Sovereign Debt

Acute geopolitical risks, like a massive oil shock, may be abating. But structural geopolitical risk remains high and could upset a blithe market. Cyclical economic risks are underrated as the US slows down and China continues to stumble. Investors should book some profits in anticipation of tariff implementation and a downturn in hard economic data.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.

President Trump’s big beautiful bill will pass but faces near-term hurdles and will not tighten the government’s belt. It will combine with renewed tariff implementation to generate near-term risk for both the bond and stock market. The Iran crisis fizzled, saving Trump from a major oil shock that could have derailed his second term.

Bond market volatility will spike again in the near term. The Fed is committed to an easing cycle yet the Trump administration’s signature fiscal policy action will stimulate the economy. Tariffs are supposed to keep the budget deficit contained but they are inflationary. 

Rising bond yields may present an even greater danger to the global economy than the trade war. With equity valuations no longer discounting much economic risk, investors should position themselves defensively.

There is an ongoing regime shift in Indonesia: SOEs will be used to drive economic growth. Bank loans will accelerate, but their profit margins will shrink. Despite higher nominal growth, Indonesian equity prices in US dollar terms will not see a sustainable bull market. Downside risks to currency and upside risks to domestic bond yields have also increased.

The South African government seems to believe that some fiscal retrenchment can stabilize the public debt-to-GDP ratio. But that’s a misconception. The country will need draconian spending cuts to achieve this.

Argentina is entering a regime shift from the traditional short boom-bust cycles of the past 50 years. Profound structural reforms will result in a productivity boom, leading to a more durable economic expansion while keeping with the disinflation trend. Authorities will likely lift capital and currency controls in the second quarter of this year. All in all, odds are that Argentinian assets have entered a multi-year bull market.

For our last publication of the year, we explore five key themes that will dominate the European macro landscape and markets next year. While the start of 2025 will be challenging for European assets, the latter part will offer some much-needed relief.