In the third issue of our quarterly publication PERSPECTIVES, we provide an update on our economic and investment outlook for the remainder of 2024 and 2025.
Introduction
Investors are returning to the markets after the summer break and pricing is increasingly being driven by fundamentals. Currently, we see relatively weak economic dynamics in the U.S., Europe and Asia. While the weakness is concentrated in manufacturing, services business confidence is also easing as some central banks – most importantly the Fed – start to focus more on labour markets. As inflation is also moderating, the current macro environment offers some room for monetary policy manoeuvre. First and further rate cuts are on the horizon for the Fed and the ECB respectively.
While a softer growth environment might persist for a while, recession fears are likely overdone. On the contrary, 2025 is shaping up to be a year with improved growth dynamics driven by real income growth and somewhat lower short-term rates. Translating this macro outlook into bond performance likely means higher long-term rates in twelve months’ time along with a steeper, positively sloped yield curve. Once again, corporate bonds remain attractive amidst significant yield pick-ups versus government bonds (“carry on”). In equities, earnings growth will drive further returns as slightly rising yields are expected to accompany better growth prospects.
In this context, we outline our forecasts for the fourth quarter of 2024 on the macroeconomic front, as well as for equities, fixed income, commodities and foreign exchange:
Macro: Growth pick-up in 2025
- Growth: U.S. to re-accelerate in 2025, Eurozone resilient at low levels.
- Inflation: Moving down but may stay elevated.
- Rate cuts: Fed to follow the ECB.
Fixed Income: Normal curves returning
- Yield curve steepening underway.
- Deficit spending to keep pressure on the longer end.
- Carry to provide solid return potential.
Equities: Solid earnings, high volatility
- Earnings growth becoming more broadly based.
- Small cap performance may pick up due to strong EPS growth.
- U.S elections and geopolitical issues may trigger short-term volatility.
Commodities: Gold glistening
- Demand pressure and strong supply limiting upside for oil prices.
- Gold price potential buoyed further by the return of retail inflows.
- Strong physical demand indicators for copper to take centre stage.
Currencies: Volatility revisited
- Imminent U.S. interest rate pivot may prompt stronger price fluctuations.
- We expect gradual JPY appreciation due to narrowing yield differentials.
- Recent CNY rebound partly in response to the unwinding of carry trades.
