PERSPECTIVES
MARKET AND ALLOCATION
Our experts’ 2024 review and 2025 outlook
OUR CENTRAL SCENARIO
Deputy CEO, CIO
OFI INVEST ASSET MANAGEMENT
2025: stop here or keep going?
2024 was a year full of contrasts marked by both predictable outcomes and unexpected events, the consequences of which will spill over into 2025. Most of the planet voted in elections last year. While the victories of Donald Trump, Vladimir Poutine and Narendra Modi were more or less predictable, political events in France and Germany created uncertainty, widening a little more the gap between a weakened Europe and a proactive United States and China.
On the financial markets, as expected, the European Central Bank (ECB) and the US Federal Reserve both executed their monetary pivot in lowering their key rates by 100 basis points as inflation receded. After naturally correcting the excessive expectations of end-2023, long bond yields tracked their expected trajectories in both direction and volatility until Trump’s election victory, a trend that is likely to continue into 2025.
Corporate bonds once again fared very well, on the back of sound company management and monetary easing. For the second consecutive year, the equity markets also had a good year. While we correctly forecasted European market trends, the S&P 500 once again surprised on the upside with a tech sector led by the “Magnificent Seven”, which have since become known as the “BATMMAAN”(1), with a gain of almost 25%. It’s true that trees don’t grow to the sky, but it was still hard to get by without having Nvidia* in a US equity portfolio last year.
Will 2024 spill over into 2025?
The volatility caused by the raucous return of Donald Trump is likely to spill over into the first months of 2025. The markets will oscillate between Trump’s statements, his turning words into deeds, and, most of all, the medium-term consequences of all this. The central banks are likely to stick to their rate-cut cycle. This will be less the case for the Fed (with two 0.25% cuts currently expected) against a backdrop of resilient growth and the risk of a resurgence in inflation. The ECB, however, is likely to lower its rates by at least 100 basis points in the first half of the year in reaction to shaky European growth. Based on expectations already priced into the curve, long bond yields are likely to anticipate this monetary easing, with yield curves steepening. Current levels already look attractive and are at a good level to buy duration, which, moreover, will be useful in the event of market stress.
We expect the credit market to be driven by carry this year. We expect no major shifts in corporate bond spreads.
Equity markets, meanwhile, should continue to fare well, driven by the US locomotive and Chinese stimulus measures. We are sticking to the long stance on US equities that we adopted in November, but everything comes at a price, and we expect a likely switch back to Europe once the dust clears on German politics and, even more so, once a halt, if any, occurs in the Ukrainian conflict and the country’s reconstruction begin. Volatility is likely to remain high and, more than ever, agility will be essential on markets that will gradually price in the looming new global order.
2025 OUTLOOK AS OF 09/01/2025
Despite ECB and Fed rate cuts, bond yields rose in December.
With this in mind, we are raising our duration on government bonds, with a preference for the United States. We are lowering our money-market and inflation-linked bond exposures for two reasons: 1/ money-market yields are tracking ECB rates downward; and 2/ inflation expectations look a little excessive in the short-term. Against this backdrop, the quest for yield remains key. We are conservative on credit spreads, but the interest-rate component could support investment grade corporate bonds, which we are once again overweighting slightly. In high yield, carry remains attractive compared to other asset classes. Emerging debt could also fare well, with yields falling in most economies.
We are approaching this new year with a constructive view on US and Asian equity markets.
In the US, a pro-growth and pro-deregulation administration will soon be in office, which should remove some uncertainties on short-term economic growth. Keep an eye out, however, for earnings releases, as forecasts are high so far this year. Europe’s manufacturing output is likely to improve but it will have to deal with the threat of US sanctions. In Asia, China has some fiscal manoeuvring room in trying to balance out the US tariff threat. In Japan, further governance reforms and a solid economy form a solid foundation for the equity markets.
Our view is constructive on the dollar this year.
While we do not expect a massive dollar rally in our baseline scenario from current levels, we believe that trends remain rather favourable to the dollar, particularly vs. the euro, for two reasons: 1/ the macroeconomic growth gap – and hence the monetary policy gap – between the US and the euro zone is likely to persist in 2025; and 2/ the new US administration’s policy plans are rather pro-dollar, just as (geo)political uncertainties are working against the euro.
MACROECONOMIC VIEW
GROWTH AND LOWER RATES
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT
For the fourth consecutive year, global growth surpassed 3%, albeit with wide inter-regional divergences. The US has played a decisive role, driven by strong consumption. In contrast, the euro zone has achieved an only very moderate recovery, with wide sector and national disparities.
SOLID US GROWTH…
The strength of US domestic demand is being driven by sustained growth in consumer spending, which on average reflects the increase in real income and not an unsustainable increase in borrowing or a marked decline in savings. US households were relatively spared by higher interest rates, as the vast majority of them had taken out fixed-rate loans for their mortgages.
Business investment never truly suffered, despite more stringent lending terms. Fundamentals of most US companies remained solid, and they were able to weather higher interest rates, thanks to their ample cash holdings. Unemployment remains historically low, at 4.2% in November, but the job market is no longer overheating, now that excess demand has been absorbed, thanks in part to increased immigration in 2022 and 2023.
All in all, economic growth was more robust than expected, at almost 2.8% in 2024 vs. just 1.2% forecast at the start of the year by the consensus of economists.
…CONTRASTS WITH EUROPEAN SLUGGISHNESS
The pace of private consumption is the main cause of the growth gap with the United States. Although the job market remains solid and wages have gradually caught up with past inflation, households consumed less than expected and the savings rate was well higher than its pre-pandemic average. Euro zone growth is forecast at 0.7% in 2024, thanks to its anchoring in the services sector, which managed to offset the crisis in manufacturing, which is due mostly to the situation in Germany. While residential investment seemed to be showing signs of stabilising at yearend, business investment shrank steadily, driven down by lacklustre demand, hawkish monetary policy, and the crisis in manufacturing.
Geographically, southern Europe offset northern Europe, as Spain and other peripheral countries drove up growth in the euro zone.
DISINFLATION HAS ALLOWED CENTRAL BANKS TO LOWER THEIR KEY RATES…
After falling by half in 2023, total inflation declined more gradually in 2024. On annual average, total inflation fell from 4.1% in 2023 in the US and from 5.5% in the euro zone, to about 3% in 2024. In 2023, inflation had been driven down by energy and food prices, as well as by the normalisation of prices of manufactured goods. In 2024, the home stretch towards the 2% target took longer, as it dealt with inflation in services, which is the most rigid of the various components of the inflation basket. Despite the rough ride by inflation, the job market is no longer inflationary in the US, and high productivity is also helping companies absorb costs without necessarily raising prices. In the euro zone, services inflation stayed close to 4% throughout the year, due to the lag in adjusting with wages and therefore is little reason for concern in 2025, as wage inflation should be more moderate. Moreover, lower producer prices in China exports disinflation to the rest of the world and, despite geopolitical tensions, energy prices have remained stable on the whole.
Ongoing disinflation allowed the US Federal Reserve and the European Central Bank (ECB) to begin easing their monetary policies in mid-year, with each cutting their rates by a total of 100 basis points. They ended the year at 4.5% in the US and 3.0% in the euro zone, but they aren’t done yet, particularly in the euro zone, while things are less certain in the US. Meanwhile, the central banks continued to normalise their balance sheets. The Fed’s fell below 7 trillion dollars, or 25% of GDP, and the ECB’s to 6,300 billion, or 42% of GDP.
…EXCEPT IN JAPAN
Against the grain, the Bank of Japan (BoJ) dialled back its pace of monetary easing in raising its key rate from 0.10% to 0.25% this summer after an initial hike in March. The macroeconomic picture justified a rate hike, but the markets were still caught off-guard. Since then, the BoJ has been more alert, although the normalisation in theory is not over.
A 2024 ASSESSMENT WOULD BE INCOMPLETE WITHOUT MENTIONING ELECTIONS
European elections saw the rise of far right parties across the continent, as opinion polls had forecast. However, the main pro-European parties managed to form a “grand coalition” which led to Ursula von der Leyen’s re-election as president of the European Commission. In reaction to the election outcome, French President Emmanuel Macron dissolved the National Assembly and called for snap legislative elections in late June.
Since then, political instability, exacerbated by an unprecedented fiscal deficit, has kept France under the market’s fire and wariness, with the spread between French OAT bonds and German Bunds now pricing in a sovereign rating for France that is more in line with a single A. In Germany, the fall of Olaf Scholz’s coalition late in the year will mean early elections in February. In the US the outcome of the elections was unequivocable, in contrast to the opinion polls, but the markets’ initial reaction was as expected – a Trump victory would theoretically be more favourable to equities, due mainly to the announced tax cuts and a more pro-business framework. Not until 2025 will we know whether the US president will, in fact, roll out his entire programme.
2025 OUTLOOK
KEEP AN EYE ON IMPACTS OF DONALD TRUMP 2 POLICIES
MODERATE ECONOMIC GROWTH AND INFLATION UNDER CONTROL IN THE EURO ZONE
The fundamentals of the US economy remain robust, and Donald Trump’s plans to roll over household tax cuts after 2025 could provide an additional growth boost, as could deregulation for investments. However, the situation on the job market, which is now no longer in a state of excess demand, is likely to encourage US households to slow their consumption slightly. If the new administration takes a moderate approach with regards to the protectionism and immigration measures announced during the election campaign, there will be few obstacles to growth in 2025 and those that do exist will be offset by fiscal stimulus.
Growth could therefore hover around its 2% potential or perhaps even higher. The European economy should expand moderately in 2025, with growth of about 1%.
The household savings rate is likely to remain high and the recovery in investment to be delayed by mounting uncertainties, both domestic (political instability) and foreign (protectionist threats). But all is not lost, as consumption has improved slightly, and the strength of peripheral economies is offsetting sluggishness in France and Germany.
The easing of the US job market is likely to relieve pressure on wages in the future. While the strength of demand could slow the receding in services inflation, protectionism, which remains the main risk at this point, could make the situation more challenging.
Even assuming moderate hikes in customs tariffs, if higher prices of imported goods are passed on into end prices, inflation could take off again temporarily and push the US Federal Reserve into an extended pause in its monetary easing cycle. In the meantime, the Fed should still be able to lower its key rates beginning in March 2025, to 4.00% or 3.75%. Euro zone inflation is on a trajectory of returning to the 2% target some time in 2025. There has been no serious reacceleration of goods inflation, while services inflation is likely to recede, tracking the slowing of wages downward, including in Germany with less pressure on the job market.
Moderate economic activity and inflation under control should allow the ECB to hit its neutral rate of about 2% as early as mid-year. Any shock to activity would push the ECB into accommodative territory as early as 2025.
Risks could shift during the year – in a positive direction with, for example, a peace deal between Ukraine and Russia, or in a negative direction, with an exacerbation of political tensions in France and Germany or a more intense or broader trade war that would weigh on European business confidence.
INTEREST RATES
A PIVOTAL YEAR
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
2024 featured major shifts in monetary policies as well as US supremacy over the rest of the world. US economic activity was once again surprisingly strong, driven by household consumption, the strength of the tech and artificial intelligence (AI) sectors, as well as a political context that carried Donald Trump to a second presidential term. There were many uncertainties – both political and geopolitical in nature – but they failed to derail global growth and the financial markets. Let’s take a look back at the main drivers of the fixed-income markets in 2024.
A WELL ORCHESTRATED TRANSITION
Let’s look first at the central bank actions that drove the fixed-income markets. In early 2024, the US Federal Reserve and the European Central Bank (ECB) kept their key rates high, at 5.5% and 4.0% respectively.
The idea was to keep those rates in hawkish territory, while ensuring that inflation would pull back to the 2% target, and then lower them thereafter.
So, these anticipated rate cuts were priced in as early as the start of 2024 with an expected easing of about 1.5% over the course of the year, which the markets expected to begin in the first half of the year. This central bank pivot did indeed occur, but not as early as expected. The ECB ultimately was the first to begin lowering its rates, in June, whereas the Fed, with an eye on stubborn inflation and still-solid growth, waited until September. Ultimately, both central banks lowered their rates by 1% during the year, but at two different paces. These well-orchestrated rate reductions had little impact on shortterm rates, with the 2-year US yield ending 2024 where it had started, at about 4.25%, while the 2-year German yield fell by 0.3% to end the year at 2.10%. In contrast, longterm yields were pushed up. The 10-year US yield ended 70 basis points higher, at almost 4.60% and the 10-year German yield 35 basis points higher, at about 2.40%. Other major central banks, in Canada, the UK, Switzerland and New Zealand, also lower their rate. Others, such as in Norway and Australia, are still in pause mode, while the Bank of Japan raised its rates for the first time in 17 years!
BOND MARKETS ARE FARING WELL
As we have seen, key rates – which are very-short-term rates – began to fall in 2024, but longer-term rates began to rise.
This explains why sovereign bonds returned just 1.8% in the euro zone. True, this was in positive territory, but still lagged behind the almost 4% returned by money-market funds on the year – a high for this asset class since 2008, with an almost unbeatable risk/reward pairing. For higher yields than that, exposure was needed to longer-dated private sector bonds, either in investment grade vehicles (4.74% in 2024) or in high yield corporate bonds (more than 9%). So, some nice returns were to be had on the credit market after an already exceptional year in 2023, in which the two asset classes gained almost 8% and 12% respectively. As the credit market is sensitive to interest rates and credit spreads, it was spreads that supported these asset classes. Despite numerous economic uncertainties, this confirms strong investor interest for the bond markets. The environment was even ideal for primary issuance, which set records at 370 billion euros in investment grade and 87 billion euros in high yield. Flows into European bond funds even tripled compared to 2023, allowing companies to refinance and reduce default risks even further for the coming years.
FRANCE AND AMERICA: DIVERGING DESTINIES
Is there something symbolic in the passing of the Olympic torch from Paris to Los Angeles? The destinies of France and the US seem to be diverging, with, on the one hand, a new president, a clear majority and strong growth and, on the other hand, a government without a majority and with weak economic growth. Each on its own scale, the two economies will, in the more or less short term, face similar challenges in reducing their debt and deficits – unlike Germany, which could benefit from its proper management of public spending. Growth was expected to slow in the US in 2023; in fact, it came to 2.9%. In 2024, it was once again expected to slow, but ended up at the same pace as in 2023. The pace of US expansion just keeps surprising on the upside, whereas European growth is accelerating less than expected and is likely to end 2024 at below 1%.
The French and German locomotives are almost at a standstill. In France, debt and deficits have been revised upward to record levels at, respectively, close to 112% and 6% of 2024 GDP, at the very moment when the political environment has worsened. Since the dissolution of the National Assembly and legislative elections in June, no majority has been emerged, and the context is dominated by political instability. As a result, the 10-year spread between Germany and France widened by about 30 basis points to end the year above 80 basis points. Germany, meanwhile, appears to have the leeway to shift its economic model and in late 2024 called for new elections, which could produce a stronger majority. Against this backdrop, the spread between the US and Germany also widened from 190 basis points at the start of 2024 to 220 points at yearend.
TO SUM UP
All in all, bond investments had another good year in terms of performance. Central banks were able to begin lowering their key rates in 2024. The ECB continued to normalise its monetary policy in shrinking its balance sheet and in halting the exceptional Covid measures (PEPP) and support for governments or the banking system (APP and TLTRO). A desynchronisation is nonetheless occurring in favour of the US. Europe looked weaker in late 2024, facing major geopolitical challenges, whether in terms of competitiveness or in making its presence felt on the international scene in managing armed conflicts.
Shrinkage this year of the ECB balance sheet after the expiration of the last TLTROs(2).
| BOND INDICES WITH COUPONS REINVESTED | 2024 |
|---|---|
| JPM Emu | 1.78% |
| Bloomberg Barclays Euro Aggregate Corp | 4.74% |
| Bloomberg Barclays Pan European High Yield in euro | 9.14% |
2025 OUTLOOK
TOWARDS THE END OF CENTRAL BANKS HAWKISHNESS
CARRY REMAINS ATTRACTIVE IN CORPORATE BONDS.
2024 was a turning point in monetary policies with the initial rate cuts by the European Central Bank (ECB) and the US Federal Reserve. The Fed is expected to land near a “neutral rate” stance by the end of 2025. However, the election of Donald Trump could impact the assessment of this rate and the pace of future rate cuts. The new administration’s fiscal policy plans could also cause some tensions on the long section of the yield curve.
In the euro zone, the ECB will be able to withdraw its hawkish bias with inflation already close to 1%.
This will provide some breathing room to a lacklustre economy that is nonetheless expected to accelerate from 2024 to 2025 par rapport à 2024. The markets are already pricing in key rates of about 2%.
The need to shore up public finances also raises the upside risk of long bond yields, something that could happen in the event of market wariness and absence of political will in Europe. On the other hand, excessive fiscal rigour could drag down growth, which would push interest rates down. Once again, it will be a tightrope walk but it will be worth grabbing opportunities to add to duration in 2025.
From the allocation point of view, investment grade government bonds could always be used as safe havens in a context that is rather favourable to a steepening of the curves.
Corporate bonds, meanwhile, experienced two very favourable years in both investment grade and high yield. So more moderate returns are expected by the end of 2025. Even so, and although key rates fell in 2024 and credit spreads moved under their historical average, we remain bullish on the asset class owing to a historically attractive carry.
Let’s point out, by the way, that default rates are expected to remain low in 2025 and that rating agency outlooks are unlikely to worsen too much. Some sectors will nonetheless remain under pressure, such as automakers and auto equipment makers, but, barring a highly unfavourable economic scenario (which is not our baseline scenario), the credit market’s performances are likely to be positive.
The main risks to keep an eye on will be political and geopolitical, and could affect Europe in particular. In the US, excessive optimism should be avoided, as that could quickly reverse itself and pull down on risky assets. A correction on equity markets could nonetheless boost fixed-income markets 2025.
EQUITIES
ONE ALL-TIME RECORD AFTER ANOTHER
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
2024 was an exceptional year for the equity markets in all ways. First of all, because it came on the heels of strong gains by equity indices in 2023. Two consecutive years of such strong gains are rare in equity market history, especially when no economic recession has played the role of catalyst. 2024 was also exceptional in ultimately belying all forecasts. A US economic recession was ultimately just a vague assumption; core inflation was relatively stubborn, especially in the US; and geopolitical tensions were party-poopers at regular intervals throughout the year. One might have expected increased volatility on the equity markets and a restoration of risk premiums. The exact opposite happened, sending indices from record to record.
US HEGEMONY BECAME EVEN MORE PRONOUNCED THIS YEAR
US stocks now account for more than 75% of the weight of major international indices – more than 20 percentage points more than 20 years ago. Economic growth there is stronger and more self-sustaining. The international environment has less of an impact on the business climate there than anywhere else in the world.
The US’s freer markets and less constraining regulations are pushing companies’ profitability to new highs. Margins are higher in the US, despite intermediate costs that rose constantly throughout the year, wage costs in particular. Major companies are generating more and more surplus cashflow, making it possible to remunerate shareholders in the form of dividends or share buybacks, which have also set records. International investment flows therefore once again flowed to US markets, which look like an island of resilient prosperity in a world that has become far more multipolar. Whatever we may think, technological innovation was also dominated by far by US companies in 2024. As of yearend, we now have eight listed companies exceeding 1,000 billion dollars of market cap. All are connected to the advent of artificial intelligence and its hoped-for transition to economic and financial reality. AI investments are commensurate with the ambitions of US hyperscalers(3) (Amazon*, Meta*, Alphabet*, Microsoft* and Apple*), who in 2024 spend more than 250 billion dollars to push artificial intelligence forward at companies, double the amount of the previous year.
These amounts are expected to reach 400 billion in 2025, and will probably contribute to widening even further the gap with the rest of the world. And such spending is not just on Nvidia* chips. The entire ecosystem is benefiting from it, including industrial companies specialising in datacentre infrastructures, cable cooling, power generation, etc., as seen in the valuations hit by all these segments by yearend.
US markets ended the year at an unprecedented valuation. At almost 23 times next year’s estimated earnings, we are far above historical averages, but also above the premiums normally seen vs. other developed markets. It would be mistaken to believe that tech companies alone are driving these gaps. Manufacturing, financial services financiers, and some consumer companies are also trading at multiples that imply a highly sustained pace of growth in the coming years. Such hopes are being driven, all at once, by consumption that remains resilient, non-AI industrial investments, which hope to see restart as early as this year, and a wave of deregulation following the election of Donald Trump that could boost activity in a large number of sectors.
Without equalling the performance of the US market, the Japanese market ended the year with a solid gain. The Nikkei at last beat its previous record high, which dated back to 1989! Abenomics(4) continues to produce its effects, driven mainly by a monetary policy that, while normalising, remains extremely accommodative. Household consumption is being driven by substantial wage increases that show that companies are willing to play the reflation game. Inflation, by the way, ended the year at close to 2%, a figure almost unheard of in recent decades. Another record set in 2024 was in the number of foreign tourists visiting Japan. Japanese exporters were not the only ones to benefit from the weak yen. Bargain-hunting tourists also benefited.
The Japanese market was also driven by reforms of governance at Japanese companies. These consist of better allocation of companies’ financial resources and are likely to lead ultimately to a greater return on capital employed. Japanese companies have just begun to unwind their cross shareholdings. This could cause them to refocus on their core businesses and better remunerate their shareholders.
ECONOMIC SLUGGISHNESS CAUSED EUROPE TO LAG BEHIND OTHER DEVELOPED MARKETS
Europe’s two locomotives – France and Germany – are at a standstill. Germany is being undermined by its unprecedented political situation, which explains the risk premium that has naturally taken shape on its domestic market.
The CAC 40 ended the year last among European indices, while Germany paid for its dependence on the Chinese economy, which is sorely lacking in growth. The restarting of manufacturing output that some expected for 2024 failed to materialise. What’s worse, destocking continued throughout the year, belying, here again, the darkest forecasts. And yet, the German market ended the year on a far brighter note than the French market, pricing in hopes of the end of hostilities in Ukraine, Chinese stimulus, and a new, more profligate government.
Market cap reached at yearend 2024 by US equity markets, more than twice US GDP.
| EQUITY INDICES WITH NET DIVIDENDS REINVESTED, IN LOCAL CURRENCIES | 2024 |
|---|---|
| CAC 40 | 0.17% |
| EuroStoxx | 9.26% |
| S&P 500 in dollars | 24.50% |
| MSCI AC World in dollars | 17.49% |
2025 OUTLOOK
A YEAR FOR PERSUASION?
RECOVERY JUST AROUND THE CORNER IN EUROPE?
The S&P 500 came very close to a second consecutive year of 25%-plus gains, which would have been unprecedented since 1998. 2024 was an excellent vintage for global markets, which, albeit to various degrees, achieved performances far better than expected at the start of the year. And whereas views were split on the markets’ trajectories for 2024, a broad consensus appears to be taking shape for 2025. We are not outliers in forecasting middling returns on the equity markets in 2025.
Market participants will continue to focus on the US in 2025, with several outstanding questions.
First of all, greater clarity will be needed of the repercussions of the new Trump administration’s initial measures. Although Donald Trump has made no secret of his priorities, keep in mind how unpredictable the new president is.
This would mean some surprises in store for markets that cheered his election victory in November. All eyes are likely to be on interest rates in the coming weeks, particularly in light of recent trends that saw the 10-year US yield hit 4.65%. The stretch run in bringing inflation under 2% is the least certain and may also generate volatility.
But the equity markets will be driven above all by earnings growth prospects. The 15% consensus forecast looks ambitious and will require a much more even contribution than in 2024, when the artificial intelligence ecosystem accounted for the lion’s share of earnings growth. At almost 23 times forecast 2025 earnings, the S&P 500 is priced at demanding levels and any disappointment could be sanctioned.
As for the realm of artificial intelligence, where investment projections remain stratospheric, it is now time to show investors some actual return on their investments. Releases by BATMMAAN (the “Magnificent 7”(5) + Broadcom*) will accordingly be placed under the microscope.
The latest leading indicators point to renewed growth, and the European Central Bank is likely to play along. While little can be expected of the political situation in France, there are persistent hopes that the German elections will produce a coalition more inclined to heavier public spending. European markets gained ground in 2024, with the exception of France, even without any contribution from earnings growth. European markets are not cheap, but nor are they trading at excessive valuations.
The earnings rebound expected in 2025 should be enough to drive the start of a catching-up rally on European markets.
In Asia, the Chinese plan is still in the works. Its extent will depend on the outcome of negotiations with the Trump administration. We still believe that the Chinese market’s risk premium will continue to recede as stimulus announcements are made by the national government.
Japan, meanwhile, is faring well. Its monetary policy remains accommodative; wage gains are driving increased household consumption; and a weak yen is driving companies’ exports. So the outlook is bright for earnings growth, especially as governance reforms at companies are likely to encourage them to continue optimising their financial structures to the benefit of investors.
EMERGING MARKETS
ASIA ENDS 2024 IN POSITIVE TERRITORY
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT
After three years of negative performances, Chinese equities gained more than 20% in 2025. Despite a serious economic slowdown, there is now a glint of hope: the government seems to have become aware of the seriousness of the situation and its risk of deflation. Prices of realestate, which accounts for almost 70% of household wealth, have dropped by 30% since 2021. As a result, consumer confidence has fallen sharply, exacerbated by a youth unemployment rate of more than 20%. To halt this downward spiral, the authorities have put through a series of measures since September 2024.
The government’s plan is threepronged: restructuring “bad debt” on local governments’ balance sheets, stabilising the real-estate market through various technical support measures, and boosting domestic household consumption. Domestic household consumption is crucial, especially at a time when Chinese exports to the US could be hit by the hike in tariffs that the Trump administration is planning.
CHINA: A VALUE PLAY(6) WITH A POTENTIAL GOVERNMENTAL CATALYST
The latest Chinese economic indicators released since September show some improvement and suggest that the measures taken so far have been rather effective: manufacturing PMI came to 50.1 in December – this fell slightly short of expectations but surpassed the 50 threshold for the third consecutive month. The PMI services indicator, in contrast, rebounded sharply, to 52.2 in December, from 50 in November and 50.2 in October.
China’s has achieved its 5% growth objective for 2024. The government is also targeting 5% for 2025. Meanwhile, sovereign yields have hit new all-time lows, at less than 1.60% on 10-year maturities and 1.00% on 2-year paper.
For 2025, additional measures that are, more proactive and coordinated are expected for the purpose of boosting domestic demand and restoring investor confidence. Equity market valuations now look rather attractive, at a 2025 forward price-earnings (P/E) ratio of 11. In light of all these factors and the government’s now clear intention to restore confidence, a strong new year on the equity markets now looks possible for 2025.
ASIA EX-CHINA: LONG-TERM GROWTH AT A REASONABLE PRICE
The EM Asia ex-China index consists of almost 430 companies operating in the other main countries of emerging Asia, encompassing a population of more than 2 billion. This is an important market with an aggregate market cap of more than 4,200 billion dollars. More to the point, these markets offer a good blend of solid domestic fundamentals (India, for example, is a fast-growing country driven by its domestic market and is little exposed to other international markets) and exposure to the global economy, particularly to promising themes such as artificial intelligence (AI). Asia is indeed a full participant in the global AI value chain. Valuations on the whole accordingly look reasonable at a 2025 P/E estimated at almost 15.
The month-on-month increase in real-estate transactions in December in China’s four largest tier-one cities (Beijing, Shanghai, Canton and Shenzhen). In Shanghai, transactions on the month even hit a high since 2021. Government measures are beginning to pay off…
| INDICES OF NET DIVIDENDS/COUPONS REINVESTED | 2024 USD |
2024 EUR |
|---|---|---|
| MSCI Emerging Markets | 7.50% | 14.93% |
| MSCI China All Shares | 16.38% | 24.43% |
| MSCI Emerging Markets Asia ex China | 8.53% | 16.03% |
| JP Morgan Emerging Market Bond Index | 5.73% | 13.04% |
| JP Morgan Government Bond Index-Emerging Markets | -2.38% | 4.36% |
After five challenging years, the Chinese equities markets have rallied since mid-September. The government appears to have grasped the urgency of the economic situation and seems to be taken seriously this time. Investors are now alert to avoid missing out on this promising market rally…
2025 OUTLOOK
EMERGING MARKETS: A CYCLICAL UPTURN COULD BEGIN AND AT LAST MEET EXPECTATIONS
WITH 60% OF THE WORLD’S POPULATION AND EXCEPTIONAL INDUSTRIAL CAPACITIES, ASIA IS A MAJOR SOURCE OF VALUE CREATION
Driven by US equities, equities of developed markets have outperformed emerging equities by far over the past 15 years. However, some recent signs are pointing towards a more bullish phase for emerging markets.
In the economy, first of all. While Western economies are looking mature and beginning a phase of slowing down, emerging markets are no longer being driven by China alone. Heavily populated countries like India, Indonesia, and Vietnam, are in a phase of acceleration in their per capita GDP – the most attractive phase for companies’ expansion.
A new and also important factor is that emerging markets are at the heart of the global shift towards decarbonation. They are the main exporters of green technologies and raw materials, such as copper and lithium. This is likely to improve their trade balances and public finances. Similarly, the rapid expansion of artificial intelligence is boosting exports of computer chips and electronics from countries like Korea, Taiwan, Malaysia and the Philippines. Meanwhile, investors are beginning to understand that it is hard to ignore the large Chinese equity markets. Moreover, this is an asset class that is decorrelated from Western markets, thus helping to make an equity portfolio more “anti-fragile”(7).
Valuations on the whole still look reasonable. That leaves one major question: will China’s political governance manage to restore overall confidence in that country?
Other Asian markets are benefiting from three longterm growth themes: the acceleration of the artificial intelligence industry, the expansion of consumption by an emerging middle class, and China workarounds in industrial supply chains. On another level, emerging debt markets could also be attractive in 2025. After a challenging decade, conditions have improved since 2023. Many countries have reduced their fiscal and current-accounts deficits and have made significant progress in governance. With high yields (averaging 8%) and retreating inflation, this asset class is well placed for 2025, especially with the Fed’s monetary easing and growing demand for raw materials.
In contrast, emerging bonds denominated in hard currencies are at a crossroads. Yields are high, averaging 7%, but spreads could widen if the US economy slows (which is not necessarily going to happen!), as they are closely correlated to US corporate bonds. To sum up, despite past challenges, emerging markets are showing signs of recovery and could offer investors some promising opportunities at a time when Western markets are looking “mature”.
Document completed on 09/01/2025
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.
Sovereign bond: a debt security issued by a national government. The sovereign yield is the yield on a sovereign bond.
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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