US Policy and Deficits Create Uncertainty
The future remains unpredictable due to various uncertainties. We are keenly observing the policies from the newly formed US administration, which have prompted the Federal Reserve to slightly revise its projections. An increase in import tariffs and more stringent immigration regulations could lead to short-term inflation in the US while potentially hindering global growth. Until we understand the extent, scope, and pace of these policies, gauging their ultimate effects will be challenging. Additionally, the response from businesses remains uncertain—will they recalibrate their supply chains or choose to absorb or pass on cost increases? Nonetheless, it is our belief that the scope for policy changes will be limited, as political leaders may hesitate to exacerbate the existing high levels of inflation and interest rates.
Concerns about fiscal sustainability are expected to restrict fiscal policies not just in the US, but also in other developed nations such as the UK, France, and Germany. This leads us to conclude that we aren’t likely to see substantial impacts on growth or inflation resulting from government spending.
Expanding Horizons for Multi-Asset Strategies
We anticipate that economic advancements across various markets will open up increased opportunities for multi-asset investors come 2025. Economic growth tends to bolster earnings, which in turn is favorable for risk assets like equities.
In the realm of developed market equities, we advocate for investments concentrated in the US, the Eurozone, and Japan. Conversely, emerging markets are facing obstacles primarily due to ongoing secular challenges impacting China’s growth. The policy measures aimed at rebalancing its economy have yet to deliver satisfactory results, and the looming threat of heightened trade barriers could further complicate matters.
Sovereign Bonds Provide Long-Term Appeal
With real yields approaching historical highs, we recognize considerable long-term value in bonds despite the surrounding uncertainties in the short term. The attractive initial yields also promise significant income potential. Presently, we have a favorable outlook on sovereign bonds in the UK and Germany, as yields in these countries are projected to decrease more than in others.
Corporate credit spreads are historically tight due to robust fundamentals and a resilient economy. In this current landscape, we believe it is prudent to shift some attention towards equities, as the risk-reward balance appears more advantageous at this time.
In summary, although US economic growth is likely to continue surpassing that of its counterparts, we expect gradual convergence across developed markets. However, we remain vigilant, recognizing that certain regions, particularly exporters, may be vulnerable to shifts in US policies. This reality underscores the importance for multi-asset investors to maintain flexibility and discernment as the economic landscape evolves.
