Wishing everyone a Happy New Year in advance!
In the tumultuous market environment of 2024, our global asset allocation strategy, viewed from a macro perspective, has yielded satisfactory results. The value of learning and reference has surpassed the absolute return itself, and we look forward to making further progress together with you in 2025.
The key issue to address in 2025 asset allocation is the persistence of U.S. inflation. Naturally, this involves several factors beyond economic supply and demand, including the impact of Trump’s economic policies on U.S. inflation. For RMB investors, while directly participating in U.S. money market funds is challenging, exposure to U.S. bond markets is an option. Alongside our judgment of U.S. inflation, it is essential to consider China’s CPI and PPI, as these two factors will be central to the 2025 asset allocation strategy.
We recommend referring to the second chapter of the IMF’s World Economic Outlook published in October, which provides a systematic analysis of global inflation and is worth consulting. To summarize briefly, global inflation has risen rapidly, exceeding market expectations, and its subsequent decline has also surprised the market. Currently, inflation’s persistence is also greater than anticipated. These three unexpected outcomes present significant trading opportunities, and a correct assessment of macro inflation will certainly lead to excess returns. The most recent surprise in inflation persistence occurred in September. Since then, the yield on U.S. 10-year Treasury bonds has increased by 100 basis points (bps). The Federal Reserve publishes its economic forecast quarterly, and the December update revised its 2025 rate-cut expectations down to two cuts, or 50bps. The market’s pricing of long-term rates already exceeds this by more than 50bps. Therefore, we believe the first decision for 2025 is to go long U.S. Treasuries, which presents a relatively attractive trade. If Treasury yields rise by an additional 25bps, it would imply only one rate cut in 2025. While this is a potential event, the risk is low, but from a volatility perspective, there is at least a 50bps upside, indicating a yield potential of 50bps.
Aside from U.S. Treasuries, if bond yields continue to rise by 25bps, we do not expect a major rally in the Dow Jones, but the Nasdaq may offer opportunities, albeit with increased volatility compared to this year. Therefore, we recommend maintaining a position in the Nasdaq while simultaneously holding long U.S. Treasuries. A balanced strategy should focus on positions in technology, particularly in areas of technological progress. From a macro perspective, both U.S. and Japanese economic data have shown strong fundamentals. The Nikkei, influenced by the Bank of Japan’s interest rate hikes and political party rotations, has lagged this year. However, as Japanese bond yields have plateaued, the pressure on the Nikkei from interest rates may ease, potentially leading to a rebound. Given Japan’s stable economic growth and foreign exchange reserves, its current monetary policy aims to curb inflation, which has suppressed stock market growth. Once market expectations shift—i.e., when long-term rates and inflation align—the stock market is likely to experience an expansionary effect.
In terms of commodities, gold remains in a slow bull market. During profit-taking, gold can serve as a store of value. Oil prices are heavily influenced by Trump’s energy policies and OPEC+, but geopolitical tensions in the Middle East and negotiations between Russia and the U.S. could lead to a slight decline in oil prices, though we do not expect a significant crash. Additionally, China’s economic recovery will impact oil demand as an X-factor. Overall, prices are likely to trend downward. Due to the divergence between gold and oil price movements, global commodity prices are expected to remain stable, with potential fluctuations due to specific events, though broad demand-driven volatility seems unlikely.
The importance of digital currencies will continue to rise. Bitcoin, influenced by regulatory easing, is likely to enter a prolonged bull market. As mentioned in our previous report, the financial stability concerns surrounding Bitcoin prices remain significant for regulatory authorities worldwide. As full compliance is achieved, price volatility is expected to increase in the future. We recommend concentrating investments in top-tier assets and buying on dips. Additionally, more digital currencies are entering the real information technology era. Many websites are planning to issue their own digital tokens, and over the next few years, we expect a peak in the issuance of digital tokens, which will benefit platforms involved in this sector and can be considered as investment targets.
In 2024, the best-performing market globally was Argentina, while the most promising technological direction was quantum technology. It is important to maintain a broad perspective, paying closer attention to investments in technological sectors while also monitoring the impact of macro policies on the underlying fundamentals. The improvement in Argentina’s economic fundamentals illustrates that good economic policies do not require long incubation periods. By being open to dialogue with the market, improvements in long-term expectations will quickly enhance macroeconomic data and, in turn, boost asset prices.