Monica Defend
Markets have cheered any good news emerging in 2024 from the economy, corporate earnings and the political environment, although occasionally they were caught by surprise. Looking ahead, they will be driven by earnings momentum, a scenario of slowing US growth and rebalancing labour markets but not drastically weakening, according to Amundi, one of Europe’s largest investment managers.
“On the other hand, the Fed getting a bit more hawkish and Trump’s approach to trade along with the international response could create volatility. Outside the US, European growth and policymaking and China’s response to its domestic problems will drive the markets,” notes Monica Defend, Head of Amundi Investment Institute and Chief Strategist.
“In particular, we see the following factors as key drivers of the global economy:
- US growth resilient but still on a declining path and subject to uncertainty on Trump policies. Recent data are pointing towards better fundamentals in the economy, but the overall growth trajectory doesn’t change.
- European growth struggling to stay on course. Governments’ attempts to impose fiscal consolidation (France, Germany) are clouding the growth outlook. In Germany, we could see a loosening of the debt brake, but it would only be gradual and the economic impact would be seen from 2026.
- Uncertainty around the Fed, while the ECB is expected to be more dovish due to inflation falling faster. We have decreased ECB’s terminal rate expectations by 50bps to 1.75%, to be reached by July 2025. The Fed delivered a hawkish cut, meaning it has very close eyes on inflation.
- Chinese announcements are big on intent. While the main points revolve around expanding the fiscal deficit and boosting domestic demand, we would like to see details about how the government intends to do it.”
“We think liquidity in markets is ample, credit conditions robust, and the profit environment reasonable. But the most important factors preventing us from significantly raising our risk stance are valuations and risks to earning revisions. We keep a mildly constructive view.”
“We see cross-asset, modestly risk-on heading into 2025 with hedges in place. Economic growth in the US and Europe is reasonable, and inflation is slowing, painting a supportive backdrop for risky assets. We have strengthened our positive stance on US equities and turned constructive on Europe, while also maintaining a small positive view on the UK and Japan. We also continue to search for opportunities in emerging market (EM) bonds, in particular in the Czech Republic, South Africa, and Indonesia. To counterbalance this overall pro-risk allocation, we maintain a positive duration bias as a hedge against potential deterioration in the growth outlook. We have also added some equity hedges and keep gold as a diversifier.
“Fixed income as an asset class will be increasingly affected by uncertainty around fiscal and monetary policies. As a result, we maintain a tactical approach to duration in the US and Europe, where we continue to look for opportunities on the expected steepening of the yield curves. In the UK, we are positive but are monitoring the recent strong inflation and wage growth data, while in Japan bonds, we remain cautious. In the credit market, we continue to favour investment grade, in particular in Europe, where valuations look more attractive. In contrast, we are cautious on US High Yield.
“In equities, diversification is the name of the game, as concentration risk remains the top concern. In the US, we remain cautious on the mega caps and explore opportunities down in the capitalisation spectrum in companies that could benefit from a resumption in industrial demand and economic growth but where the valuations do not yet reflect this.
“We also think the rally broadening towards more US value, cyclical stocks will benefit from an uptick in economic activity. In Europe, we favour banks that are less sensitive to rate changes and have strong capital buffers vs. those more sensitive to rate reductions.
“Any dollar strength and rise in geopolitical risks will likely create volatility for EM, but their growth potential is strong and central banks are prudent. We aim to explore resilient bottom-up stories that are driven by domestic consumption themes in debt and equities.”
