Structural changes: Fiscal over monetary

The consensus call for 2025 seems to be that rate cuts by major central banks are bound to continue, but not to pre-pandemic levels. At the same time, inflation trends are expected to diverge across regions, with the US experiencing sticky (albeit moderate) inflation, Europe in disinflation, and China flirting with deflation.
 

Current accounts and NIIP positions drive geopolitics

The U.S. negative Net International Investment Position (NIIP) contrasts with China's positive one, creating fundamental tension in the global financial system (we discussed the resulting constraints in this note). Such imbalances are usually corrected through FX rate adjustments. However, as the U.S. Dollar serves as the global reserve currency, its strength often shifts the burden of adjustments onto the economies of U.S. trading partners. Indeed, history shows that periods of strong U.S. Dollar have coincided with asset inflation and bubbles in the U.S., while many trading partners have faced deflation or recessions.
 
No wonder, thus, that China, already facing internal economic struggles as it transitions from an export-led economy to an internal-consumption one, is unwilling to carry the extra deflationary burden of a strong U.S. Dollar.
 
China has opted to significantly reduce its reliance on the U.S. as an export destination. Since 2017, the Chinese share of total imports in the U.S. has practically halved. China has embarked on its Belt & Road Initiative (BRI) to enhance trading activity with the rest of the world. The BRI, heralded as a win-win opportunity for China’s trading partners, has the dual advantage of offering Chinese companies new capex opportunities across the globe, and, by pushing for trade settlements in local currencies (and thus bypassing the U.S. Dollar) it concurs to the de-dollarization process.

The US Dollar takes center stage

The U.S. has not stood on the sidelines and is using all its powers, both diplomatic and less diplomatic ones, to counter these challenges. A recent tweet from Donald Trump, essentially declaring, "Don't dare touch the almighty Dollar," to which the answer came in Xi Jinping's words, "actively creating an external environment that is favorable to us," with the not-so-hidden reference to a weaker U.S. Dollar, underscores the centrality of this issue.
 
In other words, the U.S. dollar will be the key variable to monitor in the coming year, with its trajectory likely shaped more by fiscal policies than by monetary ones. As such, we anticipate a rise in economic nationalism and growing policy divergences across regions, a notable departure from the era of global coordination among central banks that has defined recent years.

Focus on the United States

The consensus calls for the American economy center on a "soft landing / goldilocks" scenario, anticipating a slower growth than 2024 (which already surprised most analysts to the upside).

The Trump effect

Although there are still about two months to go until Trump takes possession of the White House, he has already been very vocal about its intended policies, and has named its team members in accordance. In extreme synthesis (more details will be discussed in the respective themes sections) Trump’s proposed policies can be resumed as pro-cyclical (leveraging fiscal policy to stimulate growth and consumption) and seeking deregulation across the board. In essence, making America one of the most attractive investment areas of the globe. U.S. assets are bound to attract a renewed inflow of capital (which has already started, as markets anticipated Trump's election), that will push prices higher. Importantly, these same flows will lift the U.S. Dollar, with the implications we have just discussed.

The job market factor

One of the main surprising factors in 2024 was the resilience of the American job market and the absence of wage pressure. Two factors help explain this conundrum: on one side, the official labor pool shrunk as the "civilian labor force with disabilities" has grown to a record high of >8mn people, and early retirement continued to run well above projections. On the other hand, the "open borders" policy (compounded by illegal immigration) filled the gap with cheaper labor. Should Trump follow on his promise to end illegal immigration and tighten the screw on immigration, the likely consequences will be an increase in wage inflation.

Conclusion

The key risk is a resurgence of inflation, to which monetary policy will have to adjust. But Trump's policies will require time to be implemented and inflationary pressure from tariffs and immigration controls may well be a story for 2H25. Until then, the markets will more likely focus on the stimulative impact of the announcements.
 
U.S. equities look set to continue outperforming; tax cuts will be another tailwind for SMID caps; wage pressure will push companies to accelerate investing in productivity enhancements, through AI applications and Robotics.

Rest of the World

China

The consensus view is that China will continue to face economic challenges despite the recently announced stimulus measures. However, with expectations already low, this creates a potential floor, leaving room for upside surprises. As noted earlier, fiscal policies will be the key driver, and President Xi Jinping has been explicit about his objectives. The stimulus plan is expected to begin showing its initial effects soon, with further clarity likely to emerge during the significant party meetings in December, which may outline additional measures.
 
China is also expected to advance its decoupling process from the U.S., potentially surprising investors with progresses in regional economic integration. The country has long prioritized the development of high-tech industries and is now a global leader in several of them. These investments could start delivering results sooner than anticipated, contributing to economic growth and strengthening its position on the global stage.

Europe

Consensus expectations suggest that "the worst is over" for Europe, with anticipated aggressive rate cuts expected to stimulate recovery. However, these cuts may take longer than anticipated to offset the loss of competitiveness, and the weakening Euro could have an inflationary effect, potentially slowing the European Central Bank's (ECB) pace of action.
 
More significantly, Europe faces mounting political uncertainty. In early 2025, Germany will hold pivotal elections, while France remains in a state of political uncertainty. This instability compounds economic challenges when viewed through the lens of Net International Investment Position (NIIP) and current account balances. Historically, the EU has served as a pragmatic solution to balance Germany’s surplus with France’s deficit. However, with Germany’s economic position rapidly deteriorating and France losing its influence in Africa, a critical economic support system, France's economy faces heightened risks of implosion. This precarious situation threatens the very foundation of the EU.
 
Given these factors, we maintain minimal exposure to Europe in our portfolios and have no immediate plans to revise this stance.

How to invest in 2025?

The structural shift toward a greater emphasis on fiscal policy is expected to amplify divergences across geographical regions and industrial sectors. Following a period where returns were heavily concentrated in a few key names, the anticipated rise in return dispersion will create a more favorable environment for active investment strategies over passive ones.
 
With valuations, particularly in the U.S., appearing stretched and bond yields carrying upward risk, equity returns in 2025 are likely to rely on earnings growth rather than further multiple expansion.
 
Summarizing our key positioning for 2025:

• Long US Small and Mid-Cap Stocks: Positioned to benefit from fiscal stimulus and localized growth trends.
• Long Digitalization: Accelerated by AI, particularly on the software side of the technology stack.
• Long Infrastructure Capital Expenditures in the US and China: Driven by deglobalization trends and initiatives such as China’s Belt and Road Initiative (BRI).

Details for each of our investment themes

• AI & Robotics - Time for the application boom
• Blockchain & Digital Assets - From institutionalization to mass-institutionalization
• Fintech - The deregulatory advantage
• Healthcare (Bionics and Biotech 360°) - Uncertainties create opportunities
• Mobile Payments - Moving beyond de-rating 
• Security & Space - Planets are aligned
• Sustainable Future - From rock bottom to rebound

Catalysts

• Capital Flows. Strong U.S. fiscal stimulus and tax incentives likely to accelerate global capital flows into U.S. assets, amplifying dollar strength.
• Tech Acceleration. Rising wage pressures and labor constraints could force faster adoption of AI and automation across industries.
• Infrastructure Push. Competing fiscal stimulus programs in U.S. and China to drive significant infrastructure spending and related investment opportunities

Risks

• Dollar Shock. Excessive dollar strength might trigger deflationary pressures in emerging markets, potentially destabilizing the global financial system.
• Policy Regime Shift. The abrupt transition from monetary to fiscal dominance could cause market dislocations as investors struggle to price in the new paradigm.
• Fiscal Overreach. Competition between economic blocs could lead to unsustainable fiscal expansions, triggering bond market stress and volatility.