Talking Heads: Inversión en un contexto de incertidumbre

This is an edited transcript of the Talking Heads podcast episode Where to invest given all the unknowns

Andrew Craig: Hello and welcome to this week’s BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing asset allocation with Claire Mehu, who is Head of the investment team for Balanced Solutions. I’m Andy Craig, Co-head of the Investment Insight Centre and I’m joined today by Claire Mehu. Welcome, Claire.

Claire Mehu: Hello, Andrew. Thanks for inviting me.

AC: Now it’s the 16th of January. I mention that because we’re just talking ahead of Inauguration Day on the 20st of January, just to position our listeners in terms of where we are with what’s going on in the world. Perhaps to begin with, if you could talk us through what has happened in markets since the US election last November and if you could outline your high-level view for what’s ahead in 2025?

CM: Yes, of course. We had the results quicker and much more clearly than expected, removing uncertainty. This translated into a strong outperformance of US equities. Upward pressures on bond yields following less dovish than expected Fed comments mid-December weighed on equity indices by the end of the year.

The US economy is in a remarkably good shape. Recent data have been strong as well and we’d expect no slowdown in 2025, just a deceleration to trend for US equity. On the other hand, the growth prospects remain weak in the eurozone, even if we don’t expect any contraction. This decoupling of economic prospects will result in a decoupling of monetary policies and increasing equity market volatility. We think the current environment of moderate growth without recession and the central bank easing cycle is globally positive for risky assets.

AC: If we just look at the different asset classes, what strong convictions do you have coming into 2025 and what is your particular focus?

CM: Unsurprisingly, the United States remain our preferred region among the equity markets. We are still constructive in US technology stocks, which would keep on benefiting from the AI developments.
Earnings growth is expected at 25% on [the] NASDAQ [index] for 2025, which remains the highest among the global equity markets. Valuations might be expensive, but they are not so extreme if we relate them to company profitability; we see usually a return on equity above 20% on average from NASDAQ companies. In light of the broadening of EPS growth from tech that we observed in Q3 with more sectors contributing positively, we have recently entered a position in the S&P 500 Equally Weighted index, which offers a more balanced exposure to US large caps. This could mitigate risk in the case of a volatility increase in the fixed income area.

Renewed concerns about inflation in the US in a context of resilient growth and job market and tariffs might limit the Fed’s ability to cut rates. European yields suffered from US contamination. These moves seem overdone in the context of a sluggish growth expectation and the cutting cycle by the European Central Bank. We remain slightly positive on duration, but express this economic decoupling between the US and Europe through a long position in European yield and a short position in UST notes. Our conviction remains positive also on European investment-grade credit, which could be a relative safe haven in a context where rates volatility could continue to be higher than credit spread volatility.

If we turn to diversification, yes, we still like gold. Gold has been the second-best performing asset in 2024 supported by the lower bond yield environment and steady demand by central banks. We expect this upward trend to continue in 2025. We’ve recently seen that the Chinese central bank resumed its gold purchases after months and Middle Eastern central banks will also probably continue to accumulate. Obviously, gold is also a hedge against any geopolitical tension that could emerge from a potential trade war.

Last but not least, on a more contrarian basis, we expect EMU real estate to pick up in 2025. The sector underperformed quite strongly in 2024 despite the first [ECB} rate cuts.  We currently see a clear shift in market sentiment in this sector. Net asset values have been stabilising over the last two quarter. Inflows are resuming on the institutional side, where positioning is still very low and acceleration in M&A in a fragmented sector could support the asset class.

AC: To pick up on one point, you have a positive bias towards US equities. As a measure of caution, you have shifted to an equally weighted S&P 500 allocation because the extraordinary growth in tech stocks over the last few years means that their weighting within the standard S&P 500 is now very significant. Is it just in light of that change within the composition of the US equity market?

CM: Concentration is obviously a risk in the US equity market. And that’s a reason why, as mentioned earlier, our goal is really to broaden our exposure and make sure that we have a hedge to mitigate any upside volatility. Earnings growth has been concentrated in technology stocks over the past year. Recently, earnings growth is picking up in financials, healthcare and industrials, so moving to an equally weighted position helps us to take more exposure in these sectors and could be a hedge in the case of downside in the technology sector.

AC: What about other risks, Claire? What are the risks that might keep you awake at night in terms of what might happen this year?

CM: We don’t see any strong risk of a drawdown as long as growth remains strong. We don’t expect recession in 2025. Obviously, we’ll see the impact of Donald Trump’s policies on US inflation and inflation around the world. We don’t have any idea on the way tariffs will be imposed and which kind of fiscal policy he will be able to implement. So that might be a risk in terms of rate hikes for 2026, but we don’t see them for 2025. Given his background, we don’t expect any strong drawdown in equity markets. Equity valuations are high and any negative surprise on corporate earnings could trigger some volatility. Concentration, as you mentioned, can increase the risk of a correction.

But in the current context, we don’t see any strong risk and try to build our portfolio using more relative positions to make sure that diversification play its role. For me, 2025 will be a year of increased volatility, increased uncertainty, but properly diversifying portfolio will help to outperform the global market.

AC: An increase in volatility is potentially something which is welcome for us as active managers creating opportunities. With relative value positions, it’s an environment which could well be positive for your approach to investing.

CM: Our goal is really to focus on our strong convictions, and make sure we build the portfolio in a way that it would be robust whatever happens.

AC: Well, that’s a good note to finish on, Claire. Thank you very much for joining me today.

CM: Thank you very much, Andrew.

That’s it for this week’s episode of Talking Heads. If you’d like to learn more about our asset allocation and other investment insights, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibarhyphenam.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig, and Claire Mehu, Head of the investment team for Balanced Solutions. Please do join us again next week. Until then, take care.