More generally, global growth is expected to remain stable in 2025 compared to 2024, close to 3%. Although modest, activity will continue to rebalance towards the consumption of services, while the disinflationary dynamic will continue globally, outside the United States.
At the central bank level, rate cuts will be more measured in 2025. However, differences should appear between regions. In the United States, the most likely scenario for 2025 is two cuts in key rates. Economic growth should be above 2%, even if private demand should normalize and the slowdown in the job market should continue. The risk of a sharp slowdown in activity cannot be ruled out (hard landing), but this is not expected to happen before 2026 given the upcoming fiscal stimulus. In Canada, the central bank should return to a more moderate pace of monetary easing and lower rates between 50 and 75 basis points by June. A key rate of 2.5% and more accommodating financial conditions will help reduce the growth gap compared to its long-term potential.
In Europe, we expect the European Central Bank to cut rates at every meeting, until the deposit rate reaches 2% next June, while the Swiss National Bank is expected to cut its key rate to 0% in June.
This scenario will be favorable for risky assets, as evidenced by the optimism on the equity markets since November, in particular for companies exposed to American domestic activity. In short, the prospects for an improvement in economic activity data have once again become positive for stocks (good news is good news), whereas in previous years, stronger growth was seen more as a risk of tightening monetary policies. However, American equity markets remain expensive compared to European markets. Even if the economic environment seems less attractive on the Old Continent, the risks seem asymmetric with significant possibilities of positive surprises, whether at the political or geopolitical level. Regarding valuations, European markets are also better positioned.
In terms of asset allocation, the return of a negative correlation between the equity and bond markets once again allows a well-balanced portfolio to achieve solid performance while cushioning market shocks. In the longer term, the economic normalization phase calls for greater diversification of equity exposure, beyond large technology companies which represent a high concentration risk. Risk-adjusted, bond markets also remain attractive in the current phase of normalization of monetary policies across the world.
-In the bond markets in particular, an allocation to the highest quality sovereign bonds remains essential in the event that economic activity disappoints. In the United States, we favor the middle part of the yield curve with maturities of between 5 and 7 years to lock in interest rates at attractive levels. This also helps avoid possible pressure on the long end due to the risks of an increase in the deficit and government debt. In Europe, the risk of rising yields is relatively low given our growth and inflation expectations, and we favor longer positioning on the curve. On the credit side, given that we expect continued high growth in the United States and a slight recovery in Europe, corporate bonds will continue to perform strongly.
Private debt also allows you to diversify your bond allocation. Not only is its correlation low with the stock markets, but also with the bond market. Yields are also attractive and higher than in public markets. This asset class offers more diversified exposure across industries and borrowers and is less influenced by market regimes.
The key rate cuts, the cyclical recovery and the tax cuts constitute a positive cocktail for the equity markets in the short and medium term. Equity valuations are high. However, they are not a leading indicator of short-term performance and can remain at high levels when economic fundamentals are solid and market liquidity remains high. The cycle of lowering key rates should be beneficial for small and mid-caps. A more cyclical sectoral exposure is also justified, as well as an increase in exposure to discounted securities (value).
Finally, the monetary policy differential between the United States and the rest of the world, reflecting the different growth dynamics, and the trade policy of the Trump administration should exert a positive influence on the value of the greenback at the start of 2025.
