Did 2025 just start last week?

20 January 2025

AT A GLANCE

A perfect positive storm supported all asset classes last week…
With good news from top-down data on US inflation and China growth, to big banks’ quarterly earnings
The week ahead is all about the first policy moves from the new US administration

Last week was positive for all major asset classes, under the influence of three positive factors. First, core CPI inflation in the US grew less than forecast in December, leading to the first year-on-year drop since July. Long-dated US Treasury yields fell by double digits, the dollar weakened, and stocks rallied, even more so as the second good news was a strong start to the Q4 earnings season from US financials. Big banks and Blackrock had a record Q4, materially beating analysts’ expectations. Finally, China had a strong growth in Q4, which allowed them to match their initial 5% growth target for the year. Retail sales were encouraging, and industrial production was strong in December. Chinese stocks rallied, though are still in negative territory in 2025 for one single reason: tariffs, which are both an uncertainty on the future and a potential boost to Q4 exports as some clients may have rushed their orders.

This is the transition to the week ahead, which starts with the inauguration of President Trump today. We can expect a wave of executive orders to kick-start many items of the Republican platform, from taxes to immigration, energy, and of course tariffs. The announcement of a constructive conversation with President Xi gives hopes of a future good working relation, and the actual start of the ceasefire in Gaza is one more reason to be hopeful. Still, US politics will be the most important area to watch in the week ahead. We will see an acceleration of the corporate earnings season, interesting developments in Davos, and several policy meetings from central banks. We will pay particular attention to Turkey, and Japan, where the BoJ is expected to hike at the end of the week.

We are fully invested to start the year, with an overweight on government bonds of reasonably long duration funded by an underweight in hedge funds. Our 2025 Global Investment Outlook will be released soon, followed by our roadshow in February where we can’t wait to meet you. Have a great week.

Preparing for the winds of change of 2025

Cross-asset Update

Although consensus for 2025 extrapolated US exceptionalism to see yet another year dominated by US markets, Europe is starting out with a bang, comfortably outperforming the other major benchmarks in local currency. Year-to-date MSCI Eurozone is up over 4% in local currency, alongside the UK, while the S&P 500 has so far eked out returns half that size. That Europe beats the US has not happened often historically, and is usually due to valuations differential, as well as its earnings beating both expectations and peers. The latter in turn would require strong global growth, as the common area is an open economy, in particular towards China. Its valuations are indeed at a historical discount versus the US, though for a reason, with the more subdued growth profile often being cited as the main one. The prospect for Trump’s tariffs also further curbed investor enthusiasm, offering one more rationale accounting for European equities’ discount. Yet, the more pronounced the negative bias, the higher the odds for upside at the slightest turn of the tide. And this turn may be represented by Trump’s more measured stance on the trade tariffs he is planning to impose on other countries. Rumours persist that the new president’s approach would be to favour the clinching of deals, rather than being outright confrontational. While there is a good chance that in today’s inauguration speech blustering rhetoric will be upheld, it will be equally important for Mr. Trump to score some early successes in his presidency.

Without China’s participation, a strong rally in non-US markets would soon be failing, so investors will be looking forward to possible new stimulus announcements at the National People’s Congress to be held in early March. It seems that the latest pro-growth measures adopted by Beijing are starting to feed through to the economy, and that new and larger ones would be necessary to keep the traction going. The YTD performance across asset classes could already be pointing to some scenario of this sort playing out, with commodities (+5%) outperforming global equities (+1.7%), and US equities being led higher by energy (+9.2%) and materials (+5%).

While we see some scope for temporary outperformance of non-US markets, Trump’s tariffs, however lenient and deal-prone the new president’s approach will prove to be, do not bode well. They could disrupt global supply chains due to changes in relative pricing and economic agents adjusting by reshuffling procurement processes. The end-result could be inflation, not so much on tariffs’ first round-effects, rather on their second-round ones. In a year that we expect to be marked by more subdued gains, the interplay between US and overseas equity leadership will be one more factor adding to market’s volatility.

Preparing for the winds of change of 2025

Fixed Income Update

Favourable macro data fuelled a relief rally in bonds last week. US core CPI eased to 0.2% MoM, declining for the first time since July last year. US retail sales increased by 0.4% after the scorching 0.8% print in November. Bonds rallied with the belly of the curve outperforming. The 7-year decreased by 14bps while both the 2- and 30-year yields dropped by 9 bps. The benchmark 10-year traded close to 4.62%. Across the Atlantic, UK assets also got a breather as the UK CPI clocked below estimates coming in at 0.3% vs expectations of 0.4%. The 10-year UK gilts dropped 20 bps providing Chancellor Reeves some relief.

However, investors will be on the edge of their seats in the first few weeks of the Trump administration. President-Elect Trump will take oath today and has promised executive orders for swift Day-1 action remaking the federal government, shifting federal priorities at breakneck speed. Our view is that the first point of action will be tariffs. Mr. Trump would like to capitalize on a strong US economy, weak global conditions, and the distant midterm elections. We could see a burst of volatility with long-end yields moving higher if more than 10% global tariff are implemented or targeted measures against China, Mexico, and Canada around Inauguration Day exceed the broad expectations.

YTD returns for various segments look very similar to last year. US High Yield has topped the returns charts, while EM Debt is in the middle, and DM sovereigns and USD IG credit rank towards the end. Last week’s rally did benefit long-duration asset classes. USD IG credit and EM sovereigns claimed the top 2 spots. Debt capital market conditions remain benign with supportive macro fundamentals. Any policy shifts which are less-growth supportive will risk some widening in spreads and increase in volatility.

GCC Debt performed in line with the broader EM Debt last week. This year we have added nine GCC bonds to our recommended list. The average coupon of these bonds is 5.684. Median YTD returns are around 0.2%, however with yields stabilizing we expect better carry. KSA bonds have been the best performing ones for this year. We believe the capital bonds issued by banks will also do well as holding periods increase. Egypt fiscal deficit doubled to almost $5.9bn, however we don’t expect further widening in spreads in the front end of the curve. On Thursday, Turkey’s central bank is expected to cut its policy rate by 2.5%, reducing the attractiveness of the local currency carry trade.

Preparing for the winds of change of 2025

Equity Update

Last week markets demonstrated remarkable strength, with global equities rallying on the back of easing inflation, robust bank earnings, and growing optimism about central bank policy. DMs rose 2.7%, reflecting strong performance across the major economies, while EMs also pushed higher by 1.3%, as gains in China offset softness in India and other regions. Markets face a dual focus: the onset of the earnings season and President Trump’s inauguration speech, which could provide more clarity on the scale and targeting of policy actions. Last week’s rally in global equities was mirrored by an equally upbeat tone in the earnings season, particularly for U.S. banks, with exceptional results driven by strong trading revenues, surging dealmaking, and resilient credit markets. In the U.S., the S&P 500 gained 2.9%, while the S&P equal-weighted Index outpaced it with a 3.9% gain, highlighting improved market breadth. Tech also played a pivotal role, supported by TSMC’s upbeat guidance on AI-related spending.

The S&P 500’s Q4 earnings season is off to a promising start, with upbeat results from major banks. JPMorgan Chase set an industry record with $58.5bn in annual profit, driven by a 21% rise in trading revenue during Q4. Morgan Stanley’s profit more than doubled, with its equities division posting a record-breaking 51% revenue increase as post-election volatility boosted trading. Goldman Sachs delivered its strongest-ever year in equities, with Q4 net income surging to $4.1bn, supported by dealmaking and equity investment gains. Bank of America joined the trend, reporting a 43% increase in investment banking fees and robust loan growth.

European equities joined the rally, with the MSCI Europe climbing 2.4%. Luxury stocks led the way, as Richemont’s stellar sales figures and an upgrade for LVMH boosted confidence in the sector’s recovery. Energy stocks also posted strong gains as oil prices rose amidst geopolitical tensions. Novo Nordisk faced a challenging week losing 4.3%, dethroning it as Europe’s largest company by market capitalization as its obesity drug Wegovy underperformed in a trial comparing higher doses, falling short of results achieved by Eli Lilly’s competing drugs. Compounding the setback, U.S. Medicare plans to cut prices for Wegovy and similar treatments.

Chinese equities led the way, with the MSCI China Index advancing 3.3%, as stimulus measures aided in achieving the government’s growth target for 2024. Japan’s TOPIX fell 1.3% with a stronger yen and caution ahead of the Bank of Japan’s meeting. Indian markets dipped 0.6%, reflecting profit-taking in financials and consumer stocks after a stellar run in 2024. Asian equity markets are bracing for heightened volatility as Pres. Trump’s trade policies threaten supply chains and escalate tensions with China. While tech and EV sectors are particularly vulnerable to disruptions from tariffs and export controls, the uncertainty has also driven strong performance in local semiconductor stocks as China accelerates its push for self-sufficiency. The USD stays strong, tariffs remain a worry and this leads to a neutral stance for EM equities as we start the year. China valuations are attractive, but we would await US policy direction before going overweight. Netflix and Johnson & Johnson are among the 43 S&P 500 companies scheduled to post their quarterly results this week.

Preparing for the winds of change of 2025

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Anita Gupta Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

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