Terra Incognita

As the year 2024 draws to a close, it has recorded levels for stock market indices, buoyed by the strength of certain sectors such as technology, a solid economic recovery, and moderating consumer prices. Continued disinflation has led to the beginnings of monetary easing, offering a breath of fresh air to financial markets.

This year will also be remembered as an exceptional one, with almost half the world's population going to the polls. This electoral cycle has highlighted the challenges and instability that liberal democracies have been facing for several years, particularly in Europe. It has also strengthened the position of certain more authoritarian regimes or those run by populist leaders, as illustrated by the remarkable re-election of Vladimir Putin or the -- less predictable -- return of Donald Trump to the White House.

What can we expect from the new American administration?

Just recently elected, the new president of the world's leading power has established his tone, with an announced cabinet that leaves no doubt as to the political direction of the next four years. It remains to be seen whether the Trump II administration will deliver on his campaign promises, notably on migration policy, higher tariffs and fiscal stimulus.

Now that he has inherited a very healthy economy, can Donald Trump maintain this momentum? Excessive economic measures could push up inflation, slow growth and weigh on export economies, particularly in Europe and China, leading to chain reactions such as a fiscal stimulus plan in China or heightened tensions around Taiwan, as well as possible fiscal easing in Europe.

Europe and the US on divergent paths

Undermined by its political uncertainties, will Europe manage to come up with a coherent response despite an apparent lack of leadership and the slowdown in Germany's economic engine? A delicate situation would arise if it were to face a complex scenario involving discussions on the Russo-Ukrainian borders in an international framework.

For the time being, at least one thing is certain: The economic divergence between the USA and Europe is expanding on all fronts.

• On the monetary front, the ECB, faced with an economic slowdown, is set to continue its rate-cutting cycle, with the possibility of four further cuts in 2025. US monetary policy could be influenced by both an inflationary and an interventionist administration. Although the President-elect has expressed his wish to reduce the independence of the US Federal Reserve, we expect that Fed Chair Jerome Powell, whose term ends in May 2026, will remain firmly anchored to his commitments.
   
• On the fiscal front, while many European countries are aiming to reduce their deficits, public debt as a percentage of GDP is set to remain at around 90%. In the United States, the fiscal stimulus envisaged by the Trump administration could lead to a significant increase in the deficit and public debt, which could reach 137% of GDP within ten years, a level comparable to that of Italy today.
   
• On the regulatory front, European financial supervision remains an asset for bank credibility. In the US, a possible relaxation of the international standards set by the Basel Committee could revive concerns about the solidity of medium-sized banks, as was the case in March 2023. Furthermore, Trump's support for cryptocurrencies could lead to significant changes at the Securities and Exchange Commission (SEC), the US financial regulator. Ultimately, while a revision of prudential standards could support the US banking sector in the short term, it raises questions about longer-term risks.

The ‘spring force’ of structural trends

Regardless of short-term political decisions and geopolitical uncertainties, it will be essential in 2025 to remain attentive to the major structural trends impacting our economies.

We are thinking, of course, of the aging population, which is accelerating and is largely the result of advances in longevity. This demographic challenge calls for increased investment in infrastructure, medical research and innovative technologies. It also calls for structural reforms to better control its impact on public finances.

The effects of climate change continue to be felt on every continent, with ever greater force and materiality for our societies and economies, particularly the most vulnerable. While the revival of fossil fuel production could temporarily exert downward pressure on prices, reducing the competitiveness of renewable energies and slowing green investment, the decarbonization process is set to continue, even if progress is likely to occur at different speeds in different regions.

Technological innovation remains a key driver. The artificial intelligence revolution, still in its infancy, promises to profoundly transform our societies. It will play a key role both in improving the quality of life of aging populations and in accelerating the energy transition.

Opportunities and challenges for investors

In 2025, these trends will continue to present investment opportunities, but also challenges and risks -- particularly on the ethical front -- requiring a rigorous selection of issuers. Geopolitical uncertainties, combined with stretched valuations, will lead to a return of volatility and dispersion, which support active management. In this context, alternative investments offer diversified and uncorrelated solutions for investors.

While 2024 has removed some of the election uncertainties, 2025 could bring its share of surprises. Europe, in particular, is gearing up for new historic moments, with the forthcoming German and, potentially, French elections. The key question will be to grasp the future in which the peoples of the Old Continent see themselves, in the face of the growing ambitions of the ‘Russian ogre’. Democracies can always win, provided they want to.

With this in mind, we wish you all the best for a prosperous and peaceful 2025. Our teams remain fully committed to working alongside you to overcome future challenges and seize opportunities. And it's with this in mind that we invite you, throughout December, to explore a series of analyses offering strategic perspectives on the ten essential questions to keep in mind when shaping a resilient, high-performance portfolio in 2025.