Investors should expect markets to be range-bound for the remainder of this year with volatility to follow in 2025, according to Vincent Mortier, group chief investment officer at Amundi.
The main reason for his caution is the US presidential election, with Republican candidate Donald Trump expected to return to the White House.
His programme, which proposes a 10% baseline tariff on products imported to the US and a 100% tariff on imported cars, as well as a range of tax cuts and stimulus measures, could exacerbate international tensions.
Mortier said: "It is still too early to fully understand the impact, but if Trump is elected and implements his proposed programme, we could see a significant resurgence of inflation, and growth could be under pressure."
Although this is not his base case, a stagflationary environment is still one that investors must be prepared for, according to the group chief investment officer of Europe’s largest asset manager.
Trump could also have big impacts outside of trade policy too. He has threatened to replace the chair of the US Federal Reserve, Jerome Powell, while some of his allies have drafted proposals to reduce the independence of the US central bank. Mortier also expects tensions with China to increase, with no improvement in sight.
The presidential election is not his only cause for concern in the US, however. The Amundi group chief investment officer also expressed worries about the path of US debt over the long run, stating that most economists agree it is not sustainable.
He said: “The growth in real GDP that the US would need to have to pay back its debt is unachievable; it’s way beyond potential. The US can monetise its debt, which means defaulting on its debt, or it could try to lower the burden through inflation.”
Another possibility is that the US could choose to ignore its debt and consider itself too big to fail, with the assumption that investors around the world will always want to invest in American assets, he added.
“It should be a systemic issue, but it might not be one, as long as the US dollar is the only reserve currency and as long as there are excess savings around the world,” Mortier said.
In the fixed income space, Mortier expects the effects of higher rates on the credit market to be felt next year.
He said: “Because of how debts are structured, the difficulties in refinancing have not yet occurred. That will begin to happen next year and in subsequent years. We will see which companies are able to cope with higher interest payments, but investors have not fully appreciated yet that some companies may default.”
He stressed that bankruptcies of very small companies have increased dramatically in recent months, which could be “the first sign of cracks in the system”.
For the next 10 years, Amundi expects 10-year US Treasuries to deliver an annual return of 3.8%, US investment-grade credit 4.6%, US high-yield credit 4.9% and US equities 5.6%, although markets could be volatile during the period.
Away from the US, Mortier expects European and emerging market equities to outperform their American peers, which is also the view of BlackRock and Vanguard.
He has a favourable outlook for UK mid-caps, which are more sensitive to the UK economic cycle compared to multinational companies in the FTSE 100.
“We find the UK very undervalued today. There is too much negativity,” Mortier said. He also pointed out the renewed interest of foreign firms in acquiring UK companies, which could boost valuations.
Mortier’s other contrarian view is China, although he recognised it has been a “painful” conviction.
“The demand for Chinese equities is non-existent, both from international and domestic investors, but I think it’s a mistake,” he said.
Chinese equities are, on average, three times cheaper compared to their US equivalents, which he said was a “very big discount”. Although there are “some risks”, the reward could be “significant”, he noted.
Privately-owned companies in China are investing, innovating and gaining market share, he continued. This contrasts with the situation in the Chinese equity market 10 years ago when it was still dominated by state-owned companies.
Mortier concluded: “China is still a nice growth story. We see more and more private companies, which are of good quality, profitable and growing. They will create value. The next step is to become more international, and I think they will.”