INVESTMENT OUTLOOK February 2025
“New Player in the market”. DeepSeek is the Chinese answer to American supremacy in the field of artificial intelligence.
Donald Trump was inaugurated as the 47th President of the United States on January 20. Fears that the new US government would immediately turn everything upside down have been put into perspective. On the one hand, the reflation narrative, which had led to interest rate cuts and higher yields on US government bonds in the USA, had probably already reached its peak before Trump took office. In his speech, he promised to lead America into a new “Golden Age”. Can Trump really usher in a new era of unbridled economic prosperity? The consensus seems to think so. Forecasts for real growth in government spending and real consumer spending in 2025 have risen to 1.9% and 2.4% respectively following Trump’s election. Forecasters are also predicting that the US will grow by 2.2% this year, compared to the 1.7% they were expecting just four months ago. This is in strong contrast to the rest of the world, where growth expectations have fallen over the same period. The financial markets are of the same opinion.
The long-term EPS growth forecast for US companies is close to the record-high range (18% – 21%) compared to the rest of the world. US investors are positioned accordingly and are holding the least amount of cash compared to equities since 2021.
”New Player in the market“. DeepSeek is not only the Chinese answer to American supremacy in the field of artificial intelligence. It is also an opportunity for other players to enter the market if the cost advantage over US products is confirmed.
BENDURA Market Views
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.
Global Economy
The latest GDP data from the US has shown that consumer spending, which accounts for around two thirds of the US economy, is much stronger. American spending rose to an annualized growth rate of 4.2% in the last three months of 2024, the strongest pace in nearly two years. The stock market has given consumers a big boost. Could a correction put the brakes on consumer spending? Overall GDP was dampened by other factors, notably weak net exports and tight inventories. Low inventories should provide a tailwind for the economy in early 2025. However, without the stock market gains, real consumer spending would only have risen by around 2% in 2024 instead of 3%. Currently, almost no economist is predicting a recession. This is in stark contrast to 24 months ago, when every economist was predicting a contraction. But what could be the cause of a recession this year? There are known risks, the most relevant one is Trump’s trade policy. The US could slide into an escalating trade war with retaliatory measures, similar to what triggered the Great Depression in the 1930s (The Smoot-Hawley Act). Furthermore, an excessive mass deportation could hurt the economic activity.
What about the stock market?
After the DeepSeek’s launch, expectations for the AI sector’s growth rate became worrisome and sparked the speculation of a bubble. The deficit is another concern – it is expected to rise from 1.9 trillion US-Dollars this year to 2.7 trillion US-Dollars a year in 2035. It is difficult to envision the Treasury having to finance this debt with higher bond yields, which would lead to inflation and possibly a recession. At least for now, the idea of a recession is not discussed widely, and many americans tend to enjoy the moment.
Recently, the Chinese government has spoken of further financial resources to continue the “Dual Upgrade” program for the trade of selected consumer goods and the modernization of industrial facilities. The program was initiated in the middle of last year and is showing initial success. In addition to subsidies for cars, furniture and selected household appliances, consumers now also benefit from subsidies for the purchase of cell phones, tablets and other everyday items. Companies will also receive greater support in investments regarding safety for employees in production processes, industrialized agriculture and product manufacturing cycles. The program should certainly support growth in the short term. Due to China’s exceptionally high savings rate, the multiplier effect of subsidies is also considerably higher than that of much speculated cash payments.
Following a weak end to the year, sentiment indicators in the eurozone were somewhat more positive in January. Despite the politically uncertain situation in many eurozone countries, private households appear to have shed away several years of pessimism. Accordingly, consumer confidence in most countries (with the exception of Germany) brightened in January and is now slightly below the long-term average.
Equities
Analysts expect the S&P 500 to grow by 16 % in 2025. These forecasts assume sales growth of 7%, which implies margin expansion of approximately 8%. At the same time, earnings growth is expected to expand beyond the Mag-7. This is due to the expectation that some of Trump’s promised measures, such as tax cuts and deregulation, will contribute to margin expansion. We are concerned that other measures that would weigh on margins – such as tariffs – have not been yet considered. It should also be noted that the rise in the dollar will lead to lower EPS growth given the large international exposure of S&P 500 companies.
As BCA Research explained in its latest report, US banks should receive some tailwind from higher IPO fees, better interest margins and weak but recovering loan demand. Credit trends are also positive in the eurozone, where demand for credit remains robust despite the tightening of credit standards.
The stock markets in Europe have largely performed very well since the beginning of the year and have outperformed their US counterparts after a long period of underperformance. First and foremost, the DAX, which rose by over 9% in January, while the leading US index, the S&P 500, only gained 2.7%. The share indices in Europe were driven by the prospect of further interest rate cuts by the ECB, hopes of a more lenient customs policy from the Trump administration and a predominantly good reporting season. Since the election of It is questionable whether the outperformance will continue, as the eurozone economy continues to weaken while the US economy is proving to be robust.
Bonds
Government bond yields continued their upward trend at the beginning of the year. Yields on ten-year US Treasuries increased by 20 basis points in the first half of January, rising to 4.80%. At the same time, expectations of interest rate cuts by the Fed and other global central banks were scaled back, which was partly due to the persistently strong US economic data. Yields on UK government bonds rose even more sharply, even though there was no clear trigger.
We have slightly less conviction in our duration overweight than before. While our duration increase coincided with the peak in yields at the short end, the same is not true when looking at longer maturities. We are confident that growth will disappoint this year and that the Fed will cut rates more than expected. Nevertheless, term premia appear to be the dominant driver at the long end of the curve.
The inflation figures in the middle of the month somewhat reassured the bond investors. In both the UK and the US, consumer prices rose less sharply than expected in December, causing yields to fall back to the level seen at the beginning of the year. Despite the recent countermovement, yields are still above the level of mid-September, when the US Federal Reserve cut interest rates for the first time. For the time being, we remain overweight.
Commodities and Currencies
Not only does gold offer a good hedge in the event of a fiscal crisis, but there is also likely to be structural demand from global central banks looking to reduce their reserves from the dollar. The outlook for the rest of the commodities market is not so positive. Growth in both oil and copper demand remains below historical averages. Supply growth is also unlikely to boost oil prices. One of the Trump administration’s main objectives is to increase the supply of oil, as lowering energy prices reduces inflation. There are increasing calls for Bitcoin to be included in national reserves. The best-known example here is also the USA under the presidency of Donald Trump. However, politicians and private individuals in other countries such as the Czech Republic, Switzerland and Germany are also pushing for this. The small country of El Salvador, which began buying bitcoins in 2021, is repeatedly cited as an example.
