The British stock market index presents an interesting sectoral mix, including securities from the mining, financial and health sectors, estimates Julien Lafargue of Barclays Private Bank.
What conclusions can be drawn from the first weeks on the markets this year? Will the American stock market, driven by technology stocks last year, continue to offer the best prospects in 2025 or is it better to now focus on European or British stocks? Update with Julien Lafargue, head of market strategy at Barclays Private Bank, on the economic and market outlook for 2025.
In the United States, the yield on 10-year US Treasury bonds continued to rise towards the 5% threshold at the start of the year, climbing to 4.8% in mid-January before falling back somewhat ( 4.56% on Wednesday). In the United Kingdom, the yield on 30-year British government bonds (Guilt) exceeded 5.4% in mid-January, its highest level in 25 years, before falling somewhat thereafter. Did the relatively rapid rise in rates on the bond markets at the start of the year surprise you and what could be the consequences in terms of asset allocation during 2025, including for the equity markets?
This was always a risk, given concerns about public debt levels and the potential impact of rising tariffs on inflation. If anything, it reinforces our belief in the importance of adequate diversification.
In today’s world, stocks and bonds are no longer enough, and investors must seek additional sources of both return and risk management. Whether it is private markets, specific “alternative” strategies to neutralize market fluctuations, or even commodities, we believe these elements can play a key role in portfolios in 2025.
“It would be difficult to see a positive surprise for the American economy, whereas it could be the case for Europe or China.”
Concerning the economic forecasts for 2025, most research institutes again expect that the euro zone and China will lag behind this year, while the American economy should once again be a locomotive for growth worldwide. Or should we, on the contrary, expect an improvement in the situation in Europe and China?
As for the euro zone, we anticipate at most growth of around 1% for 2025. In China, GDP growth will certainly be closer to 4% than to the 5% objective targeted by the government. Unless the Chinese authorities were to launch much larger stimulus measures than those announced last fall, including with a component relating to consumption. Currently, it is difficult to find experts who are completely optimistic about China, any more than about Europe.
That said, in terms of investments, the current situation can also be an opportunity. The very cautious expectations regarding China at the end of 2024 also leave some room for there to be a potential surprise linked to the euro zone or China in 2025. At the end of last year, the consensus was very positive about the United States and very cautious towards the euro zone and China. It would therefore be difficult to witness a positive surprise regarding the American economy, whereas it could be the case regarding Europe or China, compared to what is already anticipated.
Concerning the euro zone, it is difficult to see where the impetus would come from. The French economy remains penalized by uncertainties linked to the political situation. Industry and exporting sectors are struggling in Germany. The gap in 10-year yields between French and German debt widened further at the start of the year…
The yield on France’s 10-year bonds has indeed risen again and now exceeds 3.25% compared to around 2.8% a year ago during the same period. This is true, but we must not forget that yields on ten-year bonds have increased in many countries since last fall, including in Germany and the United States. I do not believe at all that we are heading towards a debt crisis in France, as was the case in the countries of Southern Europe at the start of the last decade. France has a good capacity to raise taxes. On the investor side, there is also significant demand for French debt securities. The returns obtained are significant and in addition the French debt is protected by the ECB umbrella, in the event that a serious problem arises. The markets are not looking at France as they did for Greece in the early 2010s.
-“The markets are not looking at France as they did for Greece in the early 2010s.”
Britain has experienced significant difficulties coming out of Covid and due to persistent inflation. In terms of investments, are there any opportunities to be seized in the British market?
In absolute terms, it is difficult to say that the British economy is doing well. Inflation in the United Kingdom (+2.5% in December 2024) remains fairly high, in particular due to the increase in prices of services (+4.4%). UK GDP growth stagnated in Q3 2024. Overall, this is a situation that resembles stagflation. Despite everything, from a political point of view, things appear more stable than a few years ago. It is also a market that has been somewhat neglected by international investors in the years following Brexit. Currently, the FTSE remains one of the most attractive markets in terms of valuation. The index also presents an interesting sector mix, including stocks from the mining, financial and health sectors.
The year 2024, especially the first half of the year, saw a very strong domination of technological stocks. Will AI and Big Tech remain the themes to follow in 2025 – or should we rather avoid too great a risk of concentration in relation to these areas?
Technology and AI will certainly remain dominant themes throughout 2025. On the other hand, the concentration of performance around a handful of titles such as the “Magnificent Seven”, as we saw during the first half of 2024, will probably no longer be as marked this year. In the second half of the year, there was a greater proportion of stocks within the S&P 500 that outperformed this index. This proportion increased from less than 30% at the start of 2024 to 43% at the end of the year. In other words, this means that performance is less dependent on a handful of stocks.
“The acronym AI alone is no longer enough to move the markets.”
What about AI specifically?
Regarding the theme of AI, we went from a situation where, in the first half of 2024, it was enough for companies to proclaim loudly and clearly that they were active in AI in order to see their share price rise to a situation where investors have become more demanding. Now, when a company highlights that it is active in AI or invests in solutions related to this technology, the reaction of investors is to ask how it will make its investments profitable, how it plans to make profits . The acronym AI alone is no longer enough to move the markets.
Furthermore, when a new technology appears on the markets, it is always extremely difficult to identify which companies will win from this development. The winners of the moment are not always those of tomorrow. If we take the example of the internet revolution, it is not the telecoms companies that have emerged as the big winners from this transformation. We can draw the same parallel with AI: it is not at all certain that it is the companies that manufacture semiconductors that will emerge as the big winners of this technological revolution in a few years. These may be software designers or companies from other sectors that will manage to make AI a key competitive advantage for their field of activity.
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