Here’s to a promising year 2025…

Read the market analysis and fund positioning

Dear Reader,

The US is at the centre of events. Interest rates have recently risen sharply. However, the initial political guidelines of the upcoming government are harbingers of a new policy that will lead to interest rate cuts.

Bonds – Inflation and Growth

Continued growth in US GDP is a goal that Trump wants to accelerate with lower interest rates. This is where the Fed comes into play: rate cuts at the short end could further stimulate the economy. However, the central bank’s independence will be put to the test as the White House is likely to exert pressure.

At the long end, stimulus could also come from longer-term interest rates not rising further: Punitive tariffs and planned expulsions appear to be less inflationary than feared. After the rapid rise in interest rates in recent months, this suggests that interest rates are more likely to decline. All in all, we expect inflation to fall and approach the 2% target.

A lower-than-expected budget deficit argues for falling interest rates. This slows the growth of government debt and reduces the need for new issuance. Let’s be clear: US interest rates will fall in the longer term: at the short end because of the Fed and at the long end because of lower inflation expectations and a reduced supply of government bonds.

For all these reasons, we are invested in 10- to 30-year US bond futures and expect interest rates to fall.

Equities – Growth Engine USA

We see the S&P 500 at 6,300 to 6,500 points – a gain of 5 to 10%. The Republicans, emboldened by their election victory, are doing everything they can politically to stimulate the economy. And Trump? He’s doubling down in the second round. He has promised it – and if anyone can master the art of negotiation… With his hand-picked team, he will do whatever it takes to achieve his goals. The script is written, let the show begin!

Currencies – No Sustained Strengthening of the US dollar

Populist campaign rhetoric is having a positive impact on the US dollar. Added to this are China’s wait-and-see attitude, the escalation in Ukraine and the combination of economic stagnation and political instability in Europe. We have hedged our dollar exposure. The strength seems exaggerated – any one of these factors could quickly shake the greenback’s robustness. Once these exaggerations are over, we will reduce our hedge.

Trump Needs Low Interest Rates

The Republicans have a firm grip on the USA. They have the new president and dominate both houses of Congress. The hotly debated Trump reflation trade was a first taste of what could come. What can we expect after the inauguration?

The starting point: US real interest rates are high and slowing down the economy too much – an obstacle to the new president’s plans. He needs low interest rates like an engine needs oil. Europe is increasingly caught in the crossfire: economically trapped between the superpowers of the US and China, politically weakened by the dysfunctional Franco-German axis. For Trump, the shrewd dealmaker, it’s a perfect opportunity. He knows the other side’s weaknesses and uses them to get the maximum out of it.

The ECB will have to continue to support the economy by cutting rates; the Fed is in a more comfortable position: it can act, but it doesn’t have to. Moreover, Trump’s second term is likely to be more strategic, with advisors even more focused on the economy.

Tariffs on imports are expected to hit anyone who produces or buys too little in the US – but not with full force and not in the long term. As with many of Trump’s campaign promises, implementation will take time. Programmes such as additional tax cuts are unlikely to be put in place before 2026.

Nevertheless, Trump’s announcements should be taken seriously. They are bargaining chips to secure maximum benefits for the US. Financial markets have long priced in this course.

Exaggeration and Extremes

By the end of 2024, extremes dominate markets. Populist rhetoric fuels fears of inflation and debt. Expectations of interest rate cuts have fallen drastically – from ten to four steps by the end of 2025. A rollercoaster ride that showcases the typical exaggeration of markets. This is precisely where the opportunity lies: in recognising and exploiting these exaggerations.

We expect the US economy to grow between 1.9% and 2.5% in 2025. The tariff war could cost up to 0.7 percentage points – even so, a solid plus of 1.2 to 1.8% would remain, far better than the stagnating EU.

Best regards,

Luca Pesarini