The Fed Cools Market Expectations for Significant Rate Cuts in 2025

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The Fed has cut rates for the third time since March 2020 by 25 basis points, as expected. International asset managers highlight that Powell acknowledged this decision was “more difficult” than previous meetings and emphasized it was “the right decision” given current conditions. This follows the recent FOMC communication emphasizing the merits of a “gradual” normalization of policy, supported by resilient economic fundamentals and growing political uncertainty with the arrival of President Trump.

“A significant modification in the statement’s language reinforces how measured this trajectory is. The incorporation of the ‘magnitude’ and ‘timing’ signals a slower rate-cutting path, with markets now pricing in a 90% chance of a pause in January, aligning with our assessment. Powell reinforced this message, noting that while policy remains restrictive, they are ‘significantly closer to neutrality,’ justifying a more cautious approach reflected in the reduction from four to two projected cuts in 2025,” says Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International.

For Dongyue Zhang, Head of APAC Investment Specialists for Multi-Asset Investment Solutions at abrdn, the Fed took a hawkish tone. “These signals solidify our view that the Fed will pause in January as it slows the pace of easing. We expect a cut in March, depending on continued cooling of inflation. In our view, there’s a higher risk of fewer moves, especially if we see fireworks in the early days of the Trump administration. Judging by the slight shift in the Fed’s statement, we anticipate increased volatility due to policy changes under the Trump Administration in 2025,” Zhang notes.

This new stance represents another significant adjustment in the Fed’s approach, which just three months ago led to a 50-basis-point cut. “This shift aligns with the idea that persistent inflationary pressures would prevent the Fed from implementing the easing cycle markets had anticipated. Instead, we expect the Fed to recalibrate its policy, shifting from a restrictive stance to a less restrictive one. That’s exactly what’s happening, with Powell hinting that the central bank might end consecutive cuts, potentially pausing as soon as its next meeting in January: ‘We are at, or near, a point where it will be appropriate to slow the pace of further adjustments,’” says Jean Boivin, Head of the BlackRock Investment Institute.

In this regard, George Brown, Senior U.S. Economist at Schroders, expects an additional quarter-point cut in the March 2025 meeting, followed by a 50-basis-point hike in 2026. “It’s true that the central bank’s reaction function could be distorted if its independence were undermined by the Trump Administration. However, in our view, measures to ensure that independence are sufficient to mitigate this risk, as is the fear of market backlash,” Brown explains.

The Key Lies in the Dot Plot

Regarding the Summary of Economic Projections (SEP), Ahmed notes that the Fed appeared less aggressive in the dot plot: “The 2025 dot removed two cuts, exceeding market expectations of just one less cut. This adjustment is accompanied by stronger growth projections, higher inflation, and lower unemployment in 2025,” he states. He adds: “Importantly, the committee’s assessment of the long-term neutral rate was adjusted upward, with the median rising from 2.9% to 3%, and the central trend range increasing to 2.8%-3.6%.”

For Daniel Siluk, Head of Global Short Duration & Liquidity and Portfolio Manager at Janus Henderson, the SEP is markedly hawkish, with only two rate cuts projected for 2025, indicating heightened concern about the persistence or resurgence of inflation. “Inflation forecasts for 2025 have been revised upward to 2.5% (from 2.1%). Economic growth projections have been slightly raised for 2025, to 2.1% from 2.0%, but downgraded beyond the forecast horizon, with GDP growth for 2027 revised down to 1.9% from 2.0%. This suggests that more restrictive monetary policy has yet to make a significant dent in the economy,” notes Siluk, who observes that the market’s initial interpretation was hawkish, as evidenced by the flattening of the yield curve.

“Powell made it clear that a slower pace of cuts is the baseline case. He argued that inflation is still moving in the right direction, downplayed some of the stickiness in core inflation, and noted that the labor market is still cooling, but only gradually. We believe that if tariffs were the primary reason for the inflation uptick, we would have expected to see a softer growth forecast for 2025. Powell himself seems to have discounted tariffs, citing significant uncertainty regarding the scope, timing, and impact of tariff measures. We maintain our forecast for two more rate cuts next year, but risks have clearly shifted toward fewer (or no) cuts,” Bank of America analysts add.

David Page, Head of Macro Research at AXA IM, takes it a step further, predicting that the Fed will cut rates only once in March next year to 4.25%, depending on the magnitude of the new administration’s policies. “We are also more pessimistic about the long-term impact of these policies and expect them to weigh on growth through 2026, which we believe will prompt the Fed to resume easing in the second half of 2026. We forecast the FFR to end 2026 at 3.5%, now aligned with the Fed’s projections, but we do not believe the path will be as smooth as implied by the Fed’s mild cuts of 50, 50, and 25 basis points,” Page concludes.

SPVs vs. Structured Notes: Which is the better option?

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Managing modern portfolios demands flexible and diversified financial instruments that enable the maximization of returns while managing risks efficiently. Two widely used instruments in this context are structured notes and special purpose vehicles (SPVs). While both serve specific purposes, their applications vary depending on project needs, portfolio structure, and investor risk profiles, explained the specialized firm FlexFunds.

To choose the most suitable instrument, portfolio managers must deeply understand the characteristics, uses, and risks associated with each tool, ensuring they align with their clients’ objectives and needs. Below, we examine the specifics of each option.

Structured notes

Structured notes are customized financial instruments that combine fixed-income elements with derivatives, offering managers potential returns tied to underlying assets like stocks, indices, or commodities.

When to use a structured note:

  1. Risk-adjusted return optimization
    Structured notes enable tailored risk-return profiles. They are valuable for managing portfolios focused on capital preservation while capturing moderate returns.
  2. Access to complex assets
    Portfolios seeking exposure to hard-to-trade or replicate assets (e.g., custom indices or baskets of stocks) can use structured notes as an efficient solution.
  3. Risk hedging
    These instruments allow for hedging strategies, such as market downturn protection, often at a lower cost than directly trading derivatives.
  4. Cash flow management
    Structured notes offer flexibility in terms of maturity and coupon payments, facilitating integration into portfolios with specific liquidity needs.

Risks:

  1. Counterparty risk: They rely on the issuer’s solvency, typically banks or financial institutions. If the issuer defaults, the investment could be lost.
  2. Illiquidity: These notes are illiquid and challenging to sell before maturity.
  3. Complexity and transparency: Their structure can be difficult to understand, and associated fees may lack transparency, potentially negatively impacting the investor.

SPVs (Special Purpose Vehicles)

An SPV is a separate legal entity created to manage specific assets or risks, isolating these operations from the parent company. These structures are commonly used in asset securitization and specific projects.

When to use an SPV:

  1. Risk isolation: SPVs separate risks associated with specific assets from the parent company’s general balance sheet, protecting both investors and the parent company.
  2. Financial flexibility: They enable capital raising through tailored instruments, such as bonds or structured investment vehicles.
  3. Risk distribution: Funded by multiple investors, SPVs distribute risks among participants.
  4. Cost efficiency: Depending on the jurisdiction, SPVs may be more cost-effective to establish compared to other alternatives.
  5. Management of complex assets: For portfolios including illiquid or high-risk assets, SPVs simplify the repackaging, valuation, and sale of these assets.

Risks:

  1. Operational complexity: Structuring and managing an SPV can be complicated and require technical expertise.
  2. Transparency issues: Legal separation does not always fully eliminate reputational or financial risks to the parent company.
  3. Market exposure: SPV performance depends on the assets it manages; if these assets underperform, investors may face losses.

Both instruments offer significant benefits, but the choice depends on portfolio objectives and strategies. Structured notes are suitable for managers seeking diversification with some level of protection, while SPVs are ideal for specific projects or asset structuring. The key is to carefully evaluate the risks, costs, and benefits of each option before making investment decisions. The table below summarizes the main differences between these instruments.

 

As a leader in creating investment vehicles through Irish SPVs, FlexFunds simplifies a process traditionally seen as complex and costly. Thanks to our expertise and innovative approach, we enable portfolio managers to design investment structures tailored to their strategies, achieving faster and more cost-efficient execution.

By combining the advantages of structured notes and SPVs, FlexFunds offers customized solutions that maximize efficiency in capital raising and distribution. These solutions are also cost efficient, as they can be issued in half the time and cost associated with conventional alternatives.

To explore how FlexFunds can enhance your investment strategy in international capital markets, don’t hesitate to contact our specialists at info@flexfunds.com

The outlook for financial markets

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The Republican party’s sweep of the US election is likely to boost equity markets, particularly those in the US, if the pattern of the first Trump administration is any guide. The risks are that either growth accelerates by too much and the US economy overheats, or that large tax cuts prompt a negative reaction from the bond market. We will have to wait until there is more clarity, not only on any policy proposals, but also on what can actually be implemented.

Aside from political developments, developed market central banks are cutting policy rates. This should boost both equities – as shorter-term financing costs fall – and fixed income, as the policy rate component of bond yields declines. Of course, anticipating the reaction of markets is not as simple as that because the other, arguably more important, factor driving asset prices is economic growth.

Investors should initially be circumspect in anticipating positive equity returns during a rate-cutting cycle given that four out of the last five such cycles in the US coincided with a recession. Not surprisingly, the onset of a recession led to negative returns in equities alongside gains for government bonds.

The critical consideration in anticipating returns for next year is whether 2025 will be exceptional in not having a recession.

A preference for US equities

The consensus view has been that the US will indeed see a soft landing – that growth will slow, but remain positive as core inflation moves back towards the US Federal Reserve’s 2% target. Europe has already had a slowdown, but we believe 2025 should see a modest rebound. Economic growth would be supportive of equity markets and earnings, leading to price gains in the year ahead.

Our regional preference remains the US. Enthusiasm for artificial intelligence was the primary driver of rising earnings in 2024; the bulk of earnings derived from the types of stocks making up the tech-heavy NASDAQ 100 index, while the rest of the market saw barely positive growth.

In 2025, the distribution is expected to be more balanced, even if NASDAQ earnings growth is still superior (see Exhibit 1).

 

European equities should also see market gains, but once again lag most other major markets. The region remains hindered by the overhang of geopolitics and structural challenges facing its largest economy, Germany.

Consumer demand in Europe will need to rebound much more strongly than we anticipate for consumer-linked sectors to thrive. Exporters will benefit from robust US growth, though tariffs remain a worry. China is unlikely to pull in European products the way it has in the past as growth in China slows.

The potential for superior returns in China will depend primarily on actions from the central authorities. China remains distinct in its dependence on government policy to drive economic growth and hence corporate profits.

While we anticipate more stimulus from Beijing, it does not look likely there will be a major change in economic policy; Beijing will probably continue to focus on investment in new, developing industries rather than nurturing household consumption or bailing out property developers.

We question whether these privileged sectors will be able to generate growth for the whole economy at the rate the authorities would like. Without a stronger rebound in the property market, consumer sentiment is likely to remain depressed. Looking to exports to make up the slack may also prove insufficient due to rising global protectionism.

Chinese earnings should nonetheless rise, at more than 10% year-on-year if consensus estimates are correct, though this is not that much more than Europe at 9%. Valuations are low relative to history, but there may now be a permanent discount to multiples versus the past, meaning  price-earnings ratios will not necessarily revert to the mean.

Fixed income – Opportunities and concerns

The risk to market expectations for short-term rates in the US comes from the potentially inflationary impact of the new Trump administration’s policies (tighter immigration, tariffs, tax cuts). At this point, however, one can only speculate on what will actually be implemented.

Longer-term Treasury yields could rise to reflect the uncertainty about the outlook for inflation, to say nothing of the US budget deficit. An extension or expansion of tax cuts would only lead to a further deterioration in the fiscal outlook.

As always, however, it is unclear if and when the market will decide to fully price in these risks. We would anticipate ongoing support for gold prices as investors look for alternative safe haven assets.

Investment-grade credit should provide superior returns relative to government bonds as spreads remain contained alongside steady economic growth.

While spreads are narrow – both in the US and in the eurozone, and both for investment-grade and high-yield – they are relatively better for eurozone investment-grade credit, and we see this asset class as offering the best risk-adjusted returns.

Daniel Morris, Chief Market Strategist at BNP Paribas AM

“We are fully invested and bullish on the M&A environment in 2025 due to favorable tailwinds”

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GAB24 bullish M&A 2025
Photo courtesyFrom left to right: Willis Brucker, Paolo Vicinelli and Ralph Rocco, portfolio managers at Gabelli

Throughout the first three quarters of 2024, Global M&A activity totaled $2.3 trillion. The technology sector led in activity with a total volume of $375 billion, accounting for 16% of overall value, followed by Energy & Power at 16%/$374 billion and Financials at 12%/$308 billion. Drivers of M&A have recently been mixed, according to Gabelli Partners. Portfolio Managers Ralph Rocco, Willis Brucker and Paolo Vicinelli point out that there have been some headwinds in recent years, namely a hawkish regulatory environment fostered by aggressive anti-trust regulators in the US, who were suing deals based upon novel antitrust theories. “This aggression likely led to some management sitting on the M&A sideline. For those companies pursuing M&A, the aggressive regulators dissuaded some managements from pursuing deals after the deal deadline, caused spreads on other deals to widen, and were successful in blocking a few deals”. Nevertheless, the team points out that some tailwinds have emerged lately, leading to increased deal volumes, and have generally been positive drivers of performance.

Rocco, Brucker and Vicinelli are the portfolio managers leading the GAMCO Merger Arbitrage strategy, which has been in place since its launch in 1985 and has a UCTIS version, the GAMCO International Sicav GAMCO Merger Arbitrage UCTIS – Class I USD, launched in 2011. The investment process has remained unchanged over these 39 years, irrespective of whether the market environment was positive or negative. “We take what we believe is a conservative approach to M&A investing,” they say.

They tipically initiate deals with a small position size, which they may increase as deal hurdles and milestones are met. Position sizes are generally limited to ~5% of the total portfolio at cost, which contributes to the desired outcome of being diversified. Finally, they continuously monitor pending transactions for all the elements of potential risk, including: regulatory, terms, financing and shareholder approval. “We trust that our consistent approach will enable us to continue to earn positive risk-adjusted absolute returns for our clients”, PMs add.

 

Can you explain your approach to investing in M&A in the public markets?

The announcement of a deal is the beginning of our investment process. Simply stated, merger arbitrage is investing in a merger or acquisition target after the deal has been announced with the goal of generating a return from the spread between the trading price of the target company following the announcement and the deal price upon closing. This spread is usually relatively narrow, offering a modest nominal total return. Since deals generally close in much less than a year’s time, this modest total return translates into a much more attractive annualized return.

The objective of our merger arbitrage portfolios is to provide positive “absolute returns,” uncorrelated with the market. Returns are dependent on deal closures and are independent of the overall stock market movement. Deals complete in all types of market environments, including the recent 2022 market decline, which led to a +2.8% performance for the Merger Arbitrage strategy fund while the broader equity and fixed income markets were down double digits.

We have been managing dedicated merger arbitrage portfolios since 1985 as a natural extension of Gabelli’s Private Market Value with a CatalystTM methodology that is utilized in our value strategies. In 2011, we opened the strategy to European investors and have earned positive net returns for our clients in 13 consecutive years. The strategy is available in several currencies, including USD, EUR, GBP, and CHF.

We invest globally across a variety of listed, publicly announced merger transactions. Our portfolios are highly liquid, with low market correlation. Historically, the volatility is approximately 1/3 that of the S&P 500, and our beta is roughly 0.15. We watch and wait for transactions with high strategic and synergistic rationale in industries we know well, leveraging the fundamental research and collective knowledge of over 30 Gabelli industry analysts, who follow and analyze companies within our proprietary Private Market Value with a Catalyst investment methodology. They are experts in their areas of coverage. We comb through filings and merger agreements, and speak with management in order to outline a strong and clear path for deals to be completed.

 

You mentioned the aggressive anti-trust regulators impacted recent returns. Do you anticipate any changes in regulation under the Trump administration next year?

We believe the incoming Trump administration will usher in a much more deal friendly environment, with the expectation that there will be a change in leadership at both the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”). We have already seen an increase of new deals announced after President Trump’s successful election. With friendlier M&A regulators paired with lower interest rates, we anticipate a deal boom for 2025, which may continue over the next four years.

 

How is the Fed’s rate cutting cycle affecting M&A activity?

In 2023, the U.S. Federal Reserve ended its series of interest rate hikes. This helped provide acquiring company managements with certainty of financing cost, giving confidence to M&A. With rate cuts beginning in 2024 comes lower costs of financing, which further encourages managements. Additionally, the steep market decline in 2022 caused market price dislocations, which prompted targets and acquirers to come to new price understandings. This began to wear off in the second half of 2023 into 2024.

While we have no crystal ball into the Fed’s actions, its comments indicate, and the market anticipates, further rate cuts to follow in the new year. We believe that, with rate cuts, deal volume should increase, as acquirers will be able to take advantage of the lower costs to finance their acquisitions, and further bolster M&A activity in the year ahead.

 

How are you positioned into the near year?

Our process is sector agnostic. We approach each deal on a risk/reward basis, investing in deals that we believe have the highest likelihood of closing. Our sector exposure is generally indicative of where we see attractive deals.

We are fully invested and are bullish on the M&A environment in the coming year due to favorable tailwinds:

  • deal spreads are near the highest level in nearly a decade,
  • a more favorable anti-trust/regulatory environment,
  • prospect of further rate cuts, and
  • an expected increase in deal volume under the Trump administration

 

If you are interested in learning more about the potential benefits of investing in M&A in today’s markets, the Gabelli UCITS team is available at SICAVInfo@gabelli.com or by calling +1-914-921-5135. Please visit us at www.gabelli.com/sicav for more information on our UCITS funds.

Allfunds Hires Luis Berruga as Senior Advisor to Boost Its ETP Platform

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Allfunds hires Luis Berruga senior advisor

Allfunds has announced the appointment of Luis Berruga as Senior Advisor. In this role, Berruga will support strategic initiatives and product development, with a special focus on exchange-traded products (ETPs).

As Allfunds progresses in developing its new ETP platform, set to launch in 2025, the company has enlisted Luis Berruga’s expertise to advise on creating strategic partnerships within the industry. The firm emphasizes that Berruga’s knowledge of the development and distribution of exchange-traded products, combined with his experience and network, will help ensure Allfunds’ vision aligns with market expectations.

Luis Berruga is the founder and managing partner of the boutique investment firm LBS Capital and formerly served as CEO of Global X, a New York-based ETF provider. A recognized leader in the asset management industry, Allfunds highlights his success in building and expanding ETF businesses, particularly in the U.S. and Europe. Berruga is an expert in strategic planning, cross-border regulation, and global distribution, making him “a valuable asset to support Allfunds’ continued growth and innovation,” according to the company.

Following the announcement, Juan Alcaraz, CEO and founder of Allfunds, stated:
“With his extensive experience and deep industry knowledge, we are thrilled to welcome Luis as we enter this new phase of growth. His appointment reflects Allfunds’ commitment to bringing in senior and specialized talent to evolve our solutions, address client needs, and continue delivering a sophisticated, first-class platform.”

For his part, Luis Berruga added: “I am delighted to join Allfunds at such a pivotal time as the company seeks to enhance and differentiate its offering with the launch of its ETP platform. ETPs are rapidly evolving, providing an attractive and diversified solution for investment portfolios. I look forward to collaborating with the team, applying my expertise to help Allfunds navigate the competitive ETP landscape, and supporting them as they solidify their position as a comprehensive distributor of innovative investment solutions.”

Family Offices Increase Their Appetite for Risk Thanks to Solid Regulation

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Family offices risk appetite regulation

According to a new report by Ocorian, a specialized provider of services for high-net-worth individuals, family offices, financial institutions, asset managers, and corporations, the risk appetite of family offices is set to increase in the coming year, with improved regulation of riskier assets being the primary driver.

The study found that 82% of family office professionals, including those working in multi-family offices, believe their organizations’ investment appetite will grow, with one in eight (12%) expecting a significant increase. Among those anticipating heightened risk appetite, 62% point to the increase in regulation of riskier assets as the main reason, while 55% believe inflation has peaked or will do so soon, fostering greater risk tolerance. Additionally, 47% cite increased transparency around riskier assets as a key factor, and 44% see markets as poised for recovery.

Another conclusion of the study—which included 300 family office professionals collectively responsible for around $155 billion in assets under management—is that 99% of respondents agree that the transition toward investment in alternative assets among family offices is a long-term trend. Notably, 51% believe the Middle East is the jurisdiction likely to experience an increase in exposure to alternative assets, compared to 40% who selected the European Union and 38% who chose the United Kingdom. Another noteworthy finding is that 68% believe family offices are more likely to use funds as their preferred structure, compared to 66% who selected GPLP structures and 44% who opted for SPVs.

The survey estimates that alternative asset classes such as infrastructure and private debt will see the largest allocation increases in the next two years. About 26% of respondents predict that allocations to infrastructure will rise by 50% or more, while 23% expect the same level of increase in allocations to private debt.

The recent strong performance of alternative asset classes is seen as the main draw for family offices, surpassing the diversification benefits and greater transparency these asset classes offer. Their ability to provide income, the greater variety in the sector, and their qualities as inflation hedges also make them attractive.

“The risk appetite of family offices is increasing rapidly after many years of being highly focused on cash and taking a very cautious approach to investment. The long-term trend of family offices increasing their exposure to alternative asset classes is undoubtedly a factor in the growing risk appetite. It is clear that improvements in the regulation of riskier assets are being well-received by family offices. It remains essential that advisors and service providers deeply understand the unique risk appetite and governance needs of each family, ensuring transparency and trust in every decision,” said Annerien Hurter, Global Head of Private Clients at Ocorian.

Meanwhile, Mark Spiers, Partner at Bovill Newgate, added: “Regulation is playing an increasingly critical role in shaping family offices’ investment strategies. The findings presented in the Ocorian survey highlight how improvements in the regulatory landscape, particularly around riskier assets, are enabling family offices to explore new opportunities while ensuring robust governance frameworks. It is encouraging to see family offices feeling more comfortable with increased risk, especially in alternative asset classes like private debt and infrastructure, by recognizing the potential benefits of diversification and greater transparency. As regulatory oversight continues to evolve, it is essential that family offices work closely with their advisors to navigate this complex environment and ensure that all investment decisions align with both their long-term objectives and regulatory obligations.”

Direct Lending Market: Are We Witnessing a Widespread and Permanent Erosion of Credit?

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Direct lending erosion of credit

Direct lending has transitioned from a niche market to becoming a significant financing channel for SMEs, where traditional bank financing has been steadily replaced by debt funds. As a result, according to Sebastian Zank, Head of Corporate Credit Production at Scope Ratings, direct lending is increasingly used for SMEs with strong growth prospects, either bolstered by mergers and acquisitions or through exposure to high-growth segments.

In his latest analysis, Zank concludes that the growth of assets managed by direct lenders focused on European companies is expected to slow amid constraints on growth and investment. He also acknowledges that while the credit profiles of borrowers have deteriorated over the past two years, the outlook is improving.

“The weakening of credit profiles has been primarily due to the impact of variable and unhedged interest rates, weaker-than-expected operating results, low returns on reduced investments, and delays in deleveraging. However, we believe the erosion of credit quality has bottomed out given the decline in interest rates, easing concerns about economic growth, and the adaptation to a more challenging environment. Meanwhile, the heightened risk of default can be mitigated through a series of measures provided by private equity firms and direct lenders,” Zank explains.

In his view, these measures include greater flexibility between direct lenders and borrowers regarding payment terms compared to more traditional financing; commitments from private equity firms for capital injections or shareholder loans that can be converted into equity or PIK (payment in kind) facilities, where interest is paid by issuing new debt to the benefit of borrowers; as well as substantial dry powder (liquid financial resources available for investment) that can be used to provide bridge financing to companies likely to face difficulties.

In this context, Scope has already assigned 70 private ratings and 24 point-in-time credit estimates to various borrowers accessing direct lending, with a total rated credit exposure of over €5.6 billion. According to Sebastian Zank, issuer ratings are largely concentrated in the B category.

“The most surprising aspect is the migration of ratings. While around half of the ratings in our coverage could be maintained or reflect an upgrade, the other half shows a deterioration in ratings, either through actual downgrades/point-in-time downgrades or weaker outlooks. However, this does not indicate a widespread and permanent erosion of credit. When observing the outlook distributions, a significant portion of the negative credit migration has already been reflected, and it is likely that the erosion of credit will slow down,” Scope explains.

Assets under management by debt fund managers focused on direct lending to European companies have reached $400 billion. However, Scope expects growth to continue at a slower pace than the 17% CAGR (compound annual growth rate) of the past 10 years, at least until current constraints on economic growth and investment (such as higher long-term interest rates) are offset by supportive factors.

“Although the strong growth of direct lending over the past decade has been supported by a wide range of factors, we do not believe that the recent headwinds are strong enough to halt the growth in fundraising and deal allocation. We expect direct lending activities in Europe to continue growing, albeit at a slower pace than the average annual fundraising of approximately $40 billion in the past five years,” adds Zank.

Scope notes that while this suggests a pronounced growth trajectory (10-year CAGR: 17%), assets under management in Europe remain significantly lower than volumes in the U.S., where direct lending took off well before the global financial crisis and has become a widely utilized, if not commoditized, financing strategy.

The slower development of direct lending in Europe is primarily associated with several reasons, explains Zank: “The still significant regional and local banking sectors in most European markets, where bank financing remains the most common channel for mid-market companies, and the non-harmonized environment across European markets, where local knowledge of insolvency laws and lending conditions is crucial for debt fund managers.”

He adds: “Nonetheless, direct lending has transitioned from a niche market to becoming a significant financing channel for SMEs, where traditional bank financing has been steadily replaced by debt funds. In particular, we observe the use of direct lending for SMEs with strong growth prospects, either supported by mergers and acquisitions or through exposure to high-growth segments. Moreover, this financing channel is frequently used in cases of business successions and recapitalizations,” he concludes.

France and Germany: How Does Political Complexity on Both Sides of the Rhine Reflect in European Assets?

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France Germany political complexity European assets

We previously warned that 2024 would be a year heavily influenced by electoral processes and political developments, and this remains the case to the very end. France and Germany, the two main engines of the Eurozone economy, are navigating complex political landscapes. On both sides of the Rhine, governments are grappling with budgetary spending and deficit control, creating domestic challenges that, according to experts, affect the attractiveness of European assets.

“On the French side, the Barnier government faces uncertainty over its ability to maintain power—an almost unprecedented situation under the Fifth Republic, as a no-confidence vote will be held today. In Germany, early elections are set for February 23, 2025, and there is ongoing debate about amending the debt brake rule, which limits the federal deficit to 0.35% of GDP. Unfortunately, such a modification requires a two-thirds parliamentary majority—a challenging goal given the current fragility of traditional parties,” summarizes François Rimeu, senior strategist at Crédit Mutuel Asset Management, describing the political dynamics in both nations.

Rimeu sees the situation in France and Germany as highlighting broader challenges for the Eurozone, including fiscal integration to curb internal optimization (e.g., in Ireland, the Netherlands, and Luxembourg), a common defense policy to address current and future geopolitical risks, a shared energy strategy, and unified migration policies. However, these challenges are compounded by the political complexities in France and Germany, raising a pressing question: What are the implications for investment? Experts point to two areas—bond spreads and European equities. Let’s break them down.

France: Stuck in the Political and Fiscal “Periphery”

Benoit Anne, Managing Director of the Strategy and Insights Group at MFS Investment Management, likens France’s current situation to being “stuck in the center of Paris.” He explains:

“Anyone who has tried driving through Paris knows that being stuck on the frequently congested Peripherique ring road is a traumatic experience. Interestingly, French spreads are similarly stuck in the periphery of the Eurozone, with little hope for an end to the trauma anytime soon.”

Anne’s colleague, Peter Goves, head of Developed Markets Sovereign Analysis, echoes the sentiment, stating there is little sign of relief in France’s sovereign debt struggles. Both experts view France’s political outlook as bleak, ranging from catastrophic to merely mediocre scenarios.

“This inevitably continues to impact business and consumer confidence. In any future political scenario—whether the current government survives or falls—expecting a constructive outlook on French sovereign debt is overly optimistic,” Anne warns.

The 10-year spread between France and Germany currently stands at around 85 basis points, on par with Greece. However, according to MFS IM, the triple-digit territory could be only weeks away. There may also be repercussions for European credit, as France’s weight as a risk-bearing country in the index is significant. For this reason, MFS IM’s fixed-income team maintains a cautious stance toward the French financial sector, given its potential vulnerabilities in this uncertain environment.

Dario Messi, Head of Fixed Income Analysis at Julius Baer, points to the widening of government bond spreads as the most critical issue. “This reflects a political risk premium that is unlikely to disappear in the short term, rather than genuine concerns over debt sustainability at this stage. France’s political fragility has increased significantly since the early elections last summer, with the country’s heated budget debates serving as yet another example,” Messi explains.

Even if the budget is passed, Enguerrand Artaz, fund manager at La Financière de l’Échiquier (LFDE), notes that the deficit would only drop to 5% of GDP—a level still extremely high in absolute terms. “France has exceeded the excessive deficit threshold (3% of GDP) more often than any other Eurozone country since the bloc’s creation: 20 out of 26 years. Additionally, France currently holds the worst deficit-to-debt ratio in the Monetary Union. Italy and Greece, countries with higher debt-to-GDP ratios, have achieved near-budget balance (Italy) or a net surplus (Greece) in 2024,” Artaz highlights.

Implications for Fixed Income and Equities

According to Julius Baer, political instability in France is unlikely to fade soon, keeping sovereign spreads volatile and elevated compared to German bonds by historical standards. This translates to a political risk premium on French government debt.

However, Messi clarifies that this is not yet a matter of debt sustainability. “The current widening of spreads remains modest in absolute terms. While primary budget deficits are too high and will need to be addressed, interest rates on debt remain low, rising very slowly, and are not expected to outpace nominal growth in the medium term. This should limit concerns over debt sustainability.”

Despite these dynamics, Artaz warns that France could face a debt crisis in the coming quarters if poor budget management and political instability persist. “A climate of distrust could push interest rates higher in markets, leading to a debt crisis—a major risk for the Eurozone in the near term.”

On equities, Axel Botte, Head of Market Strategy at Ostrum AM (Natixis IM), notes that the CAC 40 is heading for its worst year since 2010 compared to European stock markets. The index has underperformed the German DAX 30 since last spring, despite Germany still being in recession due to structural challenges like dependence on Russian energy and chronic underinvestment. In Botte’s view, French banking stocks, in particular, have weighed on the index.

Germany: A Budget Debate Amidst Political Change

While France garners much attention this week, Germany is not without its own challenges. On November 6, the coalition government of Social Democrats (SPD), Greens, and Free Democrats (FDP) collapsed. A key trigger was Chancellor Scholz’s dismissal of his liberal Finance Minister over disagreements on funding a supplemental 2024 budget. Early elections are now set for February 23, following a no-confidence vote on December 16.

Martin Wolburg, senior economist at Generali AM, explains that Germany faces budget challenges for 2024 (€11.8 billion needed) and, more critically, for 2025. “Without a parliamentary agreement on the 2025 budget, a provisional budget based on 2024 expenditures would be implemented until the new government finds consensus. This process could stretch well into the summer or beyond.”

Looking ahead, Artaz predicts that regardless of Germany’s next coalition, the country’s fiscal orthodoxy will likely soften. Options include loosening debt-brake rules, extending the €100 billion defense fund created in 2022, or increasing the deficit cap from 0.35% of GDP to 0.5% or even 0.75%.

For investors, this shift could provide a breath of fresh air. “A more flexible fiscal approach might boost sectors like automotive and chemicals, which have been overlooked,” Artaz concludes.

Despite the political upheaval, DWS views Germany’s DAX as having strong potential for 2025. The index recently surpassed 20,000 points, a historic high, driven by gains in industrial, tech, and telecom stocks.

As France and Germany tackle their political and fiscal challenges, investors must closely monitor developments in bond spreads, sovereign debt sustainability, and equity market performance. Both nations’ paths will undoubtedly shape the future of the Eurozone and its investment landscape.

Institutional Investors Consider Valuations and Interest Rates to Be the Main Risks to Their Portfolios in 2025

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Institutional investors risks valuations rates 2025

The macroeconomic outlook at the end of 2024 appears positive: inflation is decreasing, and interest rates are falling. Despite this, valuations (for 47% of institutional investors) and interest rates (for 43%) remain the primary concerns for portfolios in 2025, according to the results of a new survey* by Natixis Investment Managers (Natixis IM).

As explained by the firm, following a two-year bull market where much of the gains have been concentrated in technology stocks, up to 67% of respondents believe that equity valuations currently do not reflect fundamentals. However, there is optimism among respondents, with 75% stating that 2025 will be the year when markets realize valuations matter. Nonetheless, 72% emphasize that the sustainability of the current market rally will depend on central bank policies.

Improving Sentiment

One of the key findings of this survey is that sentiment has improved drastically over the year. For example, there is a more positive view of inflation, with over three-quarters of respondents globally believing that inflation will either decrease or remain at current levels (38%) in 2025. Overall, 68% are confident that inflation will meet expected levels next year, while 32% remain concerned about potential inflation spikes in the global economy in 2025.

Economic Threats

Despite this optimism, institutional investors still see a wide range of economic threats for the coming year. Their biggest concerns are the escalation of current wars (32%) and U.S.-China relations (34%). While their market outlook may be optimistic, institutional investors remain realistic: despite the relatively calm performance of major asset classes during 2024, many respondents globally anticipate increased volatility in equities (62%), bonds (42%), and currencies (49%) in 2025.

Moreover, although confidence in cryptocurrencies has more than doubled (38% compared to 17% in 2024), given the speculative nature of this investment and its usual volatility, 72% state that cryptocurrencies are not suitable for most investors, and 65% believe they are not a legitimate investment option for institutions.

However, portfolio plans show high confidence, with 48% of respondents actively de-risking their portfolios. “Moreover, four out of ten Spanish institutional investors state that they are actively taking on more risk in 2025,” noted the firm.

Private Market Boom?

Another conclusion of the survey is that institutions plan to continue increasing their investments in alternative assets in 2025, with 61% of respondents expecting a diversified 60:20:20 portfolio (with alternative investments) to outperform the traditional 60:40 stocks-to-bonds mix. Regarding where to allocate the 20% alternative portion, institutions are clear about wanting to add more private assets to their portfolios.

Among all options, 73% are most optimistic about private equity in 2025, a significant increase from the 60% who felt the same a year ago. “This is likely to change throughout next year, as 78% believe rate cuts will improve deal flow in private markets, and 73% of respondents anticipate more private debt issuance in 2025 to meet growing borrower demand,” Natixis IM explained.

In terms of their approach to private investments, 54% report having increased allocations to private markets, while 65% are exploring new areas of interest, such as opportunities related to artificial intelligence.

Markets Will Favor Active Management

Finally, a noteworthy finding is that 70% of institutional investors believe that markets will favor active management in 2025, while 67% said their actively managed investments outperformed benchmarks over the last 12 months. “Given the changing interest rate and credit environment, institutions are likely to benefit from active investing. Overall, 70% of respondents stated that active management is essential for fixed-income investing,” concluded the firm.

Natixis IM interviewed 500 institutional investors managing a combined $28.3 trillion in assets, including public and private pension funds, insurers, foundations, endowments, and sovereign funds worldwide.

Reaching More Places: Details of the Business Strategy Janus Henderson Will Pursue in 2025

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Tecnología y salud entre pequeñas y medianas ofertas

This year, Janus Henderson Investors celebrated its 90th anniversary, taking the opportunity to reflect internally on its values and what differentiates it from competitors. In this retrospective, Martina Álvarez, Head of Sales for Iberia, brought the conversation to the Spanish market, stating, “I am very proud of the results the Spanish industry is achieving.”

Álvarez cited Inverco data, highlighting that the Spanish investment fund market has tripled in size over the past decade (including both domestic and international fund managers), becoming the fastest-growing market in the Eurozone. She also noted that “the business is now extremely mature,” with clients showing more rational behavior thanks to advancements in financial education, such as refraining from making withdrawals during market downturns.

Despite this progress, with over €1 trillion still held in deposits, Álvarez sees a significant opportunity for the industry. She remarked, “Now is the time to move that money into funds,” especially as the impending cycle of interest rate cuts is likely to diminish the appeal of money market funds.

Janus Henderson’s assets under management (AUM) in Spain are now approaching €4 billion, a milestone Álvarez believes will soon be reached. She emphasized the increased presence of Janus Henderson’s products in more institutions and with more funds, reflecting a strong appreciation by Spanish entities for active, independent management.

When asked about the firm’s goals for 2025, Álvarez provided a straightforward response: “Reaching more places.”

One avenue involves pursuing mergers and acquisitions (M&A) “when it makes sense.” For instance, Janus Henderson has expressed a strong desire to expand its presence in the illiquid assets sector. This year, it acquired Victory Capital, a private credit firm, and NDK, an infrastructure platform focused on emerging markets, as part of this effort.

Another major strategic focus for 2025 is the firm’s active ETF segment, where Janus Henderson is already the fourth-largest provider in the U.S. According to Álvarez, the business receives $1 billion per month in inflows in the U.S. alone. The goal is to pioneer the expansion of this product line in Europe.

At the Madrid Knowledge Exchange event held in September, Nick Cherney, Janus Henderson’s Head of Innovation, projected that assets under management in Europe’s active ETFs market, currently at $50 billion, could grow to $1 trillion by 2030. This growth will be driven by tokenization and increasing client demand.