Easing Cycle Continues
In its latest projections, the International Monetary Fund (IMF) revised up global economic growth forecast to 3.2% for 2024 and 2025. Economic growth projection for 2024 was revised up by 30bps relative to last October’s forecast. Regardless, projections for global growth in 2024 and 2025 remain below the historical (2000–2019) annual average of 3.8%, underscoring impacts from restrictive monetary policies, withdrawal of fiscal support, as well as low underlying productivity growth. For developed economies, growth is projected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025, marking an upward revision of 20bps for 2024. For emerging and developing economies, growth is expected to remain stable at 4.3% in both 2024 and 2025, with moderation expected in emerging and developing Asia. Geopolitics and ability of global central banks to achieve a “soft-landing” are key determinants to this and next year’s global GDP growth. The latest forecasts were prior to the reelection Donald J. Trump as the 47th President of United States. Hence, risks to global trade flows and economic expansion from potential trade tariff implementation were yet to be established.
The FED continues to normalize monetary policy with another 25bps rate cut in December to 4.25%-4.50%, marking the final cut for the year. The FED has cut policy rate by a total of 100bps for 2024. The FED’s latest dot-plot suggests a total of 75bps in rate cuts are incoming for 2025. The FED sees the U.S. economy expanding 2.5% and 2.1% in 2024 and 2025, respectively with stickier core PCE read of 2.8% and 2.5% in 2024 and 2025, respectively. Going forward in 2025, the combination of a strong U.S. economy and steady labor market has allowed the FED to remain patient in normalizing policy foregoing consecutive cuts at each meeting as seen 2024. The market overwhelmingly sees the FED on pause at the FOMC meeting in late January. Core PCE is expected to decrease to 2% only in 2026.
President-elect Trump’s inflation inducing policies range from tax cuts, trade tariff and threats of mass deportation of illegal immigrants. This sparked fear that the U.S. economy will face another prolonged period of relentlessly high inflation. Regardless, FED Chair Jerome Powell refuses to acknowledge fiscal policy risks in achieving the FED’s 2% inflation target until impacts become palpable. The FED paints the current easing cycle as an act of “recalibration” rather than a response to an unexpected downshift in its economic assessment or a response to a significant deterioration in labor market conditions.
U.S. economy grew at a 2.8% annualized rate in Q3. Credit card and auto loan transitions into delinquencies are still rising above pre-pandemic levels, with percentage of balances at least 30 days past due at the highest level since 2011. However, as real interest rates are currently elevated the FED is well-equipped to manage any unexpected economic downturn. The FED has officially declared the risk to the dual mandate as “balanced” and is focused on a gradual normalization of policy interest rate back down to neutral territory. Fears of a near-term recession has faded.
The ECB delivered the final 25bps rate cut for the year, cutting the deposit rate for the fourth time to 3%. The ECB recently downgraded GDP growth outlook to 0.8% and 1.3% for 2024 and 2025, respectively. Inflation forecasts are pegged at 2.5% and 2.2% for 2024 and 2025, respectively. However, the latest inflation read showed that Euro Area headline CPI was 2.0%YoY (year-over-year) in October and 2.3% in November close to ECB’s 2% target. Eurozone’s manufacturing sector is under pressure from a prolonged period of elevated interest rates and rising global competition. U.K.’s inflation fell to a three-year low of 1.7%YoY in September but rose 2.3% and 2.6% in October and November, respectively driven by higher energy prices. This prompted BOE Governor, Andrew Bailey, to signal a more aggressive approach to monetary easing. However, the BOE MPC’s projection of CPI increased to around 2.7% for 2025, up from August’s 2.2% projection.
Japan’s Q324 real gross domestic product expanded 0.3%YoY, reversing two straight quarters of YoY decline. The BOJ is treading carefully between avoiding excessive upward pressure on the Yen and controlling the upsurge in inflation. Japan’s new Prime Minister Shigeru Ishiba reiterated BOJ’s independence after publicly stating that Japan is not ready for further monetary tightening. BOJ held policy rate steady at 0.25% at the December meeting but may tighten policy again in 2025. China Q324 GDP growth was 4.6%YoY, slightly beating expectations. India’s 2024 GDP forecasts were downgraded to sub-7% due mainly to the contraction in government spending after a robust 8.2% growth last year.
Global Equity: Markets initially cheered President-elect Trump’s pro-growth policy but later sold off as central banks’ easing pivot faces fresh setback from sticky inflation numbers. Market expects the S&P 500 to deliver 15% EPS growth for 2025, a four-year high. Interestingly, the delta in earnings growth rate between the “Mag-7” and non-Mag 7 names are narrowing. The Mag-7 companies are forecasted report earnings growth of 21% in 2025, while the other 493 companies to report earnings growth of 13% for 2025. This 13% earnings growth for 2025 reflects a substantial improvement to analyst expectations of just over 4% earnings growth for these same companies for 2024. Net profit margin of the S&P 500 is forecast to expand to 13%, the highest in at least a decade.
Regardless of the bullish earnings outlook valuations remain stretched with a TTM (trailing twelve months) P/E of 24.6x for the S&P 500. This P/E ratio is above both the 5-year and 10-year average of 23.4x and 21.4x, respectively. However, investors remain bullish despite elevated market valuations as each percentage-point of President-elect Trump’s corporate tax cut will boost S&P 500 earnings by slightly less than 1%. Downside risks to global equity performance in 2025 consist of upcoming trade tariffs, concentration of top names in various indices and elevated valuations. This also pushed investors to diversify away from names where growth is priced to near perfection.
Market rotation continues with Russell 2000 U.S. small caps index outpacing the large cap and tech heavy S&P 500 and Nasdaq 100 by 1.5% and 1.1% over the past six months, respectively. Investors are excited about lower M&A scrutiny under a new U.S. President and lower cost of capital both are bullish for small companies. Moreover, international revenues accounted for 39% of the Russell 1000 Index (large cap proxy) constituents and half that at 19.9% for the Russell 2000. Therefore, tit-for-tat trade tariff would disproportionately affect large caps over small. This has further piqued the interest of investors for small caps.
NIKKEI225 saw selling pressure following the selloff in U.S. tech names in early August and remains 6% below all-time high. Pressure on the BOJ to hike policy rate soared back as the national core CPI index both rose 2.7%YoY in November still hovering above BOJ’s 2% target. Indian equities saw selling pressure as outflows stepped up. The recent slump in Indian shares has been largely driven by weak Q324 results across key sectors. Consumer goods companies hindered by a slowdown in rural consumption reported earnings below estimates, while banks are dealing with deteriorating asset quality, both of which have unnerved investors. Market sentiment deteriorated further by the U.S. Department of Justice (DOJ)’s indictment of the founder and chairman of the Adani Group.
China Equity: China has unveiled the largest stimulus package since the pandemic to fight off anemic growth and deflation. The property crisis has weighted heavily on economic recovery and crippled consumer confidence, given that 70% of household savings are parked in real estate. The most recent property market support package included a 50 bps reduction on average interest rates for existing mortgages, and a reduction of the minimum down payment requirement to 15% on all types of homes, among other measures. The PBOC also introduced two new tools to boost the capital market. A swap program with a size of USD71 billion would allow funds, insurers and securities brokers easier access to funding to buy stock.
The second measure provides up to USD42.5 billion in cheap PBOC loans to commercial banks to help fund other entities' share purchases and share buybacks. PBOC has slashed the reserve requirement ratio (RRR) by 50bps with more to come if liquidity conditions warrants. Recently, a new USD1.4 trillion debt swap program was launched allowing local governments to exchange high-interest off-balance sheet debts for longer-term bonds. China is set to run a 4% budget deficit as a percentage of GDP next year to shore up consumption larger than a target of 3% for 2024 targeting 5% GDP growth for 2025. The increase in the deficit by one percentage point of GDP translates to an additional expenditure of approximately 1.3 trillion yuan (USD179.4 billion).
Low market expectations coupled with compelling valuations may result in upside surprises during 2025 should economic recovery picks up steam. After the recent rally, the HSI Index trades at an undemanding 9.9x P/E still below 10 YR average with EPS growth forecast of 9.8%YoY and 10%YoY for 2025 and 2026, respectively. The mainland CSI300 Index earning growth forecasts are similar at 10.3% for 2025. Regardless, home prices are still expected to decline by 8.5% in 2024, compared to a previously forecasted 5.0% drop from the May survey. China awaits clarity on U.S. trade policy under a new U.S President to recalibrate future stimulus.
Alternative Assets: FED’s pivot has initially lifted REIT performance. FTSE EPRA Nareit Developed Index, a proxy for global REIT soared as much as 16% on a three months basis as investors positioned portfolios for an era of lower interest rates. However, REITs witnessed selling pressures from the rise in 10YR U.S. Treasury yield which rose 94bps from the year’s trough as markets price in the impending rise in U.S. fiscal deficit and sticky inflation. Nevertheless, REITs and infrastructure assets will continue to benefit from larger investors’ allocation as Treasury yields are expected to see continued pressure across the curve driven by FED’s easing pivot. As part of income investing strategies, investors are seeking out income producing assets beyond risk-free instruments to meet desired returns inevitably benefiting interest rate sensitive assets with stable cash flows.
Geopolitical risks may abate sooner than thought, a bane for gold prices. The war between Russia-Ukraine and the Israel and Hamas conflict which has threaten global supply chain and endanger energy supply may come to an abrupt end under a new U.S. President. Crude prices volatility, however, has yet to translate into a sustained upward pressure on inflation as demand from China and Europe remain benign due to tepid economic recovery. Moreover, market expects more oil and gas drilling activity going forward.
Equity remains a compelling asset class with multiple compelling investment opportunities across the globe. For 2025, the focus should be placed on quality stocks with reasonable valuations, REITs, infrastructure assets and investments that benefit from lower risk premiums such as small caps and emerging market equities. The recent and unexpected but benign reemergence of 2/10YR Treasuries curve inversion offers tactical investment opportunity at the front end of the yield curve. We recommend clients to invest with a portfolio-based approach through a combination of strategic and tactical asset allocation (SAA and TAA) to optimize risk-reward under all scenarios.
Arun Pawa, IP, FM, IA, Investment Strategist
CIMB Thai Bank (CIMBT)
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