Note Précis Jan 30, 2025: Q1/2025 –In 2025, The Rubber Hits The Road:

Note Précis Jan 30, 2025: Q1/2025 –In 2025, The Rubber Hits The Road: For politics, central banks and corporations in  2025, the rubber hits the road     The U.S. administration has marked its campaign promises from immigration to tariffs to political demands, domestic and international. Its modus operandi appears to be aggressiveness first and then assessment, eschewing past experience or that of others. Global annual GDP growth around 3%  is both weak and severely bifurcated. As second largest economy, China has been using soft power to access materials from Africa, Latin America and even Quad member Australia. In 2022, with Europe then facing cutoff from Russia, the German Chancellor found Canada noncommittal. On energy currently, strategic diversification could be different with climate change reduced in priorities. Bull-in-a-China-Shop action likely represents greater risks than is appreciated.

Tit-for-tat tariffs or other economic cut and thrust could be consequential. Weak governments in many nations are facing challenges. In Europe, France and Germany are weakened by elections, undertaken or imminent. The same goes for Japan and South Korea in Asia and now for Canada with a caretaker government. Russia is mired in war. China has real estate weakness of unknown duration. All represent challenges for populaces, even with authoritarian management.

Trashing the imperialism over trade routes of the 19^th / first half 20^th century, then President Eisenhower in 1956 quashed it over the Suez Canal. Massive trade and prosperity expansion followed. In a world of multiple wars and tariffs with tit-for-tat risks, tension over Panama could subsequently set global precedents from the South China Seas to the Straits of Hormuz to the Dardanelles to still nascent access over the Northwest Passage, to countless smaller disputes. To distract from domestic pressures, stressed and weak governments often resort to external adventures. In the absence of global leadership and with temptations for belligerence, current political economic aspects are likely to lead to higher, not lower, capital market volatility. 

Currency gyrations are likely to expand. Into myriad uncertainty mix, the Federal Reserve has a marked tilt to classical central bank creative ambiguity in its January 29, 2025 FOMCstatement staying rates.Last in the 1970s were political pressures (one successful) on two Federal Reserve Chairmen. In 2025, political exhortation needs to be monitored. With a moderate Federal Reserve, rate cuts in Europe and domestic real estate centric Canada, only a sliver increase in Japan and direct injection in China all risk currency and trade tensions. With potential for central bank policy bifurcation in 2025 and geopolitical tensions expanding even among allies, we expect precious metals to have a role for asset mix.

In fixed income for domestic constrained investors, we favor credit spread quality focus on short to medium duration. Action worldwide is overdue on fiscal deficits. Despite increases from minimalist or negative levels, fixed income yields remain low in many jurisdictions. It make many issues basically currency, plays with political frailty increasing risks to return. For global mandates, we prefer a mix of up to 10 Year maturities with U.S. Notes, U.K. Gilts, Australian, New Zealand and Netherlands issues offering some yield risk cushion compared to other, even G-7 issues.

In equity allocation, we expect earnings in 2025 to be below consensus. Only a partial consideration are lower than U.S market valuations in Japan, Europe and the U.K.. All three have slower economic growth and ambient monetary challenges. Emerging markets remain global growth sensitive. We see reasons for focus upon diversification, selectivity, and risk premium oriented valuation. All once again have seemed absent early in 2025.

Instead of momentum for a fabulous few and elevated weightings, we would diversify via a 25% cap on Information Technology and within it. As perspective on economy changing technologies, for railroads in the 19^th century, automobiles in the 20^th century and for that matter fiber optics in the late 20^th/early 21^st century, at the company level, rationalizations were fierce not least in supposed leaders.

Salient is recognition that Japan, Europe and the U.K. have heavy weightings in Consumer Staples that undergoing restructuring pressures and which we market weight. Among those historically ascribed as being defensive, we overweight Healthcare but underweight Utilities and Communications Services due to current challenges. For portfolio diversification, imperatives over high valuations require assessment about the delivery expectations already incorporated. We choose to cap Information Technology weightings at 25%. Assessed as strategically vital, we overweight Materials and Energy. For potential cyclical/growth business transition, we favor Industrials over Consumer Discretionary.

Adequacy of capital can be simulated but only assayed during actual crisis, as experienced in 2023 in Swiss banking and U.S. regional banking. In investment funds being built on leverage, nonbank financials appear with potential systemic risk. We are overweight Financials but imperatives abound to favor the strongest engaged again in restructuring. E.o.e.  Copyright Reserved