5 Factors to Monitor Between Risks and Opportunities in 2025

Plenisfer Investments SGR

1. Deflation or Reflation?

Since mid-September, bond and equity markets have been sending mixed signals.

On the one hand, in a context of extremely compressed spreads, 10-year U.S. Treasury yields have risen by over 60 basis points[1]. On the other hand, equity markets, particularly the U.S. market, have continued to hit record highs.

This is happening while central banks in nearly every country are cutting interest rates, fiscal policies remain expansive, and the U.S. economy shows signs of resilience.

This scenario can be described as reflationary, characterised by a slight rise in inflation after a period of deflation.

Have we entered a reflationary phase? In our view, no.

We believe the current stage represents the final phase of a prolonged economic cycle extended by expansive economic, monetary, and fiscal policies. Inflation, as we anticipated, appears resilient, driven by global systemic transformations: deglobalization leads to higher production costs and local reindustrialization, which the new Trump administration will further support.

Although this is not a reflationary phase, it’s essential to remember that inflation comes in waves, an eventuality that must be accounted for in portfolio construction.

2. The U.S. Anomaly

The U.S. public budget deficit is at historically high levels, reaching 7%1. This is a paradoxical situation: public balance sheets are the weakest, while corporate balance sheets are probably the strongest.

The public deficit and the current account deficit—the so-called American twin deficit—will eventually need to be balanced. How this balance will be achieved remains a significant question mark.

3. The Dollar’s Trajectory

Trump has blamed the twin deficit on the strong dollar. What strategy might he use to weaken the currency?

Recently, Trump has reportedly proposed imposing a sort of tariff on the US currency: financial flows flooding the U.S. equity market are, in fact, supporting the dollar’s strength.

We could imagine Trump, in his deal-maker nature, negotiating a 'deal' with China to orchestrate a 'currency manoeuvre' aimed at weakening the dollar and strengthening the yuan. A move that could benefit both.

This is undoubtedly an extreme tail risk but one the market seems to be disregarding for now.

4. China

For many international investors, China is seen as un-investable.Uncertainties abound due to the real estate crisis, regulatory clampdowns on the tech sector, and weak consumption reflecting a crisis of confidence rooted in the pandemic era.

In mid-September, we witnessed a brief market rally driven by expectations of fiscal and monetary policy interventions to stimulate domestic demand. There is significant scepticism about the scope of these interventions, with debates focused on this issue while overlooking a critical factor: China's remarkable industrial progress in recent years.

China has become one of the world’s leading exporters of electric vehicles in just a few years, is likely the largest producer of nuclear power plants, has made incredible advancements in robotics, and is working toward autonomy in its supply chains.

In this scenario, many Chinese companies generate cash flow, are financially healthy, and trades at much more attractive valuations than similar companies in the U.S. market.

To underestimate the potential of an economy of 1.2 billion is to ignore what has happened in other economies and what is happening and will happen in the next 20 years.

For example, in Europe.

5. Europe

Europe is the region we are most concerned about economically: on top of well-known structural issues like low capacity, low productivity, and negative demographics, there’s the crisis of Germany’s export-driven model.

What are the markets telling us today?

Looking at individual European countries, spreads indicate that among the economies most concerning to international investors is France, with total debt—including private debt—far exceeding that of Italy.

There is also a failure to grasp Draghi’s proposal: for Europe to remain competitive, it must leverage its overall scale rather than competing as individual countries, limiting mergers that would create the necessary scale to compete globally.

Europe’s economy needs to be “reflated” through a reindustrialization project, which currently seems highly unlikely.

Risks and Opportunities in the Current Scenario

From next year, we may face various risks that markets have yet to price in.

First, there’s an inflationary risk that could be exacerbated by Trump’s new trade policies, aimed at imposing tariffs not only on China but also more broadly to protect U.S. production.

Persistent inflation means that interest rates may not fall as the markets expect.

This risk is fuelled by the current conjuncture: in the absence of economic growth, negative real yields are the solution for reducing high government debt. In Europe, looking at the German yield curve, we already see yields below inflation, i.e., negative real yields.

We may, therefore, need to protect ourselves against a sudden wake-up call on public debt: how?

In the bond area, by favouring short-term maturities and steepening positions on the U.S. curve, where nominal rates remain above inflation and offer positive real yields.

U.S. equity markets, benefiting from prolonged stimulus, maintain high valuations compared to European markets weighed down by a strong U.S. dollar and geopolitical uncertainties. This valuation gap between European and U.S. equities presents opportunities for stock selection, particularly in sectors poised to benefit from infrastructure development, supportive public policies, and the digital and energy transitions.

Specifically, we focus on beneficiaries and enablers of these secular transitions, as well as the raw materials that are essential to their realisation, such as uranium, the demand for which is expected to increase as nuclear energy production increases.

Let’s not forget gold, which, in the current context of uncertainty, remains the ultimate real asset for risk protection.

Finally, real economic growth must be sought.

China, relatively insulated from broader geopolitical shifts, may offer selective opportunities in sectors independent of global macro trends.

We continue to look at Emerging Markets with increasing interest, carefully assessing fundamentals and associated risks, favouring countries with low debt and current account surpluses. Countries like Brazil and Mexico present both challenges and opportunities due to currency fluctuations and economic ties to U.S. trade policies. A potential depreciation of their currencies could signal a buying opportunity for neglected areas in both equity and fixed-income markets.

[1] Source: Bloomberg

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