Banca March expects sustained growth in 2025 and is constructive on risk assets 28 January 2025 Category: Banca March The global economy is headed for a soft landing and will grow by 3.2% in 2025, buoyed by resilient employment and private consumption. “A Proustian moment, more than a Trumpian year.” A fiscal deficit of 7% of GDP and inflation at 3% leave the US President very little room for manoeuvre. Inflation will continue to taper, but there will be headwinds: increasing salaries and steeper tariffs will keep inflationary pressures alive. Official rates will continue to come down, but at different speeds: weaker eurozone growth will see the ECB speed up its rate cuts. The ECB is slated to cuts rates by an estimated -100 bps in 2025, versus 50 bps for the Fed. Fixed income will offer a source of real returns for portfolios, with a preference for high-rated European credit. What's more, the recent downturn in long-end government bonds has opened up an opportunity to increase durations. Banca March is constructive on equities, given the extended economic cycle and improved corporate earnings. The bank likes US equities, small- and mid-caps in particular. These companies are lagging behind market gains and now stand to benefit from domestic support from the new administration and more even earnings growth. In terms of sectors, it likes technology, health and defence. Banca March’s Market Strategy team believes the economic cycle will be extended and the global economy will shift towards a new balance. Economic activity will remain consistent and global GDP growth will stand at 3.2% this year, which is below but very close to the historical average. Contained unemployment rates and rising salaries will allow for a recovery in household incomes, and in turn, private consumption will continue to drive growth. The US will continue to spearhead this soft landing for the global economy, with growth slowing slightly to 2.6%. In the eurozone, economic growth will rise to stand at 1.2% this year (vs. 0.8% in 2024) but it faces significant challenges: The region’s main driver, Germany, will need to successfully implement reforms and stimulus measures to deliver a transformation and allow it to shrug off its recent label as the sick man of Europe. Elsewhere, countries with the most exposure to the services sector and particularly tourism, as is the case of Spain, will continue to enjoy tailwinds. As for China, stimulus measures have failed to buoy domestic demand, which is still weak as a result of the real estate crisis. The higher tariffs likely to be imposed by Trump will further curtail Chinese economic growth. The new Trump era: less room for manoeuvre Despite enjoying the utmost political legitimacy, Trump faces a very different economic landscape now than in 2016: a higher fiscal deficit (7% of GDP), steep public debt (123% of GDP) and higher interest rates will limit any real room for manoeuvre. In global trade, the US is minimally dependent on foreign markets and currently applies lower tariffs; for example, the average tariff on European goods is 3.5%, versus a 5% tariff levied by Europe on US products). However, the bank believes that the US is not immune from a trade war and that if Trump fulfils his threat of more aggressive tariffs and other regions retaliate, it would shave 1% off US GDP, due, among other things, to the fact that 57% of its exports go to Canada, Mexico, the EU and China. Inflation will continue to taper, but with headwinds Banca March believes that inflation will remain on the right track to normalisation. However, rising salaries will uphold inflationary pressure, especially in the services sector, where prices will be slower to come down in the US in particular, where average inflation is set to stand at 2.6% versus 2% for the eurozone, with core inflation at 2.4%. Potential tariff hikes and more fragmented trade will also hinder progress towards more moderate inflation. In terms of energy inflation, we will see opposing effects; weak demand from China and increased US production will keep oil prices contained, whilst upward pressure on natural gas prices will continue in Europe due to supply restrictions, posing one of the main upside risks for European inflation. Central banks: headed in the same direction at different paces The relative strength of the US economy will see the Fed move more slowly: “We only expect two rate cuts in 2025, as the economy will remain strong.” The ECB will continue to slash rates with four cuts expected this year totalling 100 bps to a neutral rate estimated at around 2%. Financial assets: returns on fixed income will beat inflation and equities remain compelling thanks to earnings growth Banca March expects positive real yields in all fixed income segments in 2025. Within the asset class, Banca March believes that recent movements have corrected the negative term premium anomaly observed in recent years: “The return of a positive curve removes the opportunity cost of investing at the long end, and means that duration is beginning to offer attractive protection against negative surprises as the cycle evolves.” In the soft landing scenario, they maintain more exposure to credit than to sovereign debt and find the best risk-return trade-off in high-rated European corporate debt. As for equities, the bank remains constructive in light of an extended cycle that will see companies continue to increase their earnings. In previous soft landings, equities have gained 17% on average from the first rate cut. The bank's experts add that “given the demanding current valuations, in 2025 we expect to see a slight contraction of the multiple in our estimates and believe the key drivers for equities will be corporate earnings and lower financing costs.” In terms of regions, Banca March has a clear preference for US equities. A more heavily weighted technology sector (+12 pp versus other regions like Europe), better quality companies and more even earnings growth (in 2025 the S&P 493 will see earnings growth increase by 2.5x to +12%) mean US equities still hold appeal. As for European equities, the bank’s experts recommend taking a neutral position, given that although European listed companies are the most exposed to the US, the real risk is limited as a quarter of their revenues come from the services sector, which is hard to hit with tariffs. Valuation currently price in a pessimistic outlook, with discounts of 6% versus the historical average, so any positive news could drive up prices. As for sectors, they recommend greater exposure to three sectors where they anticipate stronger growth in investment/spending. The bank's experts like the tech sector, which will continue to be supported by the new investment phase in AI. They also expect stronger gains from companies in the health sector, where they foresee long-term earnings growth and valuations which are below the historical average (12m PER for the sector of 16.7x vs. a historical average of 17.9x). Finally, the military spending involved in Donald Trump's return to the White House will buoy defence stocks, and themes like cybersecurity are particularly attractive against the current backdrop.