In November, some of the most speculative assets of the 'Trump Trade' generated the highest returns. Looking ahead to December and 2025, how will global assets fare?

Recently, Michael Hartnett, Chief Investment Officer of BofA Securities, released the 2025 investment outlook report, stating that the global market will continue with the theme of 'big policy, big moves, big tail risks', leading to further differentiation in the global economy in 2025. The U.S. economy will exhibit 'inflationary prosperity,' while other regions face the risk of 'deflationary decline.'

Regarding which assets to invest in for 2025, Hartnett suggests taking a bold approach and provides five major investment strategies:

1. Long 'U.S. Prosperity', Short 'Global Recession' themes in Q1

'U.S. inflationary prosperity' and 'global deflationary decline' may lead to an overblown dollar and stock market in the first quarter. Investors have heavily positioned themselves in the Trump trade, anticipating a rise in the U.S. dollar, U.S. stocks, and bond yields. We believe that U.S. small-cap stocks (E-mini Russell 2000 index) are best positioned for the overblown trade, due to a combination of U.S. tariffs, immigration controls, deregulation, tax cuts, and inflation.

In contrast, Europe, Asia, and emerging markets show significantly weakened economic momentum as they enter 2025, especially in manufacturing (PMI 45-50), even before the outbreak of trade wars. Banking/financial sectors performed the best in Europe, Japan, and China in 2024, but now entering the first quarter will be the most vulnerable/best short opportunity, as investors may be forced to fully price in the 'global deflationary decline'.

2. Buy non-U.S. stocks in Q2, betting on a shift to accommodative policies in Europe/Asia

Heading into spring, we expect a combination of the Federal Reserve turning hawkish and "policy panic" in Europe and Asia; 'American exceptionalism' reaching its peak in the second quarter, indicating: a. Major adjustments in the US stock market (strong US dollar + weak global economy = unfavorable, as 30% of S&P 500 index revenue comes from overseas);

b. Asset allocation shifting towards cheap international stocks and currencies, attracted by more Chinese fiscal easing, new European fiscal easing (German elections/Russia-Ukraine conflict easing), and ECB's aggressive rate cuts, all in response to the expected "US tariffs;

the combination of lower interest rates, cheaper currencies, and lower oil prices = significantly looser financial conditions in Asia and Europe in the second quarter, supporting funds rotating towards European cyclical stocks and emerging market currencies.

3. Being bullish on gold and commodities throughout the year, expecting inflation to rise higher than anticipated.

Due to unexpected inflation rising, looking to copper, raw materials, within the commodity sector.

Overdone fiscal policy, economic isolationism, and AI will continue to override any deflationary factors in 2025; if the Trump administration allows a second wave of inflation to occur it would be politically negligent, but economic prosperity means higher rather than lower inflation, and the US is at full employment at the start of 2025.

The BofA investment clock indicates that the bullish 'recovery' phase in the stock market in 2024 (falling rates and rising EPS) may be replaced by the commodity bullish 'prosperity' phase in 2025 (rising EPS and rising rates); a steepening of the yield curve in the first quarter signals this shift, with bonds starting to reflect 'inflationary prosperity' rather than 'rate cuts';

We believe that with inflation surpassing expectations, gold (buy below $2500/oz), cryptos, and unpopular commodities asset classes will excel in 2025, with copper, raw materials, Latin America, and commodities being the best investments once 'policy panic' arises in Asia and Europe.

Buy 5% yield US Treasury bonds.

In 2025, if the US bond yield rises to 5%, it is a huge opportunity. If the US Treasury bond yield exceeds 5%, it can be heavily bought, this level will trigger: a. volatility and risk asset losses; b. "inflation prosperity" reaching its peak, c. innovative solutions to reduce the US budget deficit. The disorderly rise in bond yields poses the biggest threat to the stock market, but we believe that the US Treasury bond yield is more likely to be below 4% rather than above 5% by the end of 2025... This will turn the global stock market's volatility in the first half of the year into a 5-10% increase by the end of the year.

Long cryptos and Chinese stocks, hedge AI/technology stock bubble risk.

Investors must hedge against unexpected tail risks, such as: the end of the Hong Kong linked exchange rate system, the "America First" policy leading to the disintegration of the Euro or the European Union turning towards the East, Trump's tariffs causing a sharp contraction in the US economy, a second wave of inflation forcing the Fed to raise rates, a new inflation-friendly Fed chairman in 2026 causing the US dollar to depreciate, and the typical Wall Street bubble in the field of artificial intelligence.

We believe that the bubble in AI/seven giants is the most apparent "tail risk", as many investors anticipate that the $7 trillion currency market funds will eventually flow into the US stock market (if tighter financial conditions in the first quarter fail to curb investors' animal spirits, it will really be like 1999). We believe that among the seven major tech giants bubble, going long on cryptos and Chinese stocks (undervalued/technology-related) is the best choice.

Editor/Somer