M&A news, FOMD/FED minutes, Israel/Hezbollah cease-fire, US tariffs and PCE, led to lower yields and higher US stocks
WEEKLY TRENDS
New imposed US tariffs on Mexico, China and Canada created concerns on currencies and stocks early last week, followed by the FOMC/FED minutes that revealed preferred gradual US rate cuts, amid French budget law disagreement that pushed record OAT/Bund spread
France managed to keep its existing AA- S&P rating with a stable outlook on Friday. Banque de France Villeroy declared that ECB may need rates at stimulative levels, pointing to a 50bps rate cut on Dec 12
Cease-fire announcement between Israel and Hezbollah pushed the Oil price lower, among further announcement by OPEC+ members to postpone their meeting until Dec 5. Gold is much lower on profit taking despite a lower USD and lower US bond yields
Ahead of the US NFP release next week, and Powell speech mid week, market will focus on Zelensky being open to a cease-fire if NATO protects unoccupied areas
MARKETS
Equities
Q3 earnings releases last week (stock WoW performance:
+++ Agilent (+4%), Analog Devices (+3%), Compass (+4%), Easyjet (+5%)
- - - Dell (-11%), HP (-7%), Kingfisher (-8%)
M&A:
UK Direct Line Insurance (+48%) refused a GBP 3.3bn offer from Aviva (with a 60% premium); Macquarie considers a GBP 700m bid for Renewi (+39%); René Benko’s participation in Hugo Boss (-18%) suspected of insider dealing; Brookfield gave up on its acquisition of Grifols (-19%); Unicredit (-5%) considers buying BPM (+8%) for EUR 10bn
Rates
US curve (2-10 years) steepening lowered to a mere 5bps. Bond yields lowered across the board, corporate spreads went higher, while US futures now show 3 rate cuts only in 2025 instead of 4 previously
Commodities
Oil price is much lower (-4.5%) on Middle East cease fire announcement and OPEC+ meeting being postponed until Dec 5.
Gold price lower (-2.7%) despite a lower USD and lower Treasuries yields, on profit taking after the Israel-Hezbollah cease fire announcement
US
PCE Deflator (FED’s preferred measure of inflation) in Nov rose to 2.3% (as expected) Core rose at 2.8% (as expected)
Crypto
Ethereum was last week’s big winner at +6%. NB software company MSTR now owns 386 700 BTC (1.95% of BTC outstanding stock) clearly the largest BTC treasury company with only unsecured debts left now and a market to book value at 21.6x over
Nota Bene
US Treasury has a peak $7trn debt to refinance in 2025 (3trn in 2026)
Q2 SP500 buybacks at ATH record ($236bn) mostly in IT and Financials
US banks unrealised losses at $515bn (8x higher than during 2008 GFC)
Macro: USISM Manufacturing for Nov (2 Dec), Services (4 Dec), NFP job report for Nov (6 Dec), Powell speech (4 Dec evening)
WHAT ANALYSTS SAY
Lombard Odier - 10 investment convictions for 2025
Lombard Odier, 27 Nov 2024 - 10 investment convictions for 2025
Authors: Michael Strobaek, global CIO PB ; Dr. Nannette Hechler-Fayd’herbe, CIO EMEA
2024 was an above-average year for the performance of multi-asset portfolios. The economic backdrop should remain positive in 2025, with disinflation continuing and central banks cutting interest rates.
However, the outlook for interest rates and growth will differ from one economy to another, making active management essential.
The multipolarity of the world still forces countries to focus on their national interests. In the United States, the new Trump administration will be visible above all in its trade, energy, industrial, tax and foreign policies. It intends to step up public spending and investment.
Short-term interest rates will fall and yields on money market instruments will be lower. This will be particularly the case in Switzerland, where we expect key rates to fall to 0.25%. Global investors will have to deploy their capital selectively and actively manage their portfolios.
On the bond front, we maintain our preference for corporate bonds, which will offer higher yields than government bonds. Government bonds will face increasing budget deficits and public debt, which will lead to volatility in yields. We are therefore concentrating on countries where we believe the upward pressure on bond yields is most limited, notably Germany and the UK.
On the stock markets, earnings prospects are solid, but valuations are already very high. Where multiples look more attractive, earnings projections are less tempting. In the United States, deregulation and tax cuts should prolong the exceptionalism of the economy and equity markets. Tariffs will weigh on growth in other countries. Among non-US developed markets, our preference is for Japanese equities. In emerging markets, we prefer Korean and Taiwaneseequities.
In the wake of new US trade and energy policies, 2025 is likely to be marked by a strong US dollar and falling oil prices.
Gold should perform well thanks to safe-haven demand and structural buying by central banks, but is unlikely to match its performance in 2024. Industrial metals should be supported by positive economic growth.
The role of alternative assets in extending the investment opportunities of multi-asset portfolios is therefore becoming increasingly important. Here we highlight the role of real estate, hedge fund strategies and unlisted assets.
· Reducing liquidity and deploying capital
We see little risk of recession in 2025 and expect central banks to cut interest rates as disinflation continues.
In Switzerland and the eurozone, where key interest rates will be the lowest, the incentives to deploy capital on the financial markets are the strongest, while ensuring adequate diversification.
· Outperformance of investment-grade and high-yield corporate bonds
In both developed and emerging markets, we prefer corporate credit yields to government bond yields. The higher yields on corporate bonds can be an attractive source of income for multi-asset portfolios.
In Europe, we favour German, French, Spanish, Italian and UK issuers.
In emerging markets, we also favour corporate issuers over sovereigns. However, a selective approach is essential in Asia and Latin America, given the narrowing of spreads relative to sovereign bonds. Our preference is for investment grade corporate bonds denominated in euros and sterling with maturities of 5 to 7 years. For corporate bonds denominated in Swiss francs and US dollars, we prefer maturities of 3 to 5 years.
In high-yield credit, we favour short maturities.
· Government bonds underperform. Preference for German Bunds and UK Gilts
In a world made up of rival geopolitical blocs, strategic competition requires investment, leading to an increase in public debt. However, government bonds can provide a safe haven in times of heightened geopolitical risk. In the United States, stimulating economic policies and a growing deficit could lead to a rise in yields and an underperformance of US Treasuries.
The outlook for UK Gilts and German Bunds is brighter. Germany's healthy public finances offer room for investment, and the European Central Bank's rate cuts will benefit Bunds. In the UK, we expect growth to be somewhat higher in 2025 and inflation to be slightly above target, with the revised fiscal rules offering greater flexibility. Nevertheless, moderate inflation should allow the Bank of England to cut rates more sharply than the markets expect, which will support Gilts.
· Resilient growth and falling interest rates should benefit equities.
Prefer the United States and Japan among the developed markets, and Taiwan and South Korea among the emerging markets.
Historically, equities have performed well during periods of sustained growth and lower interest rates. We believe that a strengthening of corporate profitability under the next US administration will prolong the performance of US equities.
Japanese companies should also benefit from pro-equity domestic policies and a currency that is less prone to appreciation.
In emerging markets, strong technology-related exports should favour Taiwan and South Korea. This could help offset the impact of US tariffs, which would then be less marked than in China.
· Cyclical sectors outperform, with a preference for materials
Macroeconomic conditions and the investment needs of a multipolar world should benefit cyclical sectors. We believe that materials will be the first to benefit from these winds of change. Other sectors will follow later in the year, notably industrials.
· Substantial increase in investment in infrastructure
In developed markets, the US and possibly German elections should act as catalysts to convert some of the infrastructure investment needs into spending.
In emerging markets, investment remains strong, with the BRICS cooperation framework and its expansion to new members focusing attention on infrastructure. Within equities, we are focusing on companies along the value chain, from materials to operators, which will benefit from increased infrastructure spending.
· Real estate as an alternative source of income in low-yield markets
Against a backdrop of falling interest rates from central banks and solid growth prospects, property investments offer alternative sources of income in markets where bond yields are low in relative terms.
Switzerland is a good example of the role of property investments as an alternative to bonds. The appeal of the eurozone could also grow.
· Hedge funds and unlisted assets broaden the investment universe
In hedge funds, the performance of event-driven and relative value strategies improved in 2024. In the wake of the US elections, hopes of a relaxation of corporate regulation should stimulate transactions. This favours merger arbitrage managers and increases capital market activity, creating opportunities. Market conditions now seem favourable for hedge fund strategies that take advantage of the volatility of an underlying asset (so-called ‘non-directional’ strategies).
In the years ahead, the outlook for these strategies will be better than we have seen in the last decade. On the unquoted side, private equity offers a wider range of opportunities. In recent years, the most innovative companies have remained in private hands for longer, a phase during which returns are most pronounced. With fewer companies listed on many markets, these opportunities also help to diversify portfolios.
· Gold will continue to add value in 2025
Lower interest rates by central banks reduce the opportunity cost of holding gold as a non-interest-bearing asset. Purchases by central banks seeking to diversify their reserves away from the dollar, particularly in response to geopolitical developments, should also continue to support the gold price. A stronger dollar is a headwind for the precious metal, but it should not prevent individual investors from increasing their investment flows into gold. The price of gold in currencies other than the dollar is likely to rise, encouraging flows into the yellow metal and gold-linked financial instruments.
· US tariffs and credit spreads support the dollar
The US dollar is likely to be one of the main beneficiaries of the new Trump administration in 2025, and of its political priorities. The theme of American exceptionalism will be extended even further. We expect most currencies to fall against the dollar, particularly those of open economies. This includes the euro, sterling and Asian currencies, including the Chinese yuan. Initially, the Swiss franc and Japanese yen are likely to suffer against the dollar in 2025, although the risks associated with US tariffs are likely to make these two currencies more resilient in the final months of the year.
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