Robeco’s Peter van der Welle says he is confident about European stocks, driven by a recovery in consumption and growth similar to that of the United States in 2025.
No landing! The US economy will continue to grow in 2025, even if stagflationary risk looms on the horizon, said Peter van der Welle, multi-asset strategist at Robeco, during the presentation of the Dutch asset manager’s investment outlook on Thursday. . Equities remain the preferred asset class, but the asset manager adds two alternative scenarios, a bullish supply shock and a bearish shock, depending on the choices and implementation of Donald Trump’s economic policy. Peter van der Welle answers questions from Allnews:
What is your favorite asset class in 2025?
Historically, when a soft landing takes place and the Fed begins its cycle of rate cuts, risky assets outperform risk-free assets. In this situation, corporate bonds outperform sovereign bonds and stocks outperform high-yield bonds. As the US economy will refrain from any landing, as it continues to grow and simply moves from a slight slowdown to an acceleration, we prefer stocks.
Donald Trump’s political agenda will, however, lead to an increase in market volatility, which leads us to anticipate a stagflationary bias. We must remain agile.
We want to be ready to reduce our weighting in favor of equities as soon as negative macroeconomic surprises emerge in the United States and credit spreads start to widen.
“We want to be ready to reduce our weighting in favor of equities as soon as negative macroeconomic surprises emerge in the United States.”
The narrative fluctuates from a soft landing to a crash landing to a Goldilocks scenario. The narrative will undoubtedly evolve according to the decisions of the American president and the scope of his economic policy measures.
Continued economic growth should make it possible to increase profits, even if our estimates are lower than the consensus (14% increase) since they should be less than 10%.
In Europe, we could see an increase in corporate profits slightly above 10% (low double digits) in the wake of a catch-up effect in European consumption.
Far from the image of massive superiority of the United States, you forecast economic growth in Europe (1.5%) which would be very close to that of the United States (1.7%). How do you justify it and are you strongly bullish on European stocks?
We are confident about European equities for 2025. However, we are still waiting due to political uncertainty before actually moving to an overweight.
We are convinced of the potential of European equities with a view to accelerating the economy. If the current American rise driven by Big Tech extends to other sectors of the stock market, European stocks should benefit. There is a historic discount of European stocks compared to those of the S&P 500 index.
The catch-up of European consumption in relation to American consumption should materialize to the extent that the growth of disposable income in Europe, after a long period of weakness, should reach 3%. However, a catalyst is missing, which could come from a change in sentiment towards Ukraine. Could Donald Trump get the belligerents to negotiate a lasting peace? Observation of sentiment towards durable goods indicates that we have passed the peak of the poverty index, which gives hope for a greater desire to consume in Europe.
You are a multi-asset strategist, what is the optimal diversification in an uncertain context?
If inflation falls in Europe and perhaps also in the United States, as most often observed in history, it would result in a negative correlation between stocks and bonds. The only free lunch that finance offers, that of diversification, would become possible. On the other hand, if inflation were to rise again, the correlation could remain positive between stocks and bonds. It would become necessary to seek alternative protections to sovereign bonds. Commodities could come to the rescue.
“However, a catalyst is missing, which could come from a change in sentiment towards Ukraine.”
More generally, it is appropriate to look at the probabilities associated with our scenarios. However, the probability of our base scenario is only 55%. It is therefore important to have a portfolio that integrates other scenarios, bullish or bearish. We recommend being agile. We prefer actions but we will also have to protect ourselves depending on the events. On a technical level, it is possible to use options or call on commodities.
In the event of a favorable surprise and a positive supply shock, Chinese stocks, very cheap, would be a good investment idea in the wake of a recovery in consumption in the Middle Kingdom, supported by a plan significant stimulus, for example to compensate for American protectionist measures.
You indicate that the poverty index has passed its peak. Which of the two elements of this index should decrease?
Inflation should decrease so that losses in purchasing power should be reduced in the first half of 2025. Last September, European inflation was limited to 1.7%, before rising to 2%. The trend towards disinflation is well established. Energy prices are also under control. Moreover, German consumer confidence seems to be rebounding. The profit prospects of companies should benefit from this.
We believe that European leaders will be able to negotiate skillfully with Donald Trump and avoid a sharp increase in customs duties that would penalize European exporters. Let us not forget that we Europeans have assets in our hands. For example, we may decide to buy more American liquefied gas. A certain alignment of the stars is occurring in Europe which is sure to push European indices higher.
What do you think about correcting health values?
We are neutral on health values. The profit revisions are neutral, but the seasonality criterion is negative and the proposed appointment of Robert Kennedy Jr to health should also weigh on the sector.
Our sector preferences tend to be financials, in response to upward revisions to earnings outlooks and good momentum.
What is your analysis of Nvidia and the Magnificent 7 after the result of this American leader?
I can’t comment on any particular stock, but I see demand for data centers remaining very strong. I gather from this that increasing adoption of artificial intelligence is underway. There is no irrational exuberance on the part of investors.
Profit growth in the Magnificent 7 continues to accompany the rise of these stocks over the past 12 months. There is real downside risk given Big Tech’s valuation, but that risk is limited by rising profits. The situation remains healthy.
There are different bubble models, “bursting bubbles” and “buzzing bubbles”. The “buzzing bubbles” are justified by the sharp increase in results. This type of bubble can continue in and allow an increase of another 50% after doubling in price. Today, the Magnificent 7 give the impression that they can continue to appreciate each other.
Will the dollar appreciate more against the euro?
We saw a rise in the dollar against the euro after the Republican victory in the United States. This movement is also linked to the anticipation of customs duties on European products and is based on the experience of Donald Trump’s first term. At the time, the reminbi had fallen and this movement had offset the effects of the increase in tariffs. A similar mechanism could maintain European price competitiveness.
Europe’s economic performance is lower than that of the United States, which weakens the euro. But if European growth recovers and approaches American growth, as we expect for 2025, the euro should perform better over the course of next year.
The exchange rate also depends on the interest differential. How will rates change in 2025?
In the short term, the interest differential penalizes the euro, particularly if we consider the evolution of inflation rates. The ECB should in fact lower its rates more than the Fed. But Europe is expected to pass an inflection point in terms of inflation in 2025 due to the acceleration of its growth.
Will gold continue to appreciate?
We like gold. In the eyes of many investors, gold is the second best asset after the dollar.
The greenback is 18% overvalued based on our purchasing power parity model. Geopolitical volatility is also very high and supports gold. But its valuation is very high. Gold is overvalued by at least $1,000 when measured against real liquidity returns. There is a strong connection between the two, namely a negative correlation between the yellow metal and real liquidity yield. This correlation has disappeared in recent years, perhaps due to geopolitical uncertainty, at a time when real rates are historically high. But the current premium remains justified by the geopolitical environment.
Would peace negotiations in Ukraine hurt gold?
If a lasting end to the conflict, or even lasting peace, were achieved, that could change the situation. The price of gold could suffer. But according to our analysis, after each peak of geopolitical uncertainty, 12 months later, the price of gold increased.
Even if there was an agreement in Ukraine, the geopolitical conflict between the United States and China would not disappear. The theme of the separation of the world into two opposing forces, between China, Russia and Iran on one side, and the Western world on the other, is expected to continue to gain strength.
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