Financial markets: Analysis and convictions of CPRAM - January 2025

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.

Global stock markets ended the year down but the 2024 vintage was excellent, particularly in the United States. The last meeting of the year of the American central bank turned out to be more hawkish than expected, leading in reaction to a new rise in government bond yields, leaving the performance of government bonds slightly below expectations for the year. These end-of-year movements led to profit-taking, particularly on American stocks, which ended the month in a scattered order with the Nasdaq rising by +2.49% while the small cap index corrected by -6.57%.

Volatility on the financial markets was also fueled by disappointing communications from the Chinese authorities and cautious communications from the ECB. The latter acted on a new cut in key rates of 25 bps as expected, while being less accommodating due to the persistence of upward pressure on inflation linked to wages.

In China, investors were waiting for quantified announcements of stimulus measures but the authorities simply reiterated their desire to increase public spending to stimulate consumption without giving further details.

The MSCI World ended the month down -0.66% due to the decline in US indices while the Japanese and European indices rose by +1.4% and +1.9% respectively. Nominal rates ended the year significantly higher with an acceleration in the steepening movement. US 10-year rates rose by more than 40 bps and European rates in sympathy rose by more than 25 bps on the long parts.

Concerns about a resurgence of inflation in the coming months, the expected increase in the supply of paper and the widening of deficits weigh on government borrowing rates in the United States. The US 10-year rate flirted with the 4.65% level during the session, a level that brings us closer to the danger zone where risky asset classes are starting to suffer.

Credit spreads are widening a little but the asset class is still sought after for its yield. High Yield is performing very well this year, as an alternative to government rates benefiting from the resilience of economies.

The month of January should remain volatile for all asset classes but should offer attractive opportunities for investors given the fundamentals that remain fairly solid for the moment.

US equity markets have had another record year with significant outperformance relative to other markets. This renewed dominance of US equities could be seen as a cautionary signal for next year. The US market appears overbought and would be ripe for a correction given that current valuations leave little room for further expansion of multiples.

We should therefore see asset reallocations in favour of domestic bonds and/or international equity markets. None of that for the moment. Risky assets should initially be further supported by central bank rate cuts, although their magnitude should be less significant.

Furthermore, high valuations are not necessarily a brake on further increases. The outlook for 2025 remains optimistic for the time being and is based on rational and real foundations. The US economy should continue to grow above its potential, driven by productivity and tax cuts and by expected deregulation measures.

Any new market performance will therefore have to come exclusively from the growth in corporate profits. These have been raised in the US to reach more than 15% at the beginning of the year, led once again by technology sector stocks that now concentrate a large part of the flows and global stock market capitalization.

Reading these elements, American exceptionalism should continue. But if there is one thing that these last two years have taught us, it is that the market is still capable of doing the unimaginable.

And so caution will remain in order despite everything with the main catalyst being the level of 10-year rates that are approaching the danger zone for stocks (around 5%) and earnings expectations that could prove too generous.

This month, all eyes remained on the future policy of the Trump administration. The new president continues to blow hot and cold and uncertainty remains high about his real intentions.

The S&P and the Nasdaq reached records during the first half of December supported by good economic figures and good results publications before falling back on the Fed's statements. In terms of themes, at +6%, the Well-being/Lifestyle theme performed best in December, driven by the excitement surrounding the Chinese "Economic Forum". The Chinese government made new announcements, declaring that it would adopt a more accommodative stance in order to support the real estate markets and consumption. These announcements supported several companies in the Luxury and Automotive sectors, such as Richemont (+12.4%) and BMW (+12.8%). Conversely, in this context of rising long-term rates, Renewable Energies are struggling again with a performance of -7% over the month.

At the start of 2025, our main thematic bet remains on Generative AI. The theme offers significant growth opportunities, but the enormous investment requirements and increasing competition between the different players are calling into question certain valuations. On the other hand, apart from the major improvements made to search engines, AI lacks features on smartphones or other consumer devices. Similarly, AI has brought improvements to business productivity, but broader applications remain to be seen. Investors are waiting for a revolutionary application to continue to believe in the story.

Our key points

From this month of December, we remember the sharp rise in rates and the decline in stock markets, which will not, however, prevent 2024 from being a very good year in terms of stock performance. On the thematic side, the hope of budgetary support in China supported stocks linked to consumption, luxury and automobiles.