Global Outlook 2025!

Welcome to the third edition of the Global Outlook, where we discuss our macro view for the year ahead and dig deeper into the expected performance of various asset classes based on our well-researched macro view.

Undoubtedly, the highlight of 2024 was the elections in democratic countries globally. The trend has been clear: either the ruling party lost the elections, or the incumbents returned to power with a “weak”/“fractured” mandate.

The bottom line is that people worldwide have voted for change as the “real wages” / “real incomes”[adjusted for inflation] are down significantly.

Due to the plunge in real incomes, society's bottom pyramid (those who are not asset owners) has faced maximum suffering, with income inequality reaching unprecedented levels.

When we zoom out and examine the macro view, we can’t ignore the consequences of political change and the promises (populist measures) made by those in office after coming out victorious.

In 2024, the US avoided a recession, as the economy remained resilient due to massive asset price inflation across equities, crypto, and housing and the US government's high persistent fiscal deficits.

Nonetheless, other parts of the developed world, especially Europe, have been facing a tremendous slowdown in cyclical activity. In fact, many parts of Europe have experienced a technical recession this year.

China, the world’s second-largest economy, failed to revive the animal spirits with its enormous fiscal and monetary policies as the consumer sentiment plunged to all-time lows (severely depressed levels).

Furthermore, the Emerging Markets (EMs) were marred by political crises, with South Korea being the latest casualty.

Today, we will present a comprehensive overview of the current macro situation. We will also discuss our top macro trades for 2025, examine the appeal of equities, bonds, and commodities, and comprehend the influential FX markets.

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The “Global” Macro View!

As we entered 2024, the “consensus” view among market participants was a “recession” and significant (7) rate cuts in the US.

However, the US escaped a recession as a liquidity-led mega-risk asset rally led to an enormous positive wealth effect, which led to higher consumption, essentially a K-shaped recovery.

Nonetheless, the labour market has softened materially, as we have indicated since late H124.

We reiterate what we did 12 months back. Due to extreme deleveraging in the private sector and the Households (HHs), we don’t foresee a recession similar to the 2008 GFC.

In the last decade, the leverage has shifted from the private sector and HHs to the government sector, a trend which has accelerated post-COVID.

Furthermore, the private sector refinanced the debt at ultra-cheap rates post-COVID covid, which has led to lower borrowing costs (primarily for very large firms) despite higher rates.

As a result, interest payments have plunged, which has been EPS-accretive, especially for the top 100 companies in the US (cash-rich or companies with net debt that were able to refinance for longer tenors).

Nevertheless, the risk shifted entirely to the government as the US Government Debt/GDP rose to more than 120%.

Due to such a high debt/GDP ratio, the interest costs on the debt have soared.

Why is this important?