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It’s possible that the Federal Reserve will pause the ongoing reduction of its balance sheet known as quantitative tightening. Not because policymakers are concerned about the level of bank reserves or liquidity in the Treasury market, but because the US Treasury has reached its debt limit. According to the minutes of their January meeting, policymakers discussed this at length, which often is a hint to the markets. Once the debt-ceiling situation is resolved, the Fed may continue to taper, but probably not for much longer. Chair Jerome Powell and company aren’t attempting to empty the shelves but right-size its holdings in relation to the markets. We think that number will still be enormous, probably around $6 trillion. But with the uncertainty in fiscal policy, trade and geopolitics, the Fed is surely not interested in pushing its luck by excessively decreasing its holdings.
Deborah Cunningham, Chief Investment Officer for Global Liquidity
Consumers in the US are in a mood as their expectations of future inflation have spiked upwards. Businesses are better judges of future inflation, though, and per the Atlanta Fed, they see unit costs rising 2.3% over the next 12 months, unchanged from one year ago. Indeed, consumer confidence in the US has not been a good predictor of spending in recent years. Payment network, Visa, studies consumer spending momentum; it found that both discretionary and non-discretionary spending is improving even if 2024 was so strong a year that growth levels will be hard to surpass. According to Moody’s, the affluent now account for a record 49.7% of consumer spending. Household balance sheets are solid, with the ratio of net worth to disposable personal income near an all-time high due to asset price appreciation.
The major question appears to be whether or not government policy will undermine aggregate demand. Interestingly, the recent spike in weekly jobless claims, from 220,000 to 242,000, might suggest DOGE was to blame, but the uptick for DC, Virginia and Maryland amounted to only 2,800. No matter, consumers are wondering, “Is Elon coming after me?”
Linda Duessel, Senior Equity Strategist
We’re seeing more short-term, momentum-driven behaviour in the market due to the frequent issuance of executive orders and policy announcements. However, President Trump’s pro-growth, pro-economy agenda is particularly supportive of small and mid-cap stocks, which form the backbone of the US economy. Revenues for small and mid-cap companies are 70-80% domestically focused whereas their large cap peers are at 50%. This should provide insulation from tariffs and these small and mid-cap companies will benefit from the “America First” agenda and proposed tax cuts. We anticipate this short-term market volatility to subside in the coming weeks as the initial surge of activity from the new administration diminishes, and a clearer understanding of the policy landscape emerges. Despite the current short-term fluctuations, we remain confident in the strength of the underlying domestic economy. In these uncertain times, holding a portfolio of cash-generative companies with strong balance sheets appears to be a prudent strategy.
Charlotte Daughtrey, Equity Investment Specialist
President Trump’s additional 10% tariff announcement on Chinese goods brings the total tariff to 20%. This move generally aligns with market expectations since his election win, with some bear case analysis predicting tariffs as high as 40%. In response, the Chinese government has imposed tariffs ranging from 10% to 15% on US agricultural goods and has banned trade with certain defence companies. This measured retaliation suggests that Beijing is open to negotiations and hopes that US farmers, who are key Trump supporters, might influence his decisions.
Meanwhile, Mexico and Southeast Asia have seen significant benefits from the global supply chain reshuffling, attracting strong foreign capital inflows as companies establish non-China production bases. So far, we have heard little discussion about tariff changes affecting these Asian trade hubs, which have facilitated indirect trade from China to the US. However countries like India, Taiwan, and South Korea could face potential tariff increases based on reciprocal measures.
In summary, global trade is facing significant uncertainties. While the risks for China have been widely discussed, the potential impacts on other countries have not been fully considered.
Sandy Pei, Senior Portfolio Manager for Asia ex-Japan
Europe has faced many challenges over the last few weeks including contending with the threat of tariffs, souring US trade relations and the need to increase defence spending at a time when many European countries have been struggling with high debt and low growth. But despite this challenging political and policy backdrop, European credit has outperformed its US counterpart year to date – much like equities. We think European credit’s, outperformance has been largely driven by structural flows into the asset class given the greater degree of certainty on the European Central Bank’s easing bias, versus the Federal Reserve and also more severe valuation constraints in USD spreads. Given that valuations are now equally expensive across Euro and US-Dollar Credit assets, we are now advocating more of a neutral exposure across both regions. For the credit market as a whole, we see slowing growth and inflationary policies pressuring spreads. But the high quality bias of the market and the sustained demand for yield should keep spreads from spiking significantly wider, bar, for example, a return of any material systemic shock or renewed rates volatility. Ultimately, we think, carry should be the dominant driver of returns in Credit in 2025 and defaults will remain towards the lower end of their historical ranges.
Nachu Chockalingam, Head of London Credit
While interest rates have fallen in recent quarters thanks to a gradual relaxation of fiscal policy across central banks, leverage within private equity investments continues to be under the spotlight. The lower mid-market segment therefore remains an attractive space to deploy capital, as portfolio companies display value creation opportunities outside of financial engineering that are not reliant on leverage, such as the implementation of operational enhancements and improvement of top-line growth.
Karen Sands, COO, Private Equity
It’s no secret that the UK Real Estate sector been challenged in recent years from structural changes to its underlying investor base as many of the traditional domestic holders have been derisking or pulling back from the sector. Against the backdrop of higher interest rates and other macroeconomic factors, transactional volumes, fund launches and Real Estate equity raising have all been at historic lows, cross-border investment into the sector has slowed, and portfolio valuations have seen overall declines until recently.
But ahead of this year’s MIPIM conference, market sentiment is becoming more optimistic. It is not all doom and gloom: some property sub-sectors continue to move ahead of others in terms of demand from both investors and tenants (e.g. living and logistics), and the continued bifurcation in demand for the ‘best’ office assets versus those heading to obsolescence provides opportunity for managers and developers alike to make the most of current pricing for retrofitting, opportunistic or value-add strategies. Despite where we have been (or perhaps because of it), market sentiment and valuations are improving, with conditions now much more conducive for a wider range of investor risk appetites to start considering their Real Estate allocations again. We also expect to hear more conversations at MIPIM around increased investor interest in needs-based sectors such as living, where the demand-supply dynamics continue to support pricing, long-term growth and income generation.
Selena Ohlsson, Director – Client Solutions, Real Estate
As expected, following the stabilisation of inflation and recent interest rate reductions, M&A volumes have accelerated rapidly. Private equity has amassed significant dry powder and, after a period of subdued activity resulting in a backlog of exits, have kicked off 2025 with a flurry of transactions.
Unitranche funds have outgrown the lower middle market, having ballooned in size as investors sought to gain access to an asset class offering inflation protection, diversification and yield. As a result, the banks, and senior secured debt, have regained the dominant position, forcing improvements in documentation and offering more conservative capital structures.
While senior secured pricing has remained stable, intense competition to deploy in the unitranche market has seen spreads reduce to levels starting with a five alongside weaker documentation. While unitranche fund investors will be delighted at their money being put to work, the impact of lower fund returns with looser loan terms will be felt in the future.
Laura Vaughan, Head of Direct Lending
Recent geo-political developments and the impact on the global trade, inflation and market sentiment, may reveal examples of strategy drift amongst some investments previously characterised as infrastructure. Relative immunity to market volatility should be a critical feature of infrastructure investment. Despite market volatility and the uncertain global political environment, Infrastructure managers must continue to seek out viable opportunities for clients that benefit from infrastructure investment characteristics.
Our focus has shifted to the intersection of digitalisation, power consumption and energy transition. Increasing digitalisation of our lives is a global trend. There are over five billion internet users worldwide, and the average person has nearly eight social media accounts. Rapid advances in AI are reshaping our lives, the economy and power networks. Supporting this evolution, the infrastructure, both physical and technological, as well as the financial and contractual models required to support this, will need to evolve rapidly. However, resilience to market shocks must be part of the solution.
Emma Howell, Co-Head of Infrastructure
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