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The US economy and politics remain in the global driving seat.
US growth still dominates the world’s financial markets, which are now likely to be further boosted by the new administration’s policies.
As Donald Trump takes office, US growth is still consumption-driven. The labour market is healthy, and wage growth consistent with inflation close to the Federal Reserve’s (Fed) target. We do not see any signs that this cycle is coming to an end.
We do not see any signs that this cycle is coming to an end
A key question for investors in 2025 is, will new tariffs and immigration policies trigger inflation – and crucially, where does this leave the Fed? We believe disinflation will continue until tariffs start to bite towards year-end. Strong US growth means that the Fed will keep interest rates higher than other major central banks. We anticipate a much slower pace of easing this year, with only two cuts for a terminal rate of around 4%.
For other major economies, the situation is different, and the growth outlook lower. The European Central Bank and Bank of England need to cut interest rates much more, creating divergences around mid-year as the Fed keeps rates higher. In China, stimulus looks aimed at offsetting any new US tariffs. More support is necessary, to keep stabilising the property market and to resurrect consumer confidence. Growth in Japan remains positive with a tight labour market and solid wage growth. Inflation is likely to stay above target, suggesting further interest rate hikes.
So, what does all this mean for portfolios? The year started with market jitters, as US yields rose to reflect concerns about overheating, interest rates and America’s debt. But the US economy’s fundamentals are strong and rate cuts, coupled with solid corporate earnings, are a constructive environment for US equities.
Rising bond yields do not mean the end of this equity bull market
Rising bond yields do not mean the end of this equity bull market. The US is not on the verge of recession, the Fed is not about to hike interest rates, and inflation is relatively close to target. That is why we keep our global portfolio risk exposure above strategic levels. As long as US bond yields rise because economic growth is resilient, stock markets can keep performing. Sound earnings mean that we see more room for upside in equities. We therefore remain overweight, with a preference for US and Japanese stocks.
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We keep our fixed income allocations at strategic levels for now, favouring investment grade and high yield corporate bonds, especially US high yield credit. Within sovereigns, we prefer German Bunds, which should outperform US Treasuries.
We expect the US dollar to remain high against major currencies, thanks to US trade policies and interest rate differentials. The dollar also acts as a haven from geopolitical risk – we retain our overweight exposure. Another haven, gold, should continue to perform as well, because even if demand from central banks has slowed, it remains the main factor supporting prices.
With the new Trump administration, investors will have to brace for turbulent times. With the right portfolio drivers in place, even a wild ride can prove rewarding for investors, and we remain vigilant.
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