(Source: Merlea Macro Matters)

Summary

The evolving geopolitical and economic landscape continues to shape global financial flows and growth potential, fuelling uncertainty across regions. BNY’s iFlow® Mood Index, which measures daily investor sentiment, hit its lowest point since the pandemic in late 2024 but is trending upward in early 2025. Experts predict continued investment in equities as investors seek yield, contributing to global growth.

In the U.S., the economy is expected to remain resilient in 2025, with inflation gradually returning toward the Federal Reserve’s 2% target and GDP growth stabilizing at 2%. While the new administration’s policies may not significantly alter the growth outlook, factors such as tariff increases, tightened immigration policies, and expanded fiscal measures could raise inflation and interest rates, creating mixed effects on growth. Looser regulation and extended tax cuts may spur investment but add to the national debt, potentially increasing bond yields.

China’s economy faces challenges from U.S. policy shifts and weak domestic demand. While tariffs may have a muted impact due to China’s growing non-U.S. trade relationships, addressing low demand through targeted stimulus and infrastructure investment is crucial. Renminbi depreciation and rate differentials with the U.S. dollar highlight ongoing pressures, though stabilization efforts are underway.

In the APAC region, Japan’s gradual economic recovery is supported by the Bank of Japan’s planned interest rate normalisation. However, trade-weighted currency pressures and tariff concerns present risks. Emerging markets in the region face capital outflows and increased hedging as investors navigate global uncertainties.

Latin America’s growth outlook remains positive but volatile. High real interest rates in countries like Brazil and Mexico weigh on growth, while reforms and investments in key industries aim to offset challenges. Argentina’s recovery is expected to continue, and the region’s role in soft goods exports will remain critical.

In Europe, political and economic instability persists, with industrial contraction and rising stagflation risks in the U.K. Efforts to harmonize EU capital markets and reform pension systems aim to unlock growth opportunities. Globally, pro-growth policies and collaboration between governments, regulators, and the private sector will be key to navigating uncertainties and fostering long- term growth.

Bonds

As Donald Trump claims victory, markets are signalling that his administration could unleash a wave of inflationary pressures. Can stocks keep defying rising bond yields?

Recent developments in financial markets and official economic indicators are posing critical questions for policymakers worldwide, particularly as Donald Trump returns to the White House. The bond market’s recent spike in yields has moved beyond financial circles, becoming a major concern for policymakers and highlighting the potential impact of Trump’s policies, such as inflationary stimulus, tariffs, and immigration changes.

Initially, the market’s reaction to Trump’s election showed optimism about US economic growth, particularly with rising equity prices. However, since mid-December, bond yields have risen significantly, weighing on equities, which started the new year on a down note.

Historically, if the S&P 500 is down for the first five trading days of a new year, there is a 50% chance that the market will end the year lower. As US stocks have become volatile and bond yields continue to rise, concerns are mounting about the potential for a weak stock market in 2025—something Trump, who often gauges success by stock market performance, will have to consider carefully.

Additionally, strong US payroll numbers indicate a robust economic cycle, which could complicate Trump’s plans. The Federal Reserve has indicated fewer rate cuts than expected, while inflation expectations from the University of Michigan’s survey rose unexpectedly, signalling concerns about persistent inflation. This shift in expectations could make inflationary policies harder to implement without triggering bond market fears. Despite a slight slowdown in core consumer inflation, the bond market remains wary of the potential impact of Trump’s economic program.

These concerns are not isolated to the US. Rising bond yields, weakening equities, and currency declines are becoming prominent across global markets, including the UK and Europe, where similar patterns are emerging. While some governments can ignore market pressure, others must pay attention, especially when financial markets are directly influencing economic stability.

The bond markets are clearly sending a warning signal, and Trump’s economic team, particularly Treasury Secretary-designate Scott Bessent, should consider these developments carefully as they shape future policy decisions.

Listed Property

ASX real estate investment trusts (REITs) have faced a tough few years due to rising interest rates and challenges in the property market. However, with stabilising property values and potential interest rate cuts on the horizon, ASX REITs could be poised for a rebound in 2025. The sector’s strong sensitivity to interest rate movements suggests that a change in the macroeconomic landscape may bode well for the REITs.

In 2024, Australia’s REIT sector outperformed globally, with the S&P/ASX 200 A-REIT Index delivering an 18.5% total return, compared to the ASX 200’s 11.2%. Goodman Group, a logistics giant, was a key contributor to this performance, with shares rising 42% as the company transitioned from traditional warehouses to hyperscale data centres. This shift in focus is one of the driving forces behind the positive outlook for 2025.

A key factor in REIT earnings growth in 2025 is the supply-demand imbalance in the property market. Higher interest rates have reduced new development completions, creating a supply shortage. As a result, landlords have more pricing power, which should increase rental rates and fuel REIT earnings growth. However, it will take 2-3 years for new development to meet demand, making 2025 the lowest point for construction activity.

With office market vacancy rates still running at near historical highs – Melbourne’s is touching 20 per cent while Sydney’s inched back to 14.7 per cent in September quarter – landlords and major corporate tenants are keeping a close watch on where the work-from-home pendulum lands. Victoria is lagging as the government there takes up over 30 per cent of the office market, and isn’t imposing strict return requirements yet, which is having flow-on effects to the broader foot traffic of the CBD.

And amid the cross currents playing out across CBD office markets, leasing figures reveal at least one clear trend: a preference for higher-quality offices. Significantly, even though daily office use was still well below what it was before the pandemic even in Sydney CBD’s core, the amount of space leased in that precinct was increasing,

Several large, high-quality listed REITs, including Mirvac, GPT, BWP Trust, and Charter Hall Long WALE REIT, are trading at significant discounts to net tangible assets (NTA), with attractive distribution yields ranging from 4.5% to 6.5%. These stocks may offer great value, with potential for rotation by equity managers seeking higher returns.

Additionally, APRA’s plan to phase out bank hybrids by 2032 could boost the listed REIT sector. With over $40 billion invested in hybrids, REITs could become an attractive alternative for investors seeking higher yields, particularly retirees.

While lower interest rates could further enhance earnings, real estate performance is not solely dependent on rate cuts.

Australian Equities

Australia’s Labour Market, Inflation, and Impacts of Trump’s Policies

The Australian labour market is currently outperforming the Reserve Bank of Australia’s (RBA) forecasts, maintaining levels that the central bank is comfortable with. Inflation has also settled within the target range of 2–3%, signalling economic stability.

However, with inflation at the higher end of the target range and ongoing international uncertainty, the RBA may choose to hold interest rates steady at its February meeting. The Bank will likely adopt a wait-and-see approach regarding Trump’s economic policies. Uncertainty surrounding these policies creates anxiety for consumers and markets, potentially leading to restrained spending and investment.

High economic policy uncertainty has historically dampened real economic activity. Businesses often delay capital investments, and consumers may increase savings buffers until the economic landscape becomes clearer. This caution can reduce demand, slow economic growth, and exert downward pressure on inflation.

With the U.S. as both a key trading partner and the world’s leading economy, uncertainty stemming from its policies could have a significant impact on Australian businesses and financial markets. The Department of Foreign Affairs and Trade (DFAT) reports that over 12,000 Australian companies, including Rio Tinto and Woodside, export to the US. Lower profits for these firms could negatively affect the Australian stock market and, by extension, superannuation funds.

Impacts of Tariffs on Australia

Trumps proposed 45% tariffs on Chinese goods could disrupt global trade and supply chains, affecting Australian exports indirectly. Higher U.S. prices for Chinese goods would likely reduce demand, prompting Chinese manufacturers to cut production. This reduction would lower demand for Australian natural resources used as inputs, such as iron ore and coal, impacting exports and GDP growth.

Additionally, the tariffs could influence the Australian dollar (AUD). As global supply chains adjust, the AUD may depreciate, leading to higher prices for imported goods and adding to domestic inflationary pressures.

The timing of these potential disruptions is critical. If tariffs coincide with Australia’s economic recovery, the RBA’s efforts to achieve a “soft landing” could be jeopardized. While short-term effects may be limited, the long-term ramifications could necessitate international stimulus measures to stabilize the global economy.

The RBA will closely monitor these developments while navigating inflation, economic growth, and external risks. Amidst these uncertainties, maintaining economic resilience will require a cautious and adaptive monetary policy.

By adopting a steady approach, the RBA aims to balance domestic recovery with potential international challenges, ensuring stability in Australia’s economy and financial markets.

America

Donald Trump’s re-election in 2025 is expected to have significant implications for the U.S. economy and global growth. His policy agenda combines tax reforms, deregulation, and protectionist trade measures, each with distinct potential impacts.

Pro-growth policies may sustain momentum, but fiscal stimulus and tariff policies add inflation uncertainty, raising yield risks. With solid growth and gradual disinflation, the Fed sees no urgency to cut rates, leading investors to lower expectations for rate reductions this year.

At the core of Trump’s economic strategy is the extension of the 2017 Tax Cuts and Jobs Act, which reduced corporate tax rates to spur domestic investment. However, the Congressional Budget Office estimates that extending these provisions beyond 2025 could add $4.6 trillion to the national deficit over a decade. While aimed at boosting economic growth, critics warn these measures could heighten inflationary pressures and worsen the national debt.

Trump’s deregulation agenda is likely to benefit sectors like finance and energy, with Wall Street anticipating industry growth. However, reduced oversight may heighten the risk of market instability, reminiscent of past financial crises.

A key component of Trump’s policies is protectionist trade measures, including a planned 25% tariff on goods from Canada and Mexico starting February 2025. While intended to shield domestic industries, such tariffs are expected to raise prices on imports, fuelling inflation and curbing consumer spending. Moreover, strained relations with key trading partners could lead to retaliatory measures, further disrupting international trade.

Globally, Trump’s policies are expected to have mixed consequences. The World Bank projects global economic growth at 2.7% this year, but uncertainties surrounding U.S. trade policies could deter investment and destabilize markets. Protectionist measures and tariffs may also strain global supply chains and diminish confidence in U.S. governance, posing risks to the broader global economy.

While tax reforms and deregulation may invigorate certain U.S. sectors, these gains could be offset by inflation, rising national debt, and potential trade disruptions. On a global scale, Trump’s policies may contribute to slower economic growth and heightened uncertainty, illustrating the complex interplay between domestic actions and international economic stability.

With major indices like the S&P 500 trading above historical averages in price-to-earnings ratios, stocks could face downward pressure if earnings growth fails to justify current valuations.

A new presidential administration offers benefits and risks. Sorting through potential changes to tax policy, regulation, trade policies and immigration should keep markets busy in 2025. Less regulation and the extension of expiring provisions in the 2017 Tax Cuts and Jobs Act (in addition to lowering certain taxes) could be modestly stimulative and positive for asset prices. Yet, broad tariff implementations could dampen economic growth and put upward pressure on inflation, which would likely be a market negative.

Europe

President Donald Trump’s protectionist policies, coupled with fiscal expansion—often referred to as “Trumponomics”—are expected to strain the eurozone’s already sluggish economy. These policies are anticipated to sustain U.S. inflation, compelling the Federal Reserve to maintain or tighten interest rates, while the eurozone faces subdued growth and the prospect of additional European Central Bank (ECB) easing.

Luxembourg’s Finance Minister, Pierre Gramegna, has warned that rising global borrowing costs reflect investor concerns about the economic implications of Trump’s “America First” agenda. He noted that higher government bond yields could hinder eurozone growth, while renewed inflationary pressures and an expanding U.S. budget deficit might push yields even higher.

Despite these external pressures, the European Stability Mechanism (ESM) and Eurogroup President Paschal Donohoe remain confident in the eurozone’s fiscal discipline. Most EU member states have submitted budgets adhering to strict EU fiscal rules, signalling continued commitment to a credible medium-term budget framework.

Trump’s protectionist rhetoric, including a pledge to impose tariffs to “enrich our citizens,” has heightened concerns in Europe. European Commission President Ursula von der Leyen emphasized Brussels’ readiness to defend the EU’s economic interests, citing past instances of imposing rebalancing duties on U.S. exports in response to American tariffs on EU steel and aluminium.

Economic analysts predict a growing divergence between the Federal Reserve and the ECB. While the Fed is expected to maintain tight monetary policy to address persistent inflation, the ECB may continue easing measures to support growth and meet its 2% inflation target. Citigroup estimates that a broad 10% U.S. tariff could reduce EU GDP by 0.3 percentage points over two years, potentially prompting larger ECB rate cuts.

Political instability in key member states further underscores the eurozone’s vulnerability, complicating coordinated fiscal responses. Additionally, a projected 5% rally in the U.S. dollar over the next year could place further pressure on the euro and exacerbate trade imbalances.

As Trump’s policies reshape global trade dynamics, the eurozone faces significant challenges, requiring strategic navigation to mitigate their economic impact.

Muted economic growth in Europe coupled with downward earnings revisions have not stood up well in the momentum-driven market of the past two years.
This has translated into some downtrodden European equity valuations.

There are several potential catalysts that could provide upside to European equities: reducing political turbulence, a ceasefire in Ukraine, a recovery in China, supportive monetary policy from the ECB, and rising consumer spending.

Employment remains strong and European consumers have been rebuilding their financial net worth. The household savings rate is well above the long-term average because of uncertainties. Going forward, less negative sentiment bodes well for a recovery in consumption.

United Kingdom

The UK’s autumn budget surprised markets with a more expansionary stance than expected, raising the prospect of stronger near-term demand. However, consolidation measures outlined for 2025 suggest growth may cool in the second half of the year. The Office for Budget Responsibility (OBR) is set to deliver its next forecast update in the spring, an event that will be closely monitored by markets.

The government has left limited headroom against its new fiscal targets, and even small changes in the OBR’s macroeconomic forecasts could eliminate this headroom entirely, Economists believe that economic growth may fall short of the OBR’s current projections, increasing the likelihood of upward revisions to the debt-to-GDP forecast.

The government plans to reform the planning system for housing and development, a move that could gradually bolster UK GDP growth. While the exact effects remain unclear without detailed policy proposals, economists anticipate an increase in residential investment over the next five years.

The medium-term impact on GDP will hinge on whether these reforms improve labour productivity. Research consistently shows that wages and productivity are higher in large cities, and relaxing planning restrictions could enhance productivity by enabling urban expansion. While inflation is expected to remain firm in the near term, it is projected to ease throughout 2025. Factors such as public sector pay deals and government consumption following the autumn budget will support demand, while new measures like higher vehicle excise duties and VAT on private school fees could contribute to near-term price pressures.

Despite this, Goldman Sachs Research expects domestic inflationary pressures to recede next year. BoE surveys suggest that labour market tightness is easing, which, combined with the dissipation of catch-up effects as inflation nears its target, could slow pay growth.

While the further rise in regular private sector pay growth in November will cause the Bank of England some unease, it will take comfort from the continued loosening in labour market activity.

As pay pressures subside, services inflation is expected to decline gradually. Economists forecast headline inflation at 2.3% in the final quarter of 2025, slightly below the BoE’s November projections, with core inflation anticipated to fall to 2.5% by year-end.

The reduction of political uncertainty following the general election in July, coupled with a stronger economic outlook than the eurozone, has improved investor sentiment toward UK equities. Additionally, the fading of the Brexit discount has further bolstered the case for UK stocks, making them an attractive opportunity for investors seeking value.

Japan

2024 marked a pivotal year for the Japanese economy, as investors embraced a regime shift reflected in the Nikkei 225 Average Index reaching its highest level in March—its first peak in over 35 years. Contrary to initial market expectations, mild inflation persisted, with Consumer Price Inflation (CPI) remaining above the Bank of Japan’s (BoJ) 2% target. This development led to a historic decision to end Japan’s eight-year-long zero interest rate policy in March, followed by a rate hike in July, with further increases anticipated in 2025

Japan is confronted by a structural labour shortage, which has recently been somewhat alleviated by a greater labour participation rate for women and older people, and by the addition of more foreign workers. The shortage is nonetheless likely to exert continued upward pressure on wages.

Japan’s chronic labour shortages have underpinned sustained wage increases and continued mild inflation. The return of “a world with positive interest rates” after nearly two decades has reshaped corporate investment behaviour. Companies now view delaying investments as a risk, leading to record capital expenditures, particularly in projects aimed at improving productivity.

Looking ahead to 2025, this shift could extend to consumer behaviour, with price increases becoming more widely accepted and normalised.

Corporate governance reforms have accelerated, spurred by Tokyo Stock Exchange initiatives and more proactive measures by leading companies. A notable example in 2024 was the property and casualty (P&C) insurance sector’s commitment to unwinding cross-held shares within five years. The proceeds are earmarked for share buybacks and mergers and acquisitions, fostering sustainable growth in earnings and dividends per share (EPS and DPS). The unwinding of cross-holdings, a hallmark of Japan’s relationship-based economy, is transforming Japan into a profit-maximizing market. This trend is particularly evident in regulated sectors like financials but is increasingly common across industries.

While Japan’s moderate economic recovery has been encouraging, the biggest risk for 2025 is a potential slowdown following decades of stagnation, which could dampen business and investor sentiment.

Earnings growth for the Japanese market in 2025 is expected to be in the high single digits, a target that seems achievable. However, while financials are projected to drive this growth, the manufacturing sector could face challenges, with a pronounced slowdown potentially impacting profits due to fixed costs.

Japan’s economy is no longer as export-dependent as in the past, with many companies localising their businesses and reducing exposure to currency fluctuations. Nevertheless, nearly half of the revenue for Tokyo Stock Exchange-listed companies comes from abroad, keeping them tied to global economic trends.

Japanese equities present a compelling case for investors. Their relatively low valuations compared to global markets, coupled with ongoing governance reforms that boost return-on-equity, provide a foundation for resilience.

Despite global economic uncertainty, Japanese equities, particularly those tied to global markets and growth, offer an attractive risk-reward profile

China / Emerging Markets

Emerging markets (EM) enter 2025 with a solid fundamental backdrop. Faster economic growth, stable inflation, improving current account balances, and low debt levels are expected to support positive ratings migration for both sovereign and corporate bond issuers this year.

Current EM stock valuations look relatively cheap compared to developed market stocks. However, EM valuations look merely average compared to their own history

However, potential volatility looms, with particular focus on the second Trump administration’s trade policies. After campaigning on a renewed “America First” trade stance, President Trump’s policy moves are likely to create waves in EM assets. Despite these challenges, the diversity across EM economies and localised strengths give confidence in their overall positive credit trajectory.

During his campaign, President Trump floated significant tariff proposals, including a 60% tariff on China and a 10% universal tariff on all U.S. imports. In practice, however, we expect a more nuanced approach, like his first term, with product-specific tariffs and negotiated exemptions keeping effective rates below the headline numbers.

While tariffs may weaken U.S. demand and impact GDP growth for major trading partners, the inflationary effects are often short- lived and mitigated by disinflation in key services like housing. Currency depreciation in EM economies could also cushion the price impact, making service exports more attractive relative to goods. Furthermore, trade diversion—where supply chains shift globally—could benefit certain EM countries, as observed during Trump’s first term.

Where Tariffs May Hit Hardest: Mexico and China

Mexico, as the U.S.’s top trading partner, is particularly exposed to potential tariff hikes. During Trump’s first term, Mexico benefited from tariffs on China, seeing its share of U.S. imports rise alongside increased foreign investment. However, President Trump’s recent mention of a 25% tariff on Mexico, contingent on border security concessions, signals tougher renegotiations for the United States-Mexico-Canada Agreement (USMCA) in 2026. With nearly 80% of Mexico’s exports destined for the U.S., the country remains highly vulnerable to these trade policy shifts.

China is also expected to remain a primary target of Trump’s trade policies. Proposed tariffs of up to 60% on Chinese imports could reduce China’s GDP growth by 1% to 2%. However, as in Trump’s first term, we anticipate a more transactional approach, with effective tariffs likely averaging around the mid-30% range. Even with this, the impact on China’s economy may be mitigated by a weaker yuan and domestic policy stimulus, keeping GDP growth at an estimated 4.5% in 2025.

Opportunities Amid Challenges

While Mexico and China may face heightened challenges, other EM countries could benefit from trade diversion, gaining a larger share of global supply chains. Despite the uncertainties ahead, the combination of strong economic fundamentals, strategic adaptability, and structural reforms positions emerging markets for a year of resilience and growth in 2025.

WTIS / Gold Commodities Outlook for 2025

While 2024 proved challenging for many commodities, the outlook for 2025 carries a mix of cautious optimism and compelling opportunities. Oil futures began the new year on a positive note, fuelled by expectations of stronger demand. Markets are particularly hopeful that China, the world’s largest crude importer, will fulfill its promises to further stimulate growth in 2025.

Supply-side constraints remain a critical factor. OPEC nations are expected to keep production limited, which could sustain higher prices. At the same time, there seems to be excessive optimism surrounding the U.S. under President Trump’s second administration. Despite a relatively balanced supply-demand outlook, oil stocks remain extremely undervalued due to prevailing pessimism, potentially presenting opportunities for investors.

Adding to the bullish sentiment, U.S. crude inventories saw a sixth consecutive weekly decline, which helped drive prices upward. This occurred despite a rise in petroleum-product supplies, highlighting strong underlying demand. Forecasts for colder weather across many parts of the U.S. have further bolstered energy markets, particularly natural gas.

Gold ended 2024 on a high, achieving record levels and maintaining its status as a safe-haven asset. After an initial slump due to the U.S. dollar surge and a shift toward riskier assets following President Trump’s re-election, gold prices rebounded, closing the year at $2,647.07/oz as of January 7, 2025.

Looking ahead, analysts project the possibility of gold climbing to $3,100/oz this year, supported by a unique mix of factors:

• Central Bank Buying: Since 2022, central banks have collectively purchased 2,700 tonnes of gold, with China leading the charge. The ongoing effort to reduce reliance on the U.S. dollar, accelerated during Trump’s first term, remains a key driver of demand.
• Jewellery Demand: India’s 9% cut to gold import duties has revitalised its jewellery industry, while China continues to see robust consumer demand, albeit slightly dampened by cultural considerations tied to the Year of the Snake.
• Inflation and Uncertainty: Persistent inflationary pressures, geopolitical tensions, and market volatility are underpinning gold’s strength as a hedge against economic instability.

Interestingly, the traditional inverse relationship between gold and the U.S. dollar has not held in recent years. Despite the dollar remaining steady, gold has surged 813% since 2000, reflecting its enduring appeal as a store of value.

In 2025, the energy and precious metals markets appear poised for a dynamic year. Oil markets are navigating supply constraints, evolving U.S. trade policies, and demand recovery in China. Meanwhile, gold continues to shine amid inflation fears, robust central bank buying, and consumer demand.