Trump Era Begins
The International Monetary Fund (IMF) projects stable global GDP growth of 3.3% for 2025 and 2026, respectively broadly unchanged from prior forecast. Regardless, this is still below the historical (2000-2019) average of 3.7%. Advanced and emerging/developing economies are projected to expand by 1.9% and 4.2% in 2025, respectively. Global inflation is projected to soften to 4.2% and 3.5% for 2025 and 2026, respectively.
Multilateral cooperation is once again coming under threat from a new Trump presidency. This could potentially blunt the fruits of globalization leading to increasingly fragmented global supply chain and a structural rise in global inflation. President Trump’s policies on global conflicts, trade, taxes, immigration and etc. are expected to drive market volatility throughout 2025. However, the anticipated volatility will also provide compelling investment opportunities across all asset classes for shrewd investors.
The FED continues to normalize monetary policy with another 25bps rate cut in December to 4.25%-4.50%, marking the final cut for 2024. The FED has lower policy rate by 100bps for 2024. The latest dot-plot suggests a total of 50-75bps of incoming cuts 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% for 2024 and 2025, respectively.
The combination between a resilient U.S. economy and steady labor market has allowed the FED to remain patient in normalizing policy. This allows for the foregoing of consecutive rate cuts at each meeting as seen during 2024. The market overwhelmingly sees the FED on pause at the FOMC meeting in come late January. Core PCE is expected to decrease to 2% only by 2026. 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.
The U.S. economy grew at a healthy 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 on a path to normalize policy interest rate back to neutral territory. Fears of a near-term recession has since faded.
The ECB delivered a final 25bps rate cut to close out 2024, lowering the deposit rate for the fourth time to 3%. The ECB 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. Preliminary numbers see headline and core inflation for December at 2.2%YoY and 2.7%YoY, respectively. Eurozone’s manufacturing sector is under pressure from a prolonged period of elevated interest rates and rising global competition. The ECB is expected to aggressively lower policy interest rates in 2025 to bolster meager economic growth.
U.K.’s inflation fell to a three-year low of 1.7%YoY in September but rose 2.3%, 2.6% and 2.5% in October and November and December, respectively driven by higher energy prices. Regardless, BOE Governor Andrew Bailey has signaled a more aggressive approach to monetary easing. The BOE MPC’s projection of CPI increased to around 2.7% for 2025, up from August’s 2.2% projection. The BOE is anticipated to cut at policy interest rate four more times 2025.
After the BOJ held policy rate steady at the December meeting, the central bank voted 8-1 to hike policy rate by 25bps to 0.5%, a 17-year high. Inflation has persistently hovered above the 2% BOJ’s target. The market is now pricing a full a cycle high of 50 bps in total policy tightening for the 2025 calendar year. China’s economy ended 2024 on a stronger-than-expected note, as Q4 GDP expanded by 5.4%. India’s 2024 GDP forecasts were downgraded to sub-7% due mainly to the contraction in government spending after a robust 8.2% in 2023. India’s benchmark equity index, the BSE Sensex, drifted lower by 12% over the past four months. Concerns regarding earnings growth and consumption prompted foreign investors to sell a net USD5.4 billion in Indian equities in January so far.
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 12-15% EPS growth for 2025. 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 in 2024. Net profit margin of the S&P 500 is forecast to expand to 13%, the highest in at least a decade. The S&P 500 Index delivered 25% total returns in 2024. The Mag 7 accounted for substantial 53.7% portion of that returns.
Regardless of the bullish earnings outlook valuations remain stretched with a TTM (trailing twelve months) P/E of 24.4x for the S&P 500. This P/E ratio is above the 10-year average of 21.5x. However, investors remain bullish 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 comprise of upcoming trade tariffs, concentration of top names in various in global and U.S. large-cap indices and elevated valuations. This has pushed investors to diversify away from names where growth is priced to near perfection.
Appetite for small caps investing has improved. Investors are excited about lesser M&A scrutiny under a new U.S. President and lower cost of capital both are bullish for small-mid cap 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 (small cap proxy). Therefore, tit-for-tat trade tariff would disproportionately affect large caps over small. This has further piqued the interest of investors for small caps. Markets expect Russell 2000 constituents to grow earnings at 33% annually during 2024-2026, far higher than large caps.
NIKKEI225 saw selling pressure following the selloff in U.S. tech names during early August and remains 5% below all-time high. 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. Indian banks are also dealing with deteriorating asset quality both of which have unnerved investors. Market sentiment deteriorated further after the U.S. Department of Justice (DOJ)’s indictment of the founder and chairman of Adani Group.
China Equity: China has unveiled the largest stimulus package since the pandemic to fight off anemic growth and deflation. The most recent property market support package included a 50bps 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 PBOC said in a statement it will “implement a moderately loose monetary policy to create good monetary and financial environment for promoting sustained economic recovery”, underscoring the need for further monetary support.
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. A new USD1.4 trillion debt swap 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 to GDP in 2025 to shore up consumption larger than a target of 3% for 2024 while targeting 5% GDP growth for 2025. The increase in the deficit by one percentage point 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 for Chinese equities during 2025 as economic recovery shows progress. After finishing 2024 with mid-teens returns, the first reversal for Chinese equities in three years, the HSI Index trades at an undemanding 9.1x P/E still well below the 10YR average. The HSI and mainland CSI300 Index earnings growth are penciled in at only mid-single digits for 2025, leaving plenty of room for upward revisions. Regardless, mainland China home prices are still expected to decline by 8.5% in 2024, compared to a previously forecasted 5.0% drop from the May’s 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% over a three months period as investors positioned portfolios for an era of lower interest rates. However, REITs witnessed intense selling pressure from the rise in 10YR U.S. Treasury yield which soared as much as 128bps from 2024’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 pressure across the curve driven by FED’s ongoing easing pivot. As part of income investing strategies, investors are seeking out income generating 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 as permitting rules ease.
Equity remains a compelling asset class with multiple compelling investment opportunities across the globe. For 2025, the focus should be placed on funds that invest in quality stocks with reasonable valuations, REITs, infrastructure assets and investments that benefit from lower risk premiums such as small-mid caps and emerging market equities. The front end of U.S. Treasury curve offers a tactical investment opportunity from potential curve steeping as policy rates head lower. We recommend clients to invest with a portfolio-based approach through a combination of strategic and tactical asset allocation (SAA and TAA) to better optimize risk-reward and ride out volatility.
Arun Pawa, IP, FM, IA, Investment Strategist
CIMB Thai Bank (CIMBT)
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