Happy New Year and best wishes for a healthy and prosperous 2025! As we start a new year with an important victory of Cagliari Calcio (2-1 vs. Monza!), I have polished my best crystal ball nicely in order to make 10 predictions that could shape financial markets and portfolio returns over the next twelve months. Some may be considered as general macro or asset allocation themes, a few could be provocative, many of them won’t happen, while others may seem crazy but I still consider worth to keep them in mind. Indeed, surprises tend often to matter more than getting the central macro scenario right because the biggest risks -or opportunities- are always what no one sees it coming and thus no one is prepared for it. Just think about the last few years… the covid-19 pandemic in 2020, the surge in inflation in 2021, the Russian invasion of Ukraine in 2022, the collapse of Credit Suisse and the absence of recession in 2023; or the strong returns of US equities, gold and bitcoin that no-one expected last year. So, the most surprising thing in 2025 would actually be… a lack of surprises.
- Forget about credit in 2025! Either we remain in a Goldilocks scenario and equities should continue to be the fastest horse of the asset allocation carriage, or growth peters out and sovereign bonds / top quality duration will likely outperform. Furthermore, given the historical tight credit spreads, the odds of credit faring relatively better than govies in a scenario of rising rates related to a upside surprise on inflation or any debt sustainability issue are extra slim. Last but not the least, if inflation get definitively anchored, sovereign bonds will provide again some diversification benefits within a diversified portfolio. In other words, I am not saying credit returns will be negative but just it is now somewhat useless in a broad asset allocation.
- Within equities, the Magnificient 7 won’t be the leaders (in another positive year) as the market participation will broaden out. One of the reasons could be the AI productivity gains finally spreading out to the other sectors (or at least adoption across the broad economy seeming more palpable/tangible), or just a catch up of other sectors, and especially US small and mid-caps. For that, we just need US long rates to decline below 4.5%, without any upside surprise on inflation allowing thus the Fed to proceed with a gradual and cautious easing.
- Non-US equities will outperform US. It could be a corollary of the previous prediction if the Mag7 suffer a major setback, but there could be other reasons. Let’s explore some of them. Trump policies may finally prove more counterproductive than expected for US markets, especially if they lead to higher rates for longer… and a weaker dollar down on the road. It could happen if US debt sustainability concerns strike back, while the Fed lose its credibility. In this context, gold will probably take the scoreboard lead. Note also that Trump policies may also provoke reactions or wake-up calls from US major trading partners such as Canada, Mexico, Europe or China, which could prove beneficial from them and lead to an outperformance of these equities markets (at least in local currency). Any doubt about that? Just look at the Argentinian equity markets last year…
- A profound reform of German’s debt brake will occur. The new German coalition government after the snap elections of February will have “no other choice” at some point next year as German economy falls into a proper recession after punitive Trump tariffs, while France experiences a debt sustainability issue reverberating to some extent on the whole Euro zone, rending therefore less effective ECB monetary policy easing.
- France 10y yield will surpass Italian one. At 3.2% currently, it is already higher than Spain (3.1%) or Portugal (2.8%) and at the same level than Greece. However, I suspect it may get worse in France due to ongoing political turmoil and uncertainties deteriorating further this year, exacerbating the debt sustainability issue. And the problem here is far more serious than in other large economies for 3 mains reasons: (1) the trajectory (France primary budget has never been balanced since François Mitterrand won the Presidential elections in 1981, i.e. more than 40 consecutive years!); (2) the already high taxation level in France (tax-to-GDP is close to 45% in France vs. about 35% for the OECD average or less than 30% in the US…) and (3) foreign investors won around 50% of France overall government debt, much higher than around 25% in Italy or 30% in the US. At some point, the crisis will trigger a counterreaction such as Germany abandoning the debt brake (see above), leading de facto to a more common/integrated EU budget policy or, eventually, a more aggressive ECB monetary policy easing (slashing rates/restoring QE).
- Japanese Government Bonds (JGBs) curve will bull flatten with global growth slowing down as the year goes on -especially outside the US-, Japan wages growth finally disappointing but BoJ hiking rates at least 2 times nevertheless before that. It will be in stark contrast with most other sovereign bond curves, which will tend to steepen as shorter rates fall more than long rates.
- UK economy enters into a stagflation mode with GDP growth slowing materially, close to 0% versus +1.1% and 1.5% expected in 2025 by the IMF and OECD respectively, persistent inflation above 3% and, anyway, higher than in any other G7 economy, plus renewed some debt sustainability concerns, leading to overall downward pressures on the Cable. As a result, the BoE will cut its easing cycle short.
- Oil prices collapse below $50 per barrel as Ukraine war ends, tensions in the Middle-East ease, global growth slowdowns and Trump policies lead to an increase in US oil/shale gas production. If this proves right, it will likely cement the favorable goldilocks scenario and leads to strong equities and bonds performance, while being a headwind for gold.
- Trump tariffs policies lead to a full-blown trade war leading to major FX movements. So far, fx movements have been mainly driven by carry trade considerations and expectations about policy rates trajectories and terminal points. Let’s now suppose that Trump tariffs aren’t only negotiation’s tricks or threats but he goes really ahead with its initial intentions… Dollar may get a lost stronger either because Fed becomes more hawkish or because other currencies depreciates significantly as their growth prospects turn more negative, especially as a higher dollar may help to tame inflationary pressures in the US, while weaker trading partner currencies will help them to remain competitive (i.e. compensating to some extent the tariffs increases). In this context, 2 currencies will be worth keeping an eye on: the Hong-Kong dollar (will the peg survive another year? Especially if the prediction here below comes true) and the Swiss Franc (the BNS may be forced to abandon or adapt again its desperate Don Quixote quest against the “bad” speculators).
- China falls into a Japanese deflation scenario, similar to what Japan has experienced over the last decades. Despite the ongoing stimulus gesticulations of the Chinese authorities trying to revive demand through either monetary, budget or fiscal policies, structural headwinds (demographics, excess households’ savings, still large housing inventory, no more large infrastructure needs, already high level of debt at the country level) and lack of confidence/animal spirits will render them useless and ineffective. Moreover, China policies are somewhat constrained by the resilience of the US economy and its “exceptionalism”, which goes to pair with a relatively strong USD as it continues to attract most of global investment flows. As a result, any potential cyclical recovery will quickly hit a ceiling of lower potential growth with Chinese growth returning to a much weaker “new normal” track than in the past (definitively below 5%). Not to mention that the world fragmentation, and especially rising global trade tensions, aren’t helping its economic prospects.
Economic calendar
Welcome to 2025! For the first full trading week of this new year, investors will immediately get back into the swing of things as there will be several key economic indicators releases, including the US December jobs report on Friday, flash December CPI prints in Europe tomorrow, services PMI indices (today) and US services ISM index (Tuesday), as well as the minutes of the FOMC meeting on Wednesday. As a result, there shouldn’t be much spare time!
The US jobs report for December, due on Friday, will undeniably be the highlight of the week. The consensus expects payrolls gains to come in at around 150k, down from 227k in November, while it foresees the unemployment rate staying put at 4.2% and the average hourly earnings growth slowing to +0.3% MoM from +0.4%. Before that, we will get other important labor market indicators such as the JOLTS data on Tuesday, including the job openings or the quits rate among others, the ADP December report on Wednesday, as well as the weekly initial jobless claims on Thursday. Other notable US economic data releases include the ISM services index tomorrow (consensus forecasts 53.2 vs 52.1 in November) and the University of Michigan consumer sentiment on Friday to a lesser extent. These first economic releases of the year will have to be put in the context of the latest FOMC meeting, with its minutes due Wednesday, as they may tip the Fed’s members average stance balance into a more dovish or hawkish trajectory as the battle against inflation has not yet be won. In Europe, this week’s focus will be on the flash December CPI reports, including Germany today and France, Italy and the Eurozone on Tuesday. Here too, unexpected surprises may change the path of ECB rate cuts. Investors will also keep an eye on German manufacturing orders and industrial production for November on Wednesday and Thursday respectively. Outside of the Euro Area, inflation releases are also due in Switzerland (tomorrow), Australia on Wednesday, China on Thursday, as well as Norway and Brazil on Friday.
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