Must Read Research
Also featuring commentary from Global Economic Weekly
February 23, 2025
Candace Browning, Head of BofA Global Research
The familiar can feel inevitable until flows shift. This week, we examine whether investors are signaling peak U.S. exceptionalism as international equity allocations climb. Meanwhile, Argentina’s structural reforms are drawing fresh interest and agriculture tariffs could plant new opportunities for Latin American farmers.
The February BofA Global Fund Manager Survey (FMS) revealed steadfast bullishness as cash levels plunged to 3.5%, the lowest since 2010.
Chief Investment Strategist Michael Hartnett thinks that global optimism shows a peak in investor conviction of U.S. exceptionalism. 89% of FMS investors think U.S. stocks are overvalued. Tech allocations fell the most since September 2022 while European equity allocations rose to 8-month highs. 48% of FMS investors expect faster Chinese economic growth over the next 12 months, the highest since November 2024, with China growth acceleration cited as the most bullish potential development for risk assets. Global equities are expected to be the best performing asset class this year, followed by gold and U.S. equities. Michael thinks dips in Europe and China should be bought in 2025. On the macro, 77% of FMS investors expect Fed cuts this year with half still penciling in two or more cuts.
Argentina’s $600 billion economy is the third-largest in Latin America and home to 47 million people.
In the inaugural Argentina primer, our LatAm Economics & Strategy team highlight the country’s recent turnaround. Argentina was among the top-10 richest countries in the early 1900s but has fallen to around 70th today. Last year, the Milei administration delivered spending cuts, announced investment incentives and revisited energy regulations. Our economists think this raft of measures could unlock potential across multiple industries. After a 5% fiscal adjustment, inflation declined from 25% month over month (m/m) in Dec-23 to 2.2% in Jan-25. Improving fundamentals and market-friendly reforms fueled Argentine asset outperformance—sovereign external bonds produced 100% total returns in 2024 while equities rallied 3x. A new IMF (International Monetary Fund) deal in 1H25 could lift capital controls and help bolster reforms. Argentina is a resource-rich economy, known for its agricultural strength and some of the world’s most abundant unconventional oil and gas resources.
Tariffs on China, Canada and Mexico could disrupt agricultural trade flows and raise fertilizer costs for U.S. farmers.
Commodities Strategist Daryna Kovalska notes that the three countries collectively receive almost 50% of U.S. agriculture exports, suggesting risk in case of retaliatory tariffs. On the other hand, the U.S. imports nearly 100% of its potash fertilizer, with 85% coming from Canada. In Daryna’s view, China is the only major U.S. trading partner that can afford to impose counter-tariffs on agricultural products, potentially benefiting farmers in Argentina and Brazil. For example, Brazilian soybeans accounted for 74% of China imports after tariffs in 2018/19, up from 48% in 2016/17, as U.S. import volumes fell. Brazilian exports of chicken to Mexico and beef to China could also rise. Brazil’s agribusiness accounts for 21.5% of exports with higher productivity in recent years. Mexico would have less room to retaliate given its heavy reliance on U.S. grains while Canada remains dependent on U.S. ethanol.
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Claudio Irigoyen, Head of Global Economics, BofA Global Research
Global Letter: When confusion meets uncertainty
Executive orders are coming out of the oven at an increasing speed. Not surprisingly, market participants are confused. When companies start to have trouble rationalizing the impact of different public policies on their relevant relative prices, the option value of waiting and postpone investment goes up. The U.S. economy is still the one offering the best risk adjusted opportunities. However, policy mistakes do occur and at this point constitute the main risks to an otherwise still robust economic outlook.
United States: Congress is still the key player for deficits
DOGE (Department of Government Efficiency) has captured headlines, but significant and lasting reductions in spending will need to originate in Congress. The reconciliation proposal by House Republicans would add ~$2.8 trillion to the deficit from FY 2025-FY 2034 (Fiscal Year), and up to $2 trillion in spending reductions. This is a smaller increase in the deficit than we expected. If enacted as proposed, it would pose a downside risk to our outlook beginning in 4Q 2025.
Euro Area: Germany: it’s complicated
The German election did not deliver a clear 2/3rd conventional majority in parliament, reducing hopes for fiscal reform. We continue to expect an escape clause allowing a bigger 2025 deficit. Fiscal hopes move to a German rethink on EU ambitions.
Asia: In the shadow of U.S. tariffs
Only a few days after the U.S. hiked additional tariffs on Chinese imports by 10%, the potential for U.S. tariffs on other Asian economies looms large. Asia stands out as facing higher risk of U.S. tariffs.
