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Investment Committee - January 2025

Key Themes and Considerations for 2025

As we embark on 2025, the global economic and market landscape continues to evolve against the backdrop of shifting macroeconomic conditions, monetary policy developments, and liquidity dynamics. The past year presented notable opportunities and challenges, with interest rate expectations playing a central role in shaping market behavior. As the investment committee reflects on recent trends and prepares for the months ahead, we aim to balance cautious optimism with a disciplined approach to asset allocation. Below, we review key drivers of portfolio performance in 2024, assess the outlook for key asset classes, and highlight potential risks and opportunities in the year ahead.


Macroeconomic Overview and Asset Class Review


Expectations surrounding the path of U.S. dollar interest rates remained the dominant macroeconomic driver throughout 2024, and we anticipate this theme will persist well into 2025. The Federal Reserve’s ongoing balancing act between inflation management and economic growth continues to exert significant influence across global financial markets.


The key driver of recent portfolio performance has been exposure to corporate credit spreads. These spreads have tightened significantly over the past year, providing notable gains in 2024. However, we are cautious about extrapolating such results into 2025. While corporate fixed-income assets continue to offer a compelling positive carry, we are approaching this space with measured caution given the narrowing spreads and evolving risk environment.


Among sovereign debt, French government bonds stand out as our preferred allocation, given their relative attractiveness in the current environment. In contrast, U.S. Treasuries face headwinds, with demand flows less aggressive than in previous years. Although we expect Treasuries to remain under pressure in the near term, we do not foresee this trend lasting throughout January, as temporary factors may provide some reprieve.


Turning to currency markets, the U.S. dollar appears to have reached an inflection point. The EUR/USD exchange rate, currently trading around 1.0250, is poised for a potential correction higher. This reflects a combination of dollar fatigue and improving sentiment for the eurozone economy.


Liquidity and Market Risks in 2025


A critical factor shaping the investment landscape in 2025 will be the evolving liquidity environment. Ample liquidity characterized much of 2024, but this dynamic is set to shift significantly in the first half of 2025. The anticipated extension of the U.S. debt ceiling midyear will likely drain up to $850 billion from the U.S. financial system. Historically, such liquidity reductions have been correlated with rising unemployment and declining productivity. These developments will require close monitoring as they could influence market performance and economic stability.


Equity markets, particularly in the U.S., remain heavily influenced by a concentrated group of technology companies – the so-called "Magnificent 7" – which drove major equity indices to record highs in recent years. A key question for 2025 is whether these companies can sustain their lofty valuations. The second half of the year could see a shift in investor sentiment if demand for their products and services wanes. This, coupled with broader economic pressures, could introduce significant volatility into equity markets.


Conclusion


For the remainder of 2025, our approach remains guided by adaptability. While interest rate dynamics and liquidity shifts present challenges, they also create opportunities for thoughtful positioning. We will continue to focus on selective allocations in corporate credit and sovereign debt, while monitoring currency trends and equity market valuations. Maintaining a disciplined and proactive strategy will be essential to navigating the uncertainties of 2025, while seeking to deliver sustainable value for our clients.


Authors: John Couletsis and Kostas Metaxas

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