Three calls in three bullets:
- Tariffs to remain the key topic in 2025. Despite the severe market shock, reciprocal tariffs should be watered down – towards a 10-12% effective rate in 6-12 months. US recession odds are still relatively low in our view (30% chance) although this is critically dependent on how tariff negotiations evolve, as the retaliation/escalation risk is still very high (effective rate>25%). Tax cuts and successfully raising the debt ceiling would be a tailwind in 2H25.
- US sharp corrections - similar magnitude to past recessions after WWII - have reset valuations and improved entry points – we remain Overweight despite very high uncertainty. Excesses in IT valuations have eased substantially. We have raised US Software to Overweight – less affected by tariffs, while Health Care, Energy and Communication Services remain our favourite plays.
- European equities have narrowed their massive undervaluation gap, supported by strong fiscal stimulus. A potential Ukraine ceasefire could further sustain short-term outperformance. We stick to Neutral, as the upside is still more limited relative to the US. We have raised Utilities to Outperform, as they are reasonably immune to tariffs. Healthcare, IT and Energy are amongst our favourites. We remain buyers of China, with a supportive backdrop and enough fiscal firepower to overcome the new tariffs in place.
Thematics:
- Tariffs: i) ‘hard-tariff’ plays: if Trump’s tariffs are not watered down or retaliation escalates. Effective rate at >25%. We would favour US Healthcare Equipment, Media & Entertainment, and EU Utilities; ii) ‘soft-tariff’ plays: rates are broadly renegotiated and thus watered down over a 6-12-month timeframe. Effective rate at 10-12%. We would look at Global Semis, EU Autos and Consumer Discretionary;
- Nuclear energy: driven by energy security and AI-led demand, nuclear is making a comeback. SMRs and uranium exposure offer compelling long-term growth.