BNP Paribas Wealth Management says key trends for next year will include lower interest rates, energy infrastructure upgrades, a diversification away from the US, a wave of investment into AI, and dramatic improvements in treatment for age-related diseases.
The firm lays out these arguments in its Our Investment Themes: 2025 report.
These trends will come to pass, it said, after an ‘everything rally’ in 2024, which saw positive returns for almost all asset classes. The firm went on to say that 2024 took place against a backdrop of moderate economic growth around the global, combined with falls in inflation, and reductions in interest rates.
Regarding interest rates, the BNP Paribas authors wrote: “Today, US and European benchmark interest rates sit close to their highest levels seen over the last 15-20 years. As a result of these historically elevated rates, inflation has declined to or close to the 2% level targeted by major central banks.”
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They added: “Economic growth is now running below average in Europe and China and is decelerating in the US. Central banks have thus switched their focus to supporting employment and growth by cutting interest rates. We expect this coordinated central bank rate-cutting cycle to continue at least until late 2025.”
However, challenges still lie ahead, said BNP Paribas. These include refinancing of sovereign debt burdens, given the rising interest costs on national budget. It is a factor, they say, that could weigh on longer-term bond yields that holds back bond performance even as benchmark rates fall.
The authors added: “Secondly, the expensive valuation of US large-cap stocks at nearly 22x P/E following the impressive performance of the magnificent seven technology stocks could weigh on stock market performance if earnings momentum slows. US corporate bonds are also expensive by historic standards, judging from current record-low credit spreads over sovereign bonds.”
They concluded: “Ultimately, global liquidity will play a crucial role in determining the performance of financial assets in the year ahead, led by the actions of central banks. Lower interest rates will help boost liquidity and loan demand. However, a key factor will be the conversion of elevated household savings rates out of cash into more economically-productive assets, particularly in China and Europe.”
