By Dr Nannette Hechler-Fayd’herbe, Head of Investment Strategy, Sustainability and Research, CIO EMEA
- Deeper rate cuts by the ECB support European corporate bonds but weaken the euro.
- We see a buoyant GCC outlook, in the absence of any geopolitical escalation in the Middle East.
- A positive start to the Government of National Unity in South Africa bodes well for 2025.
Eurozone: ECB’s easing cycle to play a bigger role in 2025
Eurozone economies’ fortunes will continue to differ in 2025, while the prospect of US tariffs creates downside risks for the euro area. We anticipate the ECB cutting rates to 1.25%, or further if growth slows very sharply, and the euro weakening against the US dollar in response. Eurozone equities should continue to underperform versus global equities, although we note catch-up potential for the French stock market. In fixed income, we believe German Bunds will outperform. We expect French sovereign bonds to continue offering yields roughly approximate to those available on Spanish debt and see no significant potential for the difference between French and German government yields to narrow. Overall, we prefer eurozone corporate over sovereign bonds.
Swiss real estate and UK GIlts attractive sources of income
Swiss growth should stay close to its potential. With the Swiss economy’s other strengths (the private sector’s capacity to innovate, strong external balances and limited public debt), we expect the Swiss franc to appreciate further. However, given current low levels, we prefer corporate bonds and particularly real estate funds as sources of additional income in portfolios. We expect Swiss equities, as measured by the Swiss Market Index (SMI), to reach 12,370 over the next 12 months.
The UK’s Autumn Budget should help growth reach 1.8% in 2025. We expect the Bank of England to continue cutting interest rates to a terminal rate of 2.5%, some way below market expectations. This view helps inform our preference for Gilts, and our cautious view on sterling.
Oil questions for Saudi Arabia, buoyant UAE
The reversal of voluntary oil production cuts from the Organization of the Petroleum Exporting Countries (OPEC) will likely boost GCC (Gulf Cooperation Council) real GDP growth from below 2% in 2024 to above 4% in 2025. We also expect GCC central banks to follow the Fed with rate cuts, given well-behaved inflation. Although this is a favourable backdrop, the implied downtrend in oil prices resulting from increased supply could nudge Saudi Arabia back to fiscal and current account deficits despite a sharp rebound in real GDP growth. This is because current crude oil prices are well below the level required to balance the country’s budget. In response, Riyadh is already making cutbacks on mega projects like Neom, a vast city in the desert. In the medium-term, however, we expect these adjustments to be manageable, as recent reforms in tax, labour, and immigration will add resilience to the economy.
A favourable oil output agreement with OPEC and a thriving service sector should make the UAE the Middle East’s star performer in the next few years. The country’s real estate market in particular should continue performing strongly thanks to a robust influx of talents from overseas, booming tourism, and a more favourable global interest rate environment. The country’s healthy twin surpluses will also safeguard its economy from any temporary shock. However, the worrisome situation between Israel and Iran will be a key risk to watch. Any de-escalation of conflict in the Middle East under the influence of the new US administration would create tailwinds for the economy and GCC assets.
Uneasy cuts in Turkey and Central and Eastern Europe
In Turkey, the return to a more orthodox monetary policy has kept real interest rates high, increased currency reserves modestly, and capped the inflationary spiral to a certain degree. The cost of this process will be a further deceleration in growth to 2.5%. Yet it will be accompanied by a narrowing of the current account deficit to just above 1.0-1.5% of GDP. The government’s new medium-term plan remains somewhat unrealistic in its assumptions around tax receipts and budget balance excluding interest payments. Cooling growth and inflation will allow the central bank to start cutting its benchmark rate for the first time since 2023.
Central and Eastern European countries that led the global monetary easing cycle will see disinflation run its course and growth rebound in 2025. In Poland’s case, the central bank will keep rates on hold in the near term due to worries about sticky core inflation, but we expect it to resume rate cuts in early 2025 when visibility on regulated prices improves. In Hungary and Czechia, monetary easing will come to an end as inflation begins to rebound into the new year.
Some hopes in South Africa
The government of National Unity in the Republic of South Africa has seen a positive start since the general election, with the allocation of ministerial positions to the second largest, broadly centrist party Democratic Alliance reassuring markets. The government’s latest medium-term budget policy statement kept its primary surplus guidance (ie higher income than current spending) despite modest revenue setbacks. A confluence of favourable developments has allowed the country to avoid electricity blackouts for an extended period despite heavier winter demand. We expect the South African economy to see a modest growth rebound to around 1.5% in the medium term, with inflation staying within the central bank’s target range. This points to two more rate cuts of 25 bps this cycle, which should support South African credit and equities. The key risk for this forecast will be the rand, which has experienced significant volatility after the US election.