Financial markets: Analysis and convictions of CPRAM - December 2024

Malik Haddouk, Director of Diversified Management, and Juliette Cohen, Strategist, decipher the markets, and Julien Levy-Kern, Diversified Portfolio Manager, shares his convictions on the themes to follow.

The event of the month was undoubtedly Donald Trump's clear victory in the American election. However, the Republican majority in both chambers remains fragile and could hinder the passage of controversial legislation.

Nevertheless, the stock market has chosen its side. Global stock markets ended the month strongly, with the MSCI World Index increasing by +7.51% in euros solely due to the sharp rise in US stock markets, with increases of +13.9% for the Russell 2000 index of small-cap stocks, +9.20% for the Nasdaq technology index, and +8.8% for the S&P 500 general index.

Other stock markets ended the month in decline, suffering from the rhetoric of the newly elected president, who has already announced tariff increases on certain countries such as Mexico, Canada, and China. Europe, on the other hand, is suffering from both trade and geopolitical uncertainties. It is economically weakening, with activity indicators struggling to recover.

Government bond yields remained relatively calm during the period, as investors factored in a significant probability of an upcoming economic slowdown due to the looming trade war. US 10-year yields even ended the month lower at 4.16% after flirting with the year's highs.

The credit segment (mainly the High Yield sector) was highly sought after in November despite already compressed spreads. Investors are therefore convinced that no recession will occur in the coming days. Emerging debt, which had regained supporters, is suffering again. The rise of the dollar and the increase in interest rates are once again weakening this segment.

The difficult context we experienced in 2024 with numerous geopolitical tensions and concerns about economic slowdown did not prevent global stock markets from reaching new records.

The backdrop for 2025 should still be favorable for equity markets. The decrease in remuneration of money market instruments should lead to a reallocation of capital towards risky assets.

At the beginning of this year, we maintain our preference for US stocks in our allocation. Indeed, profit prospects remain strong. Deregulation and the prospects of tax cuts should allow US profits to increase by 15% in 2025, while European companies would only see their stocks increase by 8%. It is true that we end the year with very high valuations, well above the long-term historical average.

However, where valuation multiples seem attractive, profit prospects are less favorable, which explains our preference for the US market. On the bond front, we will favor corporate bonds, whether it be investment-grade credit or speculative credit, which will continue to offer investors a more attractive yield than government bonds. In this regard, our preference will be for the eurozone, particularly peripheral rates, which benefit from a better economic outlook.

Finally, we will continue to favor the dollar at the beginning of the year until we have a clearer idea of Trump's intentions.

We can note that 3 weeks after his election, Donald Trump is meeting expectations. What do his different statements tell us about the 3 key issues of his mandate, namely the American economy, the trade war, and Ukraine? For the economy, Trump's priorities are deregulation, tax cuts, and immigration control. Regarding the trade war, it is interesting to note that he linked his announcement of tariffs to complaints about immigration and drug trafficking, which leaves room for future negotiations. On Ukraine, Europe will have to do much more for its own defense.

In terms of stock markets, the MAGA allows the MSCI USA to far outperform other international indices. The Financial sector is leading with nearly 11% growth on expectations of deregulation, and Fintech and Cryptocurrency themes are soaring by 30%. "Drill, baby drill," Energy stocks have outperformed with a 7% increase, parallel to the rise in oil prices.

Let's remember that Trump appointed the CEO of an oil and gas fracking services company as the head of the Department of Energy. And following the principle of communicating vessels, themes related to climate change are declining, such as Renewable Energies, which are down by 5%. Robert Kennedy Jr, the future Secretary of Health, believes that vaccines are dangerous and wants to cap the price of expensive drugs. His appointment caused most of the Pharma giants' stocks to plummet, with the sector losing 1% in the month. Kennedy also wants to fight against junk food and obesity, leading to a -3% decline in the Food Challenge theme. On expectations of European rearmament, the Defense theme is soaring by 9%.

Our key points

We remember from this month of November, the strong impact of the American elections on the financial markets. On the stock side, the good performance of American stocks, the stability of Europe, and the underperformance of emerging markets. On the interest rate side, the sharp decline in rates in Europe with the anticipation of a more accommodative central bank in a less favorable economic context for Europe.