LGT Private Banking House View

February 2025 - in a nutshell

As 2025 begins, the global economy stands on relatively solid ground, though growth remains uneven across regions. We witness an economic landscape heavily influenced by persistent inflation and stringent monetary policies. The re-election of Donald Trump introduces both opportunities and risks, with tax cuts potentially stimulating the economy, while trade conflicts heighten uncertainty. Financial markets reflect this mixed outlook: moderate equity gains, rising volatility, and higher bond yields suggest growing inflation expectations and a cautious market sentiment.

Date
Auteur
Gérald Moser, CIO & Head Investment Services Europe
Temps de lecture
7 minutes

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While the US continues to take the lead considering expected economic and earnings growth, the momentum driving the stock market to new highs has recently diminished. Nevertheless, following Trump’s re-election, US equities saw significant inflows. This "Trumphoria", marked by high valuations and low market breadth, is now clashing with tighter financial conditions as US Treasury bond yields rose significantly.

While US fundamentals justify some premium, the euphoric sentiment, tighter financial conditions, and uncertainties surrounding the new Trump administration pose some risks in our view.

Consequently, we have downgraded our position in US equities to "Neutral". In fixed income, yields now exceed the S&P 500 earnings yield, offering stability amid uncertainty. The yield discount to corporate bonds remains low, enhancing their appeal. However, we deem emerging market bonds unattractive due to a strengthening US dollar, potential trade barriers, and challenging valuations.

In summary, the kick off to 2025 presents a complex macroeconomic environment with mixed signals from financial markets. We advise to adopt a cautious and balanced approach, emphasising flexibility and risk management amid ongoing uncertainties.

Macroeconomic environment

The global economy begins 2025 on a solid footing, but with regionally uneven growth prospects, and remains shaped by excess inflation and restrictive monetary policies. The new Trump administration brings both opportunities, such as tax cuts, and risks, like trade conflicts, which heighten uncertainty. Financial markets paint a mixed picture: Moderate equity gains, rising volatility, and higher bond yields point to increased inflation expectations and a gradually more cautious wait-and-see market sentiment.

Investment strategy

At its first meeting of the year, the LGT Private Banking Europe Investment Committee has decided to reduce the pro-risk stance, despite a constructive medium-term view, as short-term uncertainties appear to be elevated. We are taking profits and neutralising our global equity position in the portfolio context, reducing it from previously "Overweight" to the strategic weight by neutralising US equities from previously "Overweight". We have decided to temporarily put the proceeds in cash to maintain maximum flexibility, moving cash to an "Overweight" position. At the same time we remain "Underweight" in bonds overall, below the strategic weight, and "Neutral" in alternative investments. 

Equity strategy

The US remains the undisputed leader in terms of expected economic and earnings growth, leaving the rest of the world in the dust. Nevertheless, the strong momentum that has driven the US stock market to new highs over the past two years has recently waned. After Donald Trump’s re-election, US equities recorded high inflows, while international investors’ cash holdings have fallen to unusually low levels, indicating that they are fully invested. The market reaction after the elections - also known as "Trumphoria", indicative of the almost euphoric investor sentiment - is currently accompanied by low market breadth and is reflected in high valuations. These, in turn, are increasingly coming into conflict with the tighter financial conditions, now that 10-year US Treasury bond yields have risen back into the "danger zone" of 4.5-5.0%. While US fundamentals appear enviable and justify some valuation premium, risks are emerging from euphoric sentiment, tighter financial conditions and uncertainties related to the regime change in the White House. We prefer a more balanced approach and downgrade US equities to "Neutral". Alternatively, investors can also use hedging instruments to reduce their risk profile.

Fixed-income strategy

Following the significant rise in interest rates since September 2024, we upgrade government bonds to attractive. US Treasuries in particular stand out, with yields well above the S&P 500 earnings yield, while offering stability in an uncertain environment. The yield discount to corporate bonds remains historically low, adding to their appeal. Emerging market bonds remain unattractive in our view. The combination of a strengthening US dollar, potential additional trade barriers and challenging valuations is likely to remain a drag.

Currency strategy

The US dollar has performed well in recent months, but momentum in the greenback is expected to slow and even reverse. Overvaluation amplifies downside risks for the dollar, particularly as the Fed’s rate cutting cycle (albeit slowed by persistent inflation) will continue in 2025. While US inflation remains somewhat stubborn, much of the positive economic news is likely already priced into the dollar. Meanwhile, worries about dual deficits, potential US debt concerns and thus reduced US credibility, and the risk of economic and political shocks in the US introduce meaningful headwinds for the US dollar over the medium term.

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