expected from less stringent financing conditions. We would point out, however, that surveys have underestimated economic activity over the past year (particularly in France) and that fiscal stimulus in Germany could be greater than expected after the elections. So, it is important to keep an eye on political news in France, not just as a key variable for restoring visibility and confidence in the domestic economy, but also because the fall of the Michel Barnier government is aggravating France’s fiscal standing. The 5% deficit projection for 2025 is no longer credible. Will the ratings agencies stand mute, pending greater visibility?
THE ECB IS NOT WORRIED ABOUT INFLATION, AND SHOULD CONTINUE LOWERING ITS RATES
Lastly, as in the US, the yearend surge of prices is nothing to worry about, as it’s being driven by shortlived base effects that are likely to reverse themselves early next year. The monthly pace suggests that disinflation is accelerating and that the European Central Bank (ECB) can continue to lower its key rates in December (by 25 basis points in our baseline scenario) and once again in early 2025, towards neutrality (which we estimate at 2%).
INTEREST RATES
INSTABILITY AND LACK OF TRUST
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
The markets were driven in November in particular by political news on both sides of the Atlantic. After the outcome of the presidential election, the US looks ready, once again, to beat expectations in terms of macroeconomic prospects. Donald Trump’s unequivocable victory restored some visibility for investors, if not outright confidence. In Europe, the election raised a number of questions. European growth is at risk, with the political situation in France and Germany casting doubt on the recovery of economic activity projected for 2025. These factors have triggered a flight-to-quality and have driven bond yields down. The 10-year German yield, for example, fell from 2.40% to 2.08% on the month.
FRENCH OAT UNDER PRESSURE
The political instability weighing on yields did not keep French yields, as well, from falling on the month, albeit to a lesser extent than German yields. The French OAT (Obligation Assimilable du Trésor) fell from 3.12% to 2.90%, hence a spread with Germany that rose from about 73 basis points to 83 bps due to uncertainties over the 2025 budget.
Late in the month, the 10-year French yield even matched the 10-year Greek yield. The two economies are very different, but this is still very symbolic, when we think of Greece’s situation just a few years ago. Among the main euro zone countries, only Italy has yields higher than France, but even there, the spread is narrowing. It is now just 30 bps on 10-year paper and is being driven down up by the stability of the Italian government. After the resignation of the Michel Barnier government, a close eye will have to be kept on France’s standing compared to its European neighbours. Most ratings agencies are likely to lower their forecasts or ratings on France in the coming months, in contrast to Standard & Poor’s, which rather generously reiterated its AA- rating, along with a stable outlook prior to the early December no-confidence vote.
WE HAVE TO TALK ABOUT THE SWAP SPREAD
First, let’s recall briefly what is commonly called the “swap spread” on the markets. The swap spread is the spread between German bond yields and same-dated euro swaps. The euro swap euro is the benchmark risk-free rate in the euro zone, which is almost as important as the German one.
As of the end of November, the fixed rate euro swap was 2.16%, or very close to the German yield. Without going into the more technical details, the important thing to keep in mind is that the swap rate fell below the German yield in November, reaching -6 bps on 15 November. Why does this matter? Because it’s the first time it has happened. The swap spread has narrowed due to many different factors. These include, among others, the shrinking of the ECB’s balance sheet via quantitative tightening(1) (making German bonds “scarcer”), the ongoing increase in net government issuance, and the European Union’s growing role as an issuer, which is causing intra-euro zone spreads to converge. The swap spread is therefore an indicator of risk in the euro zone that should be monitored closely.
Against this backdrop, we took some profits on duration late in the month when the Bund approached 2.10%. We are nonetheless maintaining a slight long bias on duration via euro rates. The credit market’s performance was also solid in November, thanks to shifts in interest rates. Against this backdrop, in corporate bonds, premiums widened slightly on the month in high yield, while remaining below their longterm averages and while naturally narrowing in investment grade.
The swap spread on 15 November 2024. The spread between the 10-year German yield and 10-year euro swaps hit an all-time low.
| BOND INDICES WITH COUPONS REINVESTED | NOVEMBER 2024 | YTD |
|---|---|---|
| JPM Emu | 2.25% | 3.25% |
| Bloomberg Barclays Euro Aggregate Corp | 1.56% | 5.13% |
| Bloomberg Barclays Pan European High Yield in euro | 0.75% | 8.35% |
EQUITIES
THIS YEAR, THE US CELEBRATED CHRISTMAS IN NOVEMBER
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
As yearend 2024 approaches, the performance gap between US markets and the rest of the world is at an all-time high. Never had such divergences occurred. They result from economies and monetary policies that have become quite asynchronous, due, in turn, to the end of globalisation. And, whereas the S&P 500 gained another almost 6% in November, in reaction to the “red sweep” in the US elections early in the month, the EuroStoxx and Topix hardly budged on the month.
WALL STREET IS FAR AHEAD OF EUROPEAN MARKETS
The White House, Congress and House of Representatives have officially gone Republican. Donald Trump will therefore have a free reign in imposing his pace of reforms of the world’s largest economy. The reforms will be pro-business, as seen in the determination to reform entire swaths of the economy at a breakneck pace.
US market indices rallied sharply on the Republican victory. For proof, just look at the impressive performances, in November alone, by banking, oil and auto stocks (the latter driven mainly by Tesla’s* incredible showing on the month).
One question continues to give all market participants pause: how will US economic actors react, now that it now looks certain that taxation will remain accommodating for both households and businesses? Now that business regulations will be eased, and now that the domestic competitive environment could benefit from tariffs that will raise import prices? On several occasions, it has seemed to us that a portion of US consumer discretionary spending and/or investment had been postponed.
The clarification provided by the elections should naturally remove some barriers, and foster a recovery in volumes in the first quarter. This will probably be necessary to allow corporate earnings growth to reach the 15% expected by the consensus for 2025. Any disappointment of these expectations could be exploited to take some profits, especially as the S&P 500’s valuation leaves little room, in our view, for any disappointments.
EUROPE IS IN A POLITICAL CRISIS
Meanwhile the German and French governments are shaky and are stoking the fears of non-resident investors. And yet, there’s always a silver lining in any cloud. One might hope, for example, that a Germany that is thriftier with its public spending could once again play its role as Europe’s locomotive via a well thought-out fiscal plan. A resolution of the Ukrainian conflict, which was a campaign promise of Donald Trump, would also help lower the euro zone’s risk premium. And any additional Chinese stimulus plan would also provide a boost to Europe’s markets. At 12 times next year’s projected earnings, none of this potential good news appears to have been priced in at current levels. China could respond to US tariff threats with additional stimulus measures. We remain confident that the Chinese government has some wherewithal to protect its domestic economy from rising protectionism. But we are also convinced that the US threats are meant far more as bargaining chips than actual measures that will take effect in January. The worst-case trade scenario is not inevitable. Everything will depend on the concessions obtained by both sides.
Elon Musk’s estimated fortune as of the end of November. It surged by almost $100bn on the month, driven by Tesla’s* share price and making Musk the richest man ever.
| EQUITY INDICES WITH NET DIVIDENDS REINVESTED, IN LOCAL CURRENCIES | NOVEMBER 2024 | YTD |
|---|---|---|
| CAC 40 | -1.54% | -1.90% |
| EuroStoxx | 0.03% | 7.82% |
| S&P 500 in dollars | 5.83% | 27.59% |
| MSCI AC World in dollars | 3.74% | 20.34% |
EMERGING MARKETS
THE WORLD WILL HAVE TO ADJUST TO “TRUMP 2”, ESPECIALLY CHINA
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT
Donald Trump has won a clear victory, giving him the leeway to implement pro-business plans that would boost the US economy even more. In contrast, Europe – France in particular – is having a hard time modernising and reducing its government spending, something that is slowing its potential growth. China, meanwhile, is seeing its hopes recede of surpassing the US economy in the short term.
The alliance between Donald Trump and Elon Musk could mark the US economy the way that Ronald Reagan did with his free-market reforms in the 1980s. Trump’s plans are basically pro-business (e.g., tax cuts, proactive government reforms by Musk), but they also refocus the US on itself. This could mean a US disengagement from the Ukrainian conflict, forcing Europe to assume responsibility for its own defence.
TRUMP IS STOKING VOLATILITY IN ASIA
This prospect is causing new volatility in Asia. US diplomatic policy in the region is still fuzzy, particularly regarding Taiwan.
On the trade front, the “America first” principle could result in customs tariffs that are at least 10% higher for everyone and as much as 60% higher for imports from China. China is well aware of what’s at stake under “Trump 2”. It postponed its National People’s Congress until after the US elections, before announcing new economic support measures.
The government has expanded the measures it announced in September, which had already triggered a 30%-plus gain by its equity markets. New measures have been decided to lighten the debt of local governments and recapitalise banks. However, the market’s response was lukewarm, regarding these as more a stabilisation plan than a stimulus plan.
THE CHINESE GOVERNMENT IS RAMPING UP SUPPORT MEASURES
Prospects do look promising:
- Almost RMB 10,000 billion has been released over a period of three to five years, or more than 7.5% of GDP, a large figure indeed. This comes on top of various monetary and technical measures to support equity markets, as well as the easing of real-estate regulations to boost consumption. By way of comparison, the infrastructure plan after the 2008 crisis amounted to about 12.5% of GDP.
- What’s more, the existence of shadow debts was clearly acknowledged, which seems to confirm that the government has truly recognised the extent of the problem.
- The government will have a new opportunity for adjustments and communication in March 2025, at the “Two Sessions”, depending on the state of relations with the US. Americans’ main concern now is inflation, and a 60% tariff on Chinese products would be counterproductive. In 2018, during the first trade war with China, the actual tariff was 20%, instead of the 45% announced.
Economic growth could slow slightly in 2025, to 4.6%, according to current projections. Earnings of companies in the MSCI China All Shares index are expected to rise between 7% and 10%, which works out to a 2025 P/E of 10.9. With US equities having gained almost 50% in two years, this could be a good time for diversification. In our view, we should be neither too optimistic about US equities, nor too pessimistic about Chinese equities, which appear to be supported at the moment by a sort of “Beijing put”!
This is the additional increase in tariffs on imports from China announced by Donald Trump, which would raise said tariffs by about 30%, far below the 60% announced. Is Trump acknowledging that inflation is Americans’ main concern now?
CHINA’S TRADE SURPLUS WITH THE US (2017-2023)
China has reduced its surplus after the 2018 tariff hikes, in contrast with Canada and Mexico, which are now being targeted by the Trump administration!
Document completed on 06/12/2024
Carry: a strategy that consists in holding bonds in a portfolio, possibly even till maturity, in order to tap into their yields.
Duration: weighted average life of a bond or bond portfolio expressed in years.
Inflation: loss of purchasing power of money which results in a general and lasting increase in prices.
Inflation breakeven rate: the difference between the yield on a traditional bond (nominal yield) and the yield on its inflation-indexed equivalent (real yield).
Investment Grade/ High Yield credit: Investment Grade bonds refer to bonds issued by borrowers that have been rated highest by the rating agencies. Their ratings vary from AAA to BBB- under the rating systems applied by Standard & Poor’s and Fitch. Speculative High Yield bonds have lower credit ratings (from BB+ to D, according to Standard & Poor’s and Fitch) than Investment Grade bonds as their issuers are in poorer financial health based on research from the rating agencies. They are therefore regarded as riskier by the rating agencies and, accordingly, offer higher yields.
OAT (Obligation Assimilable du Trésor): French government bonds used as a benchmark for fixed-rate corporate bonds.
PER: Price to Earnings Ratio. A stock market analysis indicator: market capitalisation divided by net income.
PMI: the Purchasing Managers Index (PMI) from Standard & Poor’s assesses the relative level of business conditions. The data is compiled from a survey of purchasing managers in the manufacturing industry. A reading above 50 indicates expansion, and below that indicates contraction. The composite PMI is a PMI index representing both the manufacturing and services sectors.
Spread: difference between rates.
Volatility: corresponds to the calculation of the amplitudes of variations in the price of a financial asset. The higher the volatility, the riskier the investment will be considered.
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