After having front-loaded rate cuts by a total 100bps for 2024 the FED decided to stand pat at the latest March FOMC meeting. The combination between a resilient U.S. economy and steady labor market allowed the FED to remain patient in normalizing policy. The FED forgoes consecutive rate cuts at each meeting as seen during 2024. The latest dot-plot suggests a total of 50bps of incoming cuts for 2025. The FED sees the U.S. economy expanding 1.7% and 1.8% in 2025and 2026, respectively with stickier core PCE read of 2.8% for 2025.
Market expects no further FED easing at least till June. FED currently in “wait and see” mode as President Trump roll out new and potentially reflationary policies. Core PCE is expected to decrease to 2% only by 2027. 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 a healthy 2.3% in Q4 but missed estimates. Delinquency cate on credit card loans remains above pre-pandemic levels at 3.1%, but has shown sequential quarterly improvements. 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. Ongoing culling of federal workforce totals 200k positions thus far with another 75k accepting voluntary buyout offers. This puts more workers into what is already a finely balanced U.S. jobs market. The U.S. Federal Government employs 2.4 million workers (excluding U.S. postal service) accounting for 1.9% of the entire U.S. civilian workforce. This could ultimately amount to the biggest job cut in U.S. history.
The ECB eased policy by another 25bps across three key benchmark interest rates The ECB further downgraded GDP growth outlook to 0.9% and 1.2% for 2025 and 2026, respectively. The ECB’s asset purchase program (APP) and pandemic emergency purchase program (PEPP) no longer reinvests principal payments from maturing securities. 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 reaccelerated to 3% in January driven by wage pressure, energy and food prices. Regardless, BOE Governor Andrew Bailey has signaled an aggressive approach to monetary easing and follow-through with a 25bps cut to 4.5% early February. The BOE halved 2025 GDP growth from 1.5% to 0.75%. The BOE is anticipated to cut at policy interest rate at least two 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 50bps 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 6.4% 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 8% over the past six months. Concerns regarding earnings growth and consumption prompted foreign investors to turn net sellers and lock-in gains.
Global Equity: Markets initially cheered President-elect Trump’s pro-growth policy but sentiment quickly deteriorated shortly after as FED’s easing pivot faces fresh setback from tariff and 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&P500 is forecast to expand to 13%, the highest in at least a decade. The S&P500 Index delivered 25% total returns in 2024. The Mag 7 accounted for substantial 53.7% portion of that returns.
Valuations remain stretched with a TTM (trailing twelve months) P/E of 24.6x for the S&P500. This P/E ratio is far above the 10-year average of 21.6x. Market awaits President- Trump’s corporate tax cut which would 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 as risk factors pile-up.
Despite expectations for a more moderate FED easing cycle 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 9% below all-time high. The recent slump in Indian shares has been largely driven by weak Q324 results across key sectors coupled with elevated valuations relative to emerging market peers. 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. However, Q424 earnings may see reprieve from increased government spending.
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 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).
After finishing 2024 with mid-teens returns, the first reversal for Chinese equities in three years, the Hang Seng Index (HSI) soared 22% YTD dramatically outperforming global peers. Performance was driven by solid Q4 technology sector earnings and progress on AI development. Low market expectations, compelling valuations, accelerating earnings growth and continued fiscal support would continue to bolster market returns. After the recent rally, the HSI Index has re-rated to 12.2x P/E and now hovers above the 10YR average. The HSI earnings growth are penciled in at only early-single digits on 12 months forward basis hence there’s plenty of room for EPS growth to surprise to the upside. The CSI300 EPS growth was upgraded to 15%. 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. 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 delayed but 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. The recent sell-offs mark a good entry point for investors.
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., a bane for gold prices. However, fears regarding negative impacts from President Trump’s tariff and subsequent inflation resurgence continued to push gold price higher. Crude prices are pressured by weak demand growth coupled with the prospects of supply growth from both OPEC+ and non-OPEC+ producers. OPEC+ reaffirmed its commitment to unwind 2.2 million barrels per day production cut enacted earlier starting on April 1st, 2025.
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)
>> Download for more information
