Ukraine, Gaza... 2024 was marked by a number of geopolitical crises. Nevertheless, the optimism that swept through the financial markets in 2023 has not really waned.
In fact, despite the geopolitical tensions, the soft landing envisaged by AG last year is still in sight. However, Donald Trump's return to the White House opens the door to the risk of renewed uncertainty and economic decoupling between the world's main regions, with possible reflation in the United States and anaemic growth in Europe.
AG's ongoing efforts towards a more sustainable world continue to be fruitful: AG's portfolio now includes more than €12.7 billion of assets that help make a positive impact on society, and our ambitions to reduce greenhouse gas emissions have been revised upwards.
Olivier Colsoul, Senior Strategist at AG, answers our questions and offers his analysis.
At the start of this year, AG gave some forecasts for the financial markets. To what extent have these forecasts come true?
Olivier Colsoul: "Our forecasts for 2024 have mostly come true. We had anticipated a slight slowdown in global growth, and this is overall what has happened. Inflation has also continued to fall, although it remains above the 2% target. Similarly, in the second half of the year, the rate cuts made by major central banks were broadly in line with our expectations. Last year, we reported on the transition from a TINA (There Is No Alternative) world to a TARA (There Are Reasonable Alternatives) environment. This means that with the sharp rise in interest rates, there were alternatives to equities to earn an attractive ROI. Although rates have eased somewhat with the change in monetary policy, this is still the case. In fact, the pleasant surprise once again came from the United States, which exceeded all expectations in terms of both economic growth and stock market performance. In this respect, American exceptionalism is impressive!
Can we say that 2024 will have had some good tailwinds?
"Yes and no. Of course, the news in 2024 was full of twists and turns and geopolitical events. Despite this, the economy has shown surprising resilience. The financial markets have managed to maintain a certain optimism, and the ability of economies to absorb shocks has been more noted than notable. This year has proved that, even in turbulent times, it is possible to find opportunities and remain positive".
The economy has shown surprising resilience
And what does 2025 have in store for us?
"For 2025, we expect economic normalisation to continue, although the road ahead will be a bumpy one. Geopolitical uncertainty remains a major factor, but we believe that the risk of recession is low, especially in the US. Inflation has dropped to below 3% on both sides of the Atlantic, and we expect it to continue to fall very gradually. However, Donald Trump's return to the presidency could introduce new uncertainties, in particular by triggering inflationary pressures in the United States and a slowdown in growth in other regions".
What effects can we expect from a second Trump administration on Powell and interest rates in 2025?
"The election of Donald Trump could have a significant impact on the Fed's monetary policy. Despite recent statements by the president-elect that he will not interfere in monetary policy, Jerome Powell may be pressured to keep interest rates relatively low so as not to harm the economy, despite the risks of inflation. This situation could lead to increased volatility on the financial markets and complicate the Fed's task of achieving its objectives of price stability and full employment".
What is your baseline scenario for 2025?
"In our baseline scenario, we are projecting stable economic growth, or even a slight increase here and there. In Europe, this growth should logically be supported by an increase in household purchasing power and by further interest rate cuts, which will offer some respite.
In 2025, inflation should continue to fall
The problem is that the momentum is waning and sentiment is not at its best. Inflation, for its part, should continue to fall, even in the services sector which has been more resilient so far. That being said, depending on the US economic and geopolitical agenda, there could be an economic decoupling between the US and Europe, with divergent growth trajectories and monetary policies."
How do you see the future for equities in the US and Europe?
"The US equity market could continue to outperform Europe, fuelled by economic resilience, technological innovation and solid earnings growth. However, high valuations in the US could limit upside potential. In Europe, equities could offer interesting opportunities, especially if certain positive catalysts materialise. It is not certain and will take time".
How has AG geared its investment choices to the dynamic year 2024?
"Anticipating a drop in interest rates, we have seen a reduction in the spread on corporate and high-yield bonds. This means that high-yield assets are no longer particularly attractive relative to the risks involved. However, we still see opportunities in investment-grade corporate bonds, which offer better returns than government bonds. Although equity valuations have risen, we remain constructive over the long term, believing in the strength of company fundamentals".
What is happening with France and Germany as the drivers of the EU economy? Why are they in trouble? What are the consequences?
"Cooperation between France and Germany has been a pillar of stability and growth in Europe. It has had its ups and downs. Right now, both countries are mired in political and economic problems, with one country spending too much and the other too little. More generally, what is needed is to strengthen the competitiveness and attractiveness of Europe as a whole and therefore free up the financial resources to carry out this policy (cf. Draghi report). To paraphrase Emmanuel Macron's metaphor, Europeans must at the very least make the transition from herbivore to omnivore in a world dominated by carnivores. If not, this could lead to increased fragmentation in the European Union, making it harder to roll out common policies. The consequences could include weaker economic growth and a lesser ability to respond to global challenges such as climate change and geopolitical tensions".
Conclusion
In 2024, despite the geopolitical upheavals, the financial markets showed considerable stability. For 2025, AG expects to see continued economic normalisation, but with persistent challenges and uncertainties, notably linked to the return of Donald Trump as President of the United States. Monetary policy by the Fed and the ECB, geopolitical developments between economic areas and within Europe, and stock market sentiment, which has been buoyed by strong optimism over the past two years, will be key factors to watch.
AG remains cautiously optimistic about investment opportunities, focusing on investment-grade bonds and maintaining a positive long-term view on equities.
Navigating this complex environment and identifying opportunities will be crucial for investors in 2025. AG remains committed to a sustainable future, aligning its investments with its objectives to reduce greenhouse gas emissions and make a positive contribution to society.
Participate in the Pension & Health Academy:
Financial Outlook 2025 – A soft landing, but with turbulence.
2024 was a fascinating year full of geopolitical turbulence in all areas, in which the resilience of the economy once again surprised us positively. But what do we expect from 2025? And how do we respond to this with our investment choices?
During this webinar we will briefly look back at the events of 2024. We will then look ahead and discuss the most likely economic scenarios for 2025. So you will quickly gain insight into current and future economic trends and their impact on the financial markets!
When?
- 28th January 2025 from 1PM to 2PM.
- 30th January 2025 from 1PM to 2PM.