To the summit by rope team
By Luca Pesarini: Chief Investment Officer & Portfolio Manager at ETHENEA
Let's set out on an (investment) tour as a rope team with the aim of reaching the summit together.
When we set out in the light of the new year 2025, dense fog clouds the view. The way up could be rocky and challenging. We all carry our own backpack. Some paths will be impassable. Steep sections and descents must be planned in. We have to constantly orientate ourselves and, above all, keep an eye on the weather. We have to be prepared for that. Our goal? To find a path where the sun warms us and a fantastic view awaits us at the end – our annual performance.
It is not for nothing that there is a saying that there are many paths that lead to the goal. A journey is not usually a straight line. There are many paths. In our holistic approach, it is important to weigh up the various options against each other. Just as the weather is crucial when going on a mountain hike, in addition to the condition, steepness and length of the route, we take the fundamental data into account when investing.
The gap between the US and Europe is likely to widen further
The compass needle points to an expected real growth rate of between 2.5% and 3% for the US. This means that Americans are looking to the near future in a much more positive light than Europeans. The old continent will just about manage slightly positive growth. The gap between the US and Europe is likely to widen further. While Europe sinks into a depression of political instability and bureaucracy, the new US administration will do everything it can to keep the business cycle going. There is no sign of a recession, especially not with a President Trump, who has put the stimulation of economic growth at the top of his agenda. We therefore expect the investment environment to remain favourable. Especially as the forecasts paint a positive picture. The US labour market is easing, inflation remains at an adequate level of around 2.5%, and the Federal Reserve is sticking to its path of interest rate cuts, albeit somewhat more cautiously than it did two months ago. Two interest rate cuts by 2025, an extension of the tax cuts beyond 2025 and a series of deregulation and fiscal measures should create an investment- and growth-friendly environment in the US.
There are always dangers lurking on the way to the summit. Parts of the way will be a tightrope walk. Geopolitical challenges (two current wars), domestic political difficulties in Germany and France and the fear of a renewed trade war may force hikers to change the route. Whether, how and to what extent these events will affect the route remains to be seen – cancelling the tour is therefore not an option. Reorienting, finding alternative routes or setting new goals are therefore sensible solutions in such a situation.
Visibility is poor at the beginning of the investment year
As when setting out on a hike in the morning mist, visibility is poor at the beginning of the investment year. The order of the day is to ride the view and take the turn-offs when you come to them – this is active and flexible management. The sustained bull market has pushed valuations up – you have to be able to carry this burden. If high valuations are the heavy backpack at the beginning of the mountain hike, then the interest rate level is a measure of the angle of inclination of the path that lies ahead. Too high an incline (a too steep ascent) affects the legs, one tires more quickly, some might stumble. That is why we pay very close attention to the level at the long end of the yield curve. Our expectation is clear: the levels at the end of 2024 will be at the upper end of the spectrum. With lower interest rates in 2025, the baggage should be easier to carry. If economic growth is as expected or even surprises on the upside, the ‘burden’ will be reduced, like the provisions.
