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19/11/2024
US equities more promising than eurozone stocks
Positive outlook for interest-bearing investments, Euro IG corporate bonds favored
European small- and mid caps hold promise
Real estate market turnaround, infrastructure investments promising
If someone had told us five years ago that we would face a global pandemic, a real estate crisis in China, major disruptions to supply chains, the outbreak of war in Europe and the escalation of conflicts in the Middle East plus that yields on two-year US bonds would rise above five percent, no one would have expected such a good performance from the capital markets,” says Vincenzo Vedda, Chief Investment Officer. 2024 is likely to be the second year in which the stock markets see an increase of more than 20 percent. Nevertheless, Vedda does not expect a bubble in the markets. “I expect equities to continue to go up.” However, the risk of negative surprises has increased. If the assumptions of a soft landing and a significant increase in corporate earnings – especially in the US– prove to be wrong, there could be significant negative surprises. In general, diversification is key to success in the current rather uncertain investment environment.
Eurozone bottoming out
Johannes Müller, Chief Economist, expects a normalization of the economic cycle in Europe, mainly because the low point in the production cycle has probably been reached. The question of how the current uncertainty is affecting hard economic data depends on sentiment, according to Müller. In Europe and Germany, it is currently negative, but uncertainty can also translate into a sense of optimism. “We repeatedly underestimate how flexibly companies respond to change,” said Müller. Most recently, economic data for the eurozone has been better than expected. Inflation has also fallen significantly. Müller expects the ECB to cut interest rates five times over the next twelve months and growth to pick up slightly from 0.7 percent this year to 0.9 percent in 2025. The US economy has proven to be very resilient, thanks in particular to fiscal stimulus, the dissipation of the large savings accumulated during the pandemic, which have strengthened consumption, and the robust labor market. The US Federal Reserve is likely to continue its interest rate cut path, but probably not as quickly as markets had been expecting until recently. Müller expects three interest rate cuts in the US over the next twelve months. Growth is expected to slow slightly to 2.0 percent in 2025, down from 2.7 percent in 2024.
Euro investment-grade corporate bonds favored
“The yield outlook for interest-bearing investments is positive in all areas, and the asset class remains very attractive,” says Thomas Höfer, Head of European Corporate Bonds EMEA. For ten year government bonds, he expects a yield of 4.5 percent for the US over a twelve-month horizon, and 2.2 percent for German government bonds. This would put the achievable total returns at 4.6 (USA) and 4.3 percent (German government bonds). He added that credit spreads on corporate bonds were now at a historically low but still acceptable level compared with government bonds. The market had priced in weak growth, no recession and a stable financial system. Höfer favors high quality euro-denominated corporate bonds, where total returns of 4.7 percent are possible. In the case of high-yield bonds, it is more likely that spreads will widen, leading to price losses. However, the higher yields compensate for these risks. Höfer's conclusion: “Interest-bearing investments offer attractive yields and positive earnings prospects. The appetite for the asset class suggests that further inflows can be expected and is having a supportive effect on valuations.”
USA: Strong earnings growth should support high prices
“Higher profits, but also higher risks of negative surprises” – this is how David Bianco, Chief Investment Officer USA, assesses the outlook for US equities. The policies of US President-elect Donald Trump – in particular the deregulation measures and tax cuts – will be good for corporate earnings. Earnings growth for S&P 500 companies is expected to be in the range of 10 to 15 percent in 2025. Technology stocks are likely to remain among the price drivers, but financial stocks, energy intensive companies and utilities also have good prospects. However, this is subject to the provision that the announced tariffs do not get out of hand and are only imposed in a targeted manner. “On balance, the effects of tariffs and tax cuts could roughly offset each other,” says Bianco. He sees the S&P 500 at 6,500 points over a twelve-month horizon. Valuations of US equities are likely to remain very high, with a forward price-earnings ratio of 21.5x, but this is justified by earnings momentum and long lasting US economic expansion: “We expect strong, long-lasting growth,” Bianco concludes.
European equities could benefit from cyclical upturn
The return prospects for global equities should also be good in 2025. Marcus Poppe, Co-Head European Equities, expects a nine percent return for the MSCI All Countries World Index. The situation for European companies could also take a turn for the better in 2025. “The long-lasting global downward trend in industry could end in 2025. European companies, and small-to mid-cap stocks in particular, should benefit from this,” Poppe expects. If there is a change in sentiment, private consumption could provide a significant boost if the currently very high savings rate in Europe of 15 percent were to be reduced. However, European equities are not expected to outperform US equities in the near future, despite the record high valuation discount of 45 percent. The growth outlook for the US is too good for that. In addition, global investors will only invest more in Europe if a cyclical upturn is on the horizon. Risks to the overall positive outlook include, in particular, a significant increase in US interest rates to a level of five percent, an escalation of the trade war and geopolitical risks.
Promising Asian bonds
“Our outlook for Asia-Pacific (APAC) equities is currently neutral ,” says Ivy Ng, Chief Investment Officer APAC. In China, India and Japan, the development of domestic consumption is of central importance. “In China, we are still waiting for the government stimulus measures to be reflected in corporate earnings,” says Ng. The impact of US tariffs could be somewhat smaller than many expect, as the export share to the US has fallen from 20 percent in 2017 to 13 percent in 2023. In India, further stock market performance depends largely on companies investing more and justifying high valuations by increasing profitability. The Japanese stock market, on the other hand, could benefit from a cyclical recovery in the global economy. It is supported by the sharp increase in share buyback programs, but also by real wage increases, which are boosting consumption.
In Asian bonds, Ng sees particular opportunities in broader diversification, which reduces the weighting of Chinese bonds and takes into account growth drivers such as Japan, India and Indonesia. Further interest rate cuts in the US and favorable inflation trends in Asia are likely to have a particularly positive impact.
Real estate turnaround – attractive infrastructure
“After two tough years in the European real estate market, we are seeing a turnaround,” says Ulrich von Creytz, Chief Investment Officer Real Estate Europe. ‘We have recently observed a recovery inn core real estate, particularly in the residential, logistics and high-quality office sectors.’ He adds that the situation has improved significantly after the markets ran into troubled waters due to the rise in interest rates that followed Russia's invasion of Ukraine. However, the market is divided: demand for high-quality properties has been on the rise again since the second quarter of 2024, while the turning point for lower-quality properties is yet to come.
In the area of real estate loans, von Creytz expects a growing financing gap as banks tighten their portfolios due to higher risk provisions and increased regulation. This is creating more opportunities and attractive yield expectations for alternative lenders. “We expect whole loan strategies, where a lender provides the entire loan amount, to play an increasingly important role, replacing the traditional combination of senior bank loans and equity financing,” said von Creytz. Another attractive sector is infrastructure investments in Europe, for which capital requirements are expected to total 14 trillion euros by 2040. This offers particularly attractive investment opportunities for private infrastructure debt investments, as governments will not be able to raise these volumes on their own.
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