Growth dip or not: how investors should position themselves now

Read the market analysis and fund positioning

‘There are decades when nothing happens, and there are weeks when decades play out.’ This saying of Lenin seems to be the motto of the first weeks of the new US president's second term in office.

Donald Trump's presidency, which has been ongoing for five weeks now, and the associated strategic and protectionist changes are disrupting established geopolitical and trade dynamics. This has led to a significant increase in uncertainty and thus to downside risks for the global economy. At the same time, monetary and fiscal policy will continue to have a stabilising effect. In addition to the path of inflation, geopolitical crises and the sovereign debt problem, global trade is the biggest challenge for global growth in 2025.

Inflation

In our view, price increases in Europe and the US are not a cause for concern at present. However, it is clear that the disinflationary trend that began two years ago is currently stagnating. In the US, headline and core inflation are running at 3% (3.3%), while in the European Union they are at 2.5% (2.7%). A timely decline in inflation to pre-pandemic levels is unlikely; rather, inflation rates are expected to rise in the coming quarters. A labour market that remains tight, rising wages and a shrinking workforce pose additional challenges for the disinflation process. In our opinion, President Trump's economic policy is not as inflationary as currently expected.

It should be clear that there are no winners in escalating trade conflicts. The disruption of global value chains increases production costs, raises selling prices and reduces global growth.

However, we believe that the US tariff policy in particular is only a temporary means of exerting pressure in the upcoming negotiations and unilateral demands. It is worrying that current inflation expectations, combined with falling consumer confidence, could lead to consumer reticence on both sides of the Atlantic. Weaker-than-expected retail sales data in the US are one indication of this.

However, it is important to note that inflation slightly above target is easier to absorb than an environment of low growth and high unemployment. For this reason, we are also convinced that the central banks' reaction function will continue to focus less on price stability and more on strengthening economic performance.

Growth

From a macroeconomic perspective, the opportunities and risks for growth in the global economy are currently relatively balanced. By contrast, the capital market is currently seeing a different development: the falling interest rates at the long end of the yield curve and the significant rotation in equity favourites are, as discussed above, not justified by falling inflation, but could point to a feared dip in growth.

However, we assume that the growth of the global economy is intact. The US economy continues to benefit from the business-friendly policies of the Trump administration, which are creating the basis for growth that could be as high as 2.5–3% in real terms through deregulation, tax cuts and cheap energy. This supports both the US and the global economy. However, the current tariff policy entails risks for inflation and global growth. Our baseline scenario assumes that the tariffs will either not remain in place in the long term or that exchange rate adjustments will mitigate the negative effects and prevent global and US economic growth from weakening too much. An escalation of the trade conflict could potentially trigger a global recession, but this is currently rather unlikely. The latest leading indicators show a mixed picture, albeit with an overall positive trend. After a long period of dominance by the service sector, the manufacturing industry is now also recovering – not only in the US, but also in Europe. Furthermore, current developments in the geopolitical flashpoints of the Middle East and Ukraine suggest that the situation is defusing. If these developments continue, particularly with regard to peace on Europe's eastern border, the uncertainty that is inhibiting investment could be significantly reduced, with a positive impact on global growth.

The fact that it is no longer just the Americans who are helping to boost global growth, with fiscal packages being planned in China and Europe, adds to our optimism. Of course, we are still talking about plans and not concrete measures. In this context, it is not surprising that the leading central banks are staying the course. In view of the economic focus described above, we expect both the ECB and the Fed to cut interest rates further. However, we believe that rate hikes are unlikely.

Core beliefs

For Ethenea, as a multi-asset boutique, the three asset classes of bonds, equities and currencies are of central importance.

Bonds

Bond credit spreads are at historically low levels. However, in an environment of positive economic growth, these periods of low spreads can last for a very long time. It would take an external shock, which we are not currently seeing, for these spreads to widen. For our positioning in fixed income, this means that we are neutral with a focus on high quality and creditworthiness.

Our view on interest rates remains unchanged. Both short and longer-term rates have peaked and we expect rates at the long end to trend lower, especially in the US. The change of power in the US has reinforced expectations of strong growth and higher inflation, leading to an overshooting of longer-term rates well into January. If these levels were to be reached again, which we do not expect, this would be a major headwind for risk markets. Our preferred way to profit from this view is to buy long-term US interest rate futures or US government bonds.

Equities

We remain bullish on equities! We are currently seeing US equity markets, in particular, returning to their post-election levels. The euphoria of the post-election period has faded. We are now seeing some change in favourites, reflected in a strong sector rotation. Although US indices have not yet outperformed other markets, we believe that after two years of very positive performance, a third good year for US equities is possible. We see the gradual increase in market breadth as a positive signal. We expect performance to be in line with earnings growth in the high single-digit to low double-digit range. However, the scope for further expansion in valuation multiples is likely to be limited. The timely reduction of exposure to Mag7 has paid off so far and should be maintained after the reporting season.

FX

We expect the US dollar to enter a period of weakness. The fact that the dollar has been overvalued in purchasing power parity (PPP) terms for some time is not a new phenomenon and is not in itself a reason to hedge. Rather, it is another element in an overall picture in which the US dollar is losing strength. There are two main reasons for this: on the one hand, we expect the interest rate differential to converge in line with the interest rate path shown above, and on the other hand, the new US administration is deliberately working to weaken its own currency. Incidentally, this assessment can also be illustrated with the much-cited dollar smiley: in a diagram in which economic expectations are shown on the X-axis and the strength of the dollar on the Y-axis, the US dollar tends to be strong in both a very poor (fear) and a very good (greed) environment. However, we expect relatively central (i.e. neutral) growth, which means there is no reason for the dollar to be strong.