Monthly house view | March 2025
Context
The world is changing fast this year. In Europe, the potential for a positive surprise that we identified in December is materialising and a revival is taking hold. Possibilities are becoming realities. In France, political risk has diminished. The prime minister, in office since 13 December 2024, has survived several no-confidence votes and his government is well on the way to having a budget for 2025. In Germany, the election result promises stability. A two-way coalition is the most likely outcome – a more market-friendly scenario than an uncertain three-way tie-up. Fiscal expansion is likely to follow. And rounding out the brighter picture, global leaders are pushing for a swift end to the war in Ukraine. For investors, this means Europe is back. A pick-up in the euro area economy may mean the European Central Bank needs to turn less dovish than previously anticipated. This will particularly be the case if a potential Ukraine peace deal stirs “animal spirits”. In the US, we now expect just a single rate cut by the Federal Reserve – in June – as price pressures prove more stubborn than previously expected.
Rebalancing
Europe’s revival is part of a broadening of returns away from the Magnificent 7 technology stocks, and beyond the US. This rebalancing is being turbo-charged by the DeepSeek effect. Advances made by the Chinese AI start-up have jolted the tech sector and stunned global markets – disruption that stands to benefit companies that integrate AI into their business models, a far wider range of businesses than just those that develop AI infrastructure.
Investment implications
Our core positioning is crucial for portfolio resilience and is set to seize on the opportunities we expect our base case scenario will present. Our strong convictions around specific markets and segments should enable investors to generate additional value. Moreover, retaining some flexibility would give investors scope to be flexible and react to unexpected surprises, be they positive or negative.
3 things you need to know
1. Europe surprise
- Political risk has diminished in France
- German election result promises stability, modest fiscal support
- The prospect of peace in Ukraine could reignite animal spirits
- Tariffs impact might be limited
2. DeepSeek catalyst
- DeepSeek disruption stands to benefit AI adopters
- Low cost of application could benefit more market participants
3. Markets broadening?
- Equity markets performance has been very concentrated in the US and in the Magnificent 7
- Europe’s brightening outlook sets European companies on track to perform better
- DeepSeek could be the catalyst for active managers