Seize opportunities in a reconfigured world

We are in an unconventional economic cycle phase, characterised by a positive outlook alongside anomalies like market concentration and excessive debt levels. While global macro liquidity supports riskier assets, growing policy uncertainty and geopolitical tensions highlight the need for greater diversification.

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Monica Defend

Monica Defend

Head of Amundi Investment Institute

In a world of anomalies, there are plenty of bright spots. Identifying the opportunities created by policy choices and geopolitical shifts will be as important as safeguarding against the risks they entail.

Monica Defend, Head of Amundi Investment Institute

What exactly are the Bright Spots?

The global economic outlook is benign as monetary policymakers have curbed high inflation without triggering a recession. Abating price pressures will allow major central banks to cut rates further but the easing cycle will end well before policy rates reach pre-pandemic lows.

Geopolitics and national policy choices are paving the way for more fragmentation, with the United States pursuing geostrategic competition and the European Union focusing more on strategic autonomy. Drilling into sectors that will benefit from big trends is important given this backdrop and valuations.

Anomalies, such as low equity market volatility at a time of uncertainty, are becoming marked and may not last. A reversal of such phenomena could see assets like inflation-linked debt and gold find more favour.

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What exactly are the Anomalies?

Source: Amundi Investment Institute, Bloomberg. 1 US Treasuries data projection on gross interest payments. 2. Fed FOF, data as of 30 June 2024. Households and Nonprofit Organizations; Net Worth as a Percentage of Disposable Personal Income .3.  Datastream as of October 2024. 4. Shillerdata.com, Robert J. Shiller. Refers to the Shiller CAPE. 5. Analysis on percentage change in average volatility levels in 2024 vs the 2013-2023 average. Bond volatility refers to levels of MOVE index (implied volatility indicator on the Treasury market), equity volatility refers to the VIX Index (implied volatility indicator for the S&P500).

 

Looking ahead, what are the major convictions for 2025?

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Vincent Mortier

Vincent Mortier

Group CIO

Seizing opportunities in risk assets, while balancing inflation risks, will be key in 2025. Investors should broaden their exposure to equities beyond US mega-cap stocks, look for income across liquid and illiquid assets, and implement hedges in a more fragmented world.

Vincent Mortier, Group CIO

The global economy is expected to soften in 2025. The US economy will moderate due to cooling domestic demand and labour market conditions. Disinflation may persist, but inflation risks loom and the Fed may need to adapt to a potential shift in US policy. Europe is positioned for a modest recovery, with strategic investments in focus. Emerging markets are likely to continue to command a growth premium over developed ones, and Asia remains a major driver of growth.

Emerging Asian economies are enjoying strong growth, driven by the dominance of their IT supply chain and supportive fiscal and monetary policies. External demand and trade within the region will enhance their resilience and connectivity. India and Indonesia are positioned as long-term beneficiaries, while we expect continuous re-routing and policy support to stabilise the Chinese economy and mitigate the possible negative impact from tariffs.

Escalating geopolitical tensions, increased economic frictions, and ongoing conflicts will require companies to form new partnerships and relocate their operations to mitigate risks. The global reordering will generate opportunities to identify new beneficiaries in the investment landscape, and support traditional safe havens such as gold.

As inflation decelerates to long-term averages, central bank policy will continue to become less restrictive. The gradual return to neutral monetary policies, combined with the low probability of recession, will emphasise bonds’ income-generating function given yields are higher than in the past. Opportunities are appealing in Investment Grade and short maturity High Yield credit, leveraged loans, EM bonds and private debt.

A positive backdrop for earnings, coupled with good macro liquidity, is positive for equity. However, valuations are stretched, particularly in US mega caps. Investors should look at equal-weighted indices in the US, pockets of value in Europe and sectors such as financials, utilities, communication services, and consumer discretionary. Value investing and mid-caps are good hedges against possible declines in Growth and mega cap stocks. Opportunities will also be available in EM, with India in focus.

Private markets present attractive investment opportunities amid decelerating economic growth and expectations of more interest rate cuts, with a particular emphasis on infrastructure due to its strong growth outlook. Private debt offers appealing income, with companies still benefiting from strong bargaining power when negotiating lending contracts, while the outlook for the real estate market is expected to improve in 2025.

The economic backdrop offers bright spots in risky assets, but markets are underestimating the challenges. The macroeconomic outlook, high valuations and escalating geopolitical tensions warrant more nuanced diversification on multiple fronts. In particular, investors should be aware of the potential for geopolitical tensions to generate higher inflation and embrace risk diversifiers such as inflation-linked bonds and gold.

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