Key insights

The US economy is one of the strongest in developed markets and we expect this to remain the case in 2025. President Trump’s policy agenda of supply-side reform, coupled with some promised fiscal and regulatory relaxation, is unequivocally a pro-growth narrative. However, even the most optimistic expectations for implementation mean the full impact would not really be felt until late 2025 at the earliest. Expectations for US Federal Reserve rate cuts have fallen sharply since the December meeting and the latest economic projections. Bond yields will be under continued pressure if strong economic data puts the 1-2 Fed cuts priced for 2025 in doubt, but trade-tariff policy, especially if poorly executed, might derail today’s positive sentiment.

In contrast with the US, sub-trend growth forecasts and weak sentiment in Europe are giving policymakers cause for concern. Increasing competition from China in core industries has hurt the manufacturing sector, while slowed progress on a deeper fiscal and monetary union is hurting investment. Now political challenges in core countries of France and Germany are hurting sentiment. Market pricing that suggests an ECB policy rate below 2% by the end of 2025 looks reasonable against this backdrop and this should help keep growth positive with inflation in check. The risks of a hard landing are much higher than in the US, but this is not our base case. The German election early in 2025 might even bring some fiscal support.

In China, stimulus measures already implemented, and ongoing indications of more policy support, confirm that policymakers are committed to their target of around 5% GDP growth for 2025 (although market consensus is just below this). Recent policy announcements recognized the need for more proactive fiscal policy, ‘moderately loose’ monetary policy and the need for more efforts to boost domestic consumption. Incrementally we expect these measurers to be effective over time and domestic spending and investment to pick up. Longer term, whether China can return to more stable growth will largely depend on the bottoming and recovery of the housing market with further policy help.

Asset class views

Rates / FX

  • Monetary easing cycles are underway across most economies, as growth momentum and inflationary pressures soften.
  • In the US, the policy pipeline under President Trump and its likely impact on the economic landscape is uncertain.

 Investment grade

  • Macroeconomic and corporate fundamentals combined with persistently strong technicals are supportive for investment grade credit.
  • Tight valuations balance this outlook: while a material widening in spreads appears unlikely, carry will likely drive returns in the near future.

High yield

  • Fundamentals are skewed to the downside, with defaults increasing, albeit from low levels.
  • Valuations are historically tight, though technicals are more supportive, with healthy demand keeping pace with strong supply.

Emerging markets

  • Valuations are attractive as countries continue to emerge from low growth, with the benefit of less restrictive monetary policy.
  • Recent stimulus measures in China raise hopes of a meaningful boost to growth, an important catalyst for improvement in EM.

Investment implications

Rates / FX

  • Outside the US, selected markets look attractive in regions where growth is weaker, particularly at the short end of the curve.

Investment grade

  • With no clear catalyst for a widening or tightening, spreads can remain range bound. We prefer EUR and AUD corporates.

High yield

  • We prefer Europe and Asia over the US, and look to trade up in quality and shorter in duration in all markets.

Emerging markets

  • We are constructive on Asia HY, given attractive valuations and reduced China property exposure. In EM IG, we like corporates.
  • We prefer hard currency over local currency positions to limit relative return volatility tied to unexpected changes in Fed policy.

S-01/25 NAMT-2081

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