Must Read Research
Also featuring commentary from Global Economic Weekly
January 26, 2025
Candace Browning, Head of BofA Global Research
Investors are always charting their next flight path. This week we’re putting 10 big themes on the radar through 2030 and take a 30,000-foot view of asset allocations.
After an era of Quantitative Easing (QE), GDP booms, and inflation shocks, we think 2025-30 will be defined by micro themes.
In “The World in 2030,” Head of Thematic Investing Haim Israel and Chief Investment Strategist Michael Hartnett highlight 10 key market drivers for the next five years. Leading the charge are A.I. and the resources required to fuel its growth. A.I. agents could begin entering the workforce within the next year, with some estimates pointing to 100bn agents in the future. To power this growth, data centers will likely consume more energy than Japan by 2026 and require more land than Singapore by 2030. An explosion of data would escalate cybercrime, with global costs projected to exceed $15 trillion by 2029-30. An estimated $94 trillion of funding will likely be needed to expand the infrastructure supporting tech and rebuild ageing assets. The end of fiscal excess, another key theme, could benefit bond-sensitives such as REITs, small cap stocks, and emerging markets.
The January Global Fund Manager Survey revealed ample risk appetite, with cash levels at 3.9%.
FMS (Fund Manager Survey) investors are still bullish equities with 41% “overweight” stocks while bond allocations are the lowest since October 2022. Michael Hartnett notes that FMS investors entered the first week of Trump 2.0 positioned for "targeted" tariffs (49%), immigration cuts (20%), and "universal" tariffs (12%). Asset allocation could stay risk-on if concerns over Trump tariffs and disorderly bonds are unfounded, which could bolster lagging risk assets. For example, allocations to European equities saw the 2nd largest monthly increase in 25 years. On the macro front, 26% of FMS investors expect a global economic “boom” in the next 12 months (i.e., above-trend growth and inflation). Similarly, expectations for “no landing” rose to 38% (from 33%) while probability of a “soft landing” fell to 50%. Long Magnificent 7 and long U.S. dollar are among the most crowded trades.
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Claudio Irigoyen, Head of Global Economics, BofA Global Research
Policy convergence: lost in translation
Trump's inauguration was a reaffirmation of the degree of policy uncertainty ahead. Perhaps most surprisingly, in terms of tariffs, the President signaled a softer-than-expected stance on China and a harsher stance on Canada and Mexico. Many Executive Orders were signed including on energy deregulation and immigration, many of which could be challenged in court.
In terms of the outlook, such policy uncertainty can have different consequences globally, including on monetary policy. A U.S. economy at potential with a stabilizing labor market and inflation stuck above target anchors our call that Fed easing is over: the Fed can afford to wait and be prudent. In contrast, overall uncertainty in general, and trade uncertainty in particular, mean other G10 central banks like the ECB (European Central Bank) and the BoC (Bank of Canada) should keep cutting, including to support the economy and let the FX act as a shock absorber.
Tariffs as a (comprehensive) negotiating tool
Many of the announcements on Day One of the second Trump administration were broadly expected, including the Executive Orders signed with a focus on energy deregulation and immigration restrictions. Among the most important issues for markets, Trump's inauguration confirmed that tariffs would not be enacted on day 1, leading the dollar to weaken, though only until Trump's comments on 25% tariffs on Mexico and Canada on February 1.
Most important, perhaps, was the fact that the inauguration speech lacked any explicit mention about tariffs on China, which the President later hinted would increase by 10pp (percentage points) (a lot less than the 60% tariffs initially touted). We have long held the view that tariffs would be used by Trump as a tool to negotiate comprehensive policy packages bilaterally.
We believe the Trump administration would be probably engaging in broader negotiations with Mexico and Canada, including tariffs and immigration, though not necessarily thinking of tariffs as a first-best outcome. In this context, toning down trade tensions with China could be intended to prevent having too many simultaneous negotiation fronts, in our view.
