BNP Paribas urges investors to diversify

Energy and technology will be key drivers of markets, as the US broadens returns from a narrow engine room and unfashionable southern European economies bounce back.

With much of the investment community attempting to predict the actions of Donald Trump, as he ascends to the US presidency, stock watchers are recommending continued diversification, away from a handful of tech leaders.

Edmund Shing, global chief investment officer at BNP Paribas Wealth Management, responsible for advising client assets of €456bn ($474bn) across Europe, Asia and the Middle East, expects a continued broadening of the US market away from the high-tech engine room of the Magnificent Seven stocks  — Apple, Amazon, Alphabet (Google), Microsoft, Meta, Tesla and Nvidia.

“Since July, US mid- and small-cap stocks have broadly kept pace with the large-caps, but the mid/small-cap outperformance we had seen from July until November has largely unwound in December. I still think it will happen, but it has been a little delayed,” suggests Mr Shing.

He does expect US returns to “be a bit softer” in 2025, because the third year of a bull market can be one of the weaker years, potentially posting single rather than double digit “crazy numbers” performance.

“It's the unpopular stocks that will lead the way in 2025 but in the context of a market which makes some ground, but maybe not that much ground,” predicts Mr Shing.

Risks will be elevated as “Trump adds a little bit of spice into the mix, because he’s quite clearly not that interested about the world, which is quite a break”, says Mr Shing, emphasising that Mr Trump has broken with history in that he “cares about America, first and foremost”.

Whispering words of wisdom

It is the battle with inflation that may be one of the toughest for Mr Trump to win, believes Mr Shing. “My contention would be the major reason why the Democrats lost the presidential election was inflation, and whenever there’s a big economic problem, the government of the day will inevitably be blamed by the voters, whether or not it's justified. We saw that in the aftermath of the global financial crisis, virtually every major political leader, bar [Germany’s Angela] Merkel, was ejected from office after the financial crisis. They were all sanctioned and unfairly.”

Inflation, which has not really featured as a concern among US households for two decades, suddenly became a major issue from 2022 onwards. “Once consumer staples become out of the reach of the everyday American, given the price hikes, it becomes a strain, so President Trump will have to keep an eye on inflation.”

Tariffs have the potential to cause an inflationary surge, which is why Mr Shing expects a lower key initial approach to taxing Chinese imports in particular, with Scott Bessent, Mr Trump’s nominee for Treasury secretary and a prominent macro hedge fund manager, to be regularly “whispering in his ear”.

“He’ll be saying: ‘Let’s take a gradual approach. You don't whack the temperature up to boiling straight away, you just turn the heat up bit by bit over time.’ And I think that's going to be his approach and he’s going to where the pain threshold is.”

Europe’s inverse performance

When it comes to European markets, Mr Shing is less enthusiastic for the next few years, “taking a sector by sector, country by country” approach, rather than blanket allocation to a poorly performing continent.

“We’re seeing an inverse economic performance today among EU members, compared with what we saw back in 2011 and 2012,” he says. “Back then, southern Europe was in great difficulty. They saw their bond spreads blow out and had to enter austerity. Today they’re the ones with the dynamic growth, whether it be Greece, Portugal or Spain. Of the big countries, Italy is looking a lot healthier in growth terms than either Germany or France.”

This is a painful admission for Mr Shing, representing the biggest private bank in the eurozone, based in Paris. The fortunes of northern European countries will continue to suffer, due to uncertain energy supply, he believes.

“Energy has become such a huge topic — not only the transition to cleaner energy — but also energy security. When you put those two together, and then throw in growing demand from developing economies like India and power-hungry AI-driven data centres, you have this confluence of trends which all point to one thing, that energy is front and centre of the global economy today.”

This will continue as a major trend, globally, due to geopolitics and technological progress with extraction. “One of the greatest advances in the US experience is nothing to do with computing or AI, it’s fracking. That has been one of the biggest revolutions in productivity and technology that you've seen in US industry in decades,” states Mr Shing.

“It has conferred upon the US a massive energy related competitive advantage for their economy, because they have the cheapest source of domestic energy anywhere in the world. With Trump in place, that's only going to increase, as he talks about ‘drill, baby, drill’. But the reality is that even in the shale oil fields of Texas, you’re seeing a much more natural gas being produced and gas liquids rather than actual oil.”

This may eventually prove a bright spot for Europe, spurring realignment in trade patterns.

“In Europe, in the absence of pipeline gas from Russia, where are we going to get gas from? Yes, Norway and Algeria, fine, but we need more and more LNG [liquid natural gas]. And this actually could be one of our responses to any implicit tariff threats from Trump to say, ‘Okay, we will import more LNG. That way we can redress the trade balance between the European Union and the US quite easily, because we need it, you’ve got it.’”

With natural gas prices in Europe and the UK at five times that of the US, even when considering the costs of transport and liquification, “there is a huge arbitrage potential there”.