LGT Private Banking advises investors to buckle up for a bumpy ride this year. While US President Donald Trump is the biggest wildcard, Stefan Hofer, chief investment strategist at LGT Private Banking Asia Pacific, expects the overall US economy to do well this year.
Having defied all predictions of slipping into recession in 2023 and 2024, the US economy looks set to repeat this outcome this year. The new administration is also set to lower corporate and household income taxes and engage in broad deregulation. “These policies will likely cause a widening growth differential with the rest of the world, causing US assets to outperform and the US dollar to remain strong,” says Hofer in an interview with The Edge Singapore.
Hofer also expects the new administration to “clean up the books” and the deficit to widen, causing the US debt-to-GDP ratio to rise significantly. While this could lead to a correction, Hofer remains positive on the US market as investors continue to show their tolerance for its debt load. “We think that the market will digest this,” he says.
“Long story short, we see no evidence that the US dollar will go down by 10% to 20%; neither do we think that the market will collapse from the deficit. So, this big concern of clients is a little bit misplaced,” says Hofer.
“The debt itself should not be a problem. The bigger problem is the combination of tax cuts, deregulation and tariffs together could bring about a risk of inflation in 2H2025 in the US. This is problematic as it could cause the Federal Reserve to halt its reduction in interest rates,” says Hofer.
Meanwhile, LGT is also convinced that tariffs will increase in the US in 2H2025, just as Trump promised. This move will positively correlate with inflation and be problematic for the bond market, although the equities market should still stay resilient. For instance, Hofer notes that several chemical compounds used in industries like healthcare and construction can only be imported from China.
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The tariffs on top of these chemical compounds mean higher costs of the final product will trickle down to US consumers, stoking inflation. “The key risk for the US is whether the economy runs too hot and inflation re-emerges in 2H2025, causing the Fed to pause or even raise rates again,” says Hofer, who expects one or two more rate cuts before the Fed stalls and “goes sideways”.
Overall, Hofer expects global markets to be volatile throughout the year but with potential for positive growth. Meanwhile, falling interest rates and booming technology investments support risk assets.
“As we kick off 2025, our core predictions are for US equities, global IT, healthcare, industrials, US small- and mid-caps, and US financials to outperform. Our core calls are US, Japanese and Indian stocks. On fixed income, we think investors should take a flexible approach, blending investment-grade bonds with higher-rated high-yield bonds. We continue to advocate for private market solutions,” says Hofer. “The key risks are centred on disruptions in international trade due to US tariffs and an associated increase in inflation in 2H2025,” he adds.
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Sector focus
As expected, different sectors will perform differently. Hofer sees much potential in the artificial intelligence (AI) sector, especially with billions of dollars in private-sector spending.
Last year, the US recorded about 5,500 data centres and Germany came in second with about 600 data centres while the rest of the world lagged behind significantly. “It will take at least five to 10 years for the rest of the world to catch up in terms of tech spending,” says Hofer.
Unlike the semiconductor industry, which has been politicised, AI is “not tied to politics.” Therefore, regardless of new policies and geopolitical tensions, the tech industry, especially the AI sector, is expected to remain resilient, which Hofer advises investors to stay vested in for the long term.
However, is there too much funding and investment going into the AI sector? “Over the next two or three years, after all this spending investment is done, we will see which projects and products are profitable. Not everything will work,” says Hofer, adding that although the Magnificent Seven stocks have yielded good results so far, investors ought to keep a close eye on them.
Tech and AI aside, Hofer is positive on the global healthcare sector as well. While it has always been a resilient one, he sees several “interesting areas with a lot of innovation”, especially in cancer care, diabetes and obesity, among others. “These healthcare companies are going to be regulated in a more friendly way under Trump than they would have been,” says Hofer, elaborating that this will be a positive on the companies’ growth.
Asian plays
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Hofer favours the India market for its growth story. He expects the country’s GDP to grow 6.5% or higher this year and next. However, the caveat is that valuations are not cheap and could leave the market exposed to corrections. Nonetheless, Hofer believes in India’s growth story over the long term, and therefore, one where investors will find it worthwhile to stay invested.
India, as an emerging market, has made significant progress in terms of infrastructure under the Modi government. Massive projects have come under budget and are expected to “change the face of the Indian economy”. With better integration of rural and urban areas, Hofer sees the country moving in the right direction for growth.
“That is the investment case for India — it is about the delivery of infrastructure, which is resulting in earnings growth and job creation,” says Hofer, who sees India’s growth being a conversation that will last for at least four to five years. “The boom in infrastructure spending and various monetary and civil reforms are very encouraging, supporting future growth.”
Hofer is also upbeat on the Japanese market. “Japan is doing really well because it is transitioning from 30 years of deflation to inflation. That is very positive for assets,” he says. Japan remains squarely on a reflation path, leaving behind decades of deflation. Wage growth is now ahead of the Consumer Price Index (CPI), meaning that households should get relief from rising prices.
He believes that several export-oriented Japanese companies may benefit from a stronger US dollar and a weaker yen. These companies earn their revenue in US dollars but book their costs in yen, giving them an additional forex advantage. Furthermore, corporate earnings are expected to show growth, making it LGT’s favourite market from this perspective.
Another positive for Japan is that it should be shielded from potential US tariffs but not exposed to lower Chinese demand for Japanese exports. “Overall, we think Japanese equities have room to perform well this year. We think the yen is undervalued at levels above USD/JPY 145 and expect that the authorities will intervene to smooth out excessive volatility,” he says
Finally, China is a market where Hofer still sees opportunities, but he advises investors to tread with caution. China may have recovered from the pandemic, but its growth has slowed. Nonetheless, there are some bright spots such as that of electric vehicles (EVs), where Chinese brands are shaping up to be “phenomenal” global competitors.
In 2023, China was exporting close to 1.8 million so-called next-gen EVs to the markets that they are allowed to sell. Currently, China still is not able to sell its vehicles in the US and certain parts of Europe. “But those restrictions, if they are removed one way or another, would be a very competitive environment for next-generation vehicles,” says Hofer, adding that China has been aggressively building its EV capacity, where he sees several structural changes take place as a result.
Hofer believes the pace of support measures for the monetary, fiscal and property markets accelerated last year, setting the stage for property prices to stabilise this year. That, in turn, would improve household sentiment and boost domestic demand.
The key risk is the uncertainty surrounding trade and the extent of US tariffs that might be imposed by President Trump. “In our view, a 10% blanket tariff on all Chinese exports to the US might raise US CPI by 100 basis points over 12 months, which would complicate US monetary policy and be a detriment to growth,” says Hofer.
