Investment Newsletter – March 2025
Gold is reaching new highs not only in dollar terms but across multiple currencies, driven by a strong global demand as central banks increasingly turn to the metal amid shifting geopolitical dynamics. Over the past four years, official gold reserves have surged significantly, outpacing declines in traditional dollar assets, as nations reassess their portfolios in light of challenges to the dollar’s dominance. Although retail traders were initially hesitant, recent weeks have seen growing interest in gold ETFs. While the rally could persist, there is also the risk of a sharp correction, as historical patterns suggest that periods of strong outperformance often precede steep drawdowns. Nonetheless, given the ongoing uncertainty in the global financial system, the fundamental case for holding gold remains compelling.
Foreign capital is a major driver behind emerging market equity rallies, as unhedged inflows in smaller markets can significantly boost returns through currency gains. To maximize these returns, investors should target countries with both low stock market valuations and undervalued currencies, qualities that the US lacks due to its overvalued dollar and large current-account deficit. In contrast, countries like China, Colombia, Chile, Indonesia, and Korea not only offer attractive valuations but also have more resilient external accounts, making them better positioned to handle financial shocks. Despite inherent risks in emerging markets, including political instability and capital flight, deep negative sentiment and panic selling can create compelling buying opportunities. While Europe is poised to gain importance in global asset allocation, emerging markets remain a necessary alternative to US stocks, given their historical performance and potential for strong returns.
Bank of America strategist Hartnett noted that despite surveys showing a steep decline in global growth expectations and US equity allocations, market activity tells a different story. Strong inflows into global and US equity funds along with robust buying by private clients suggest that investors remain largely long on equities. While he advises caution and waiting for further signals, recent moves such as rising cash levels and continued foreign accumulation indicate that the worst of the correction may be over . Hartnett also pointed to mixed market reactions to recent policy events and the five-year anniversary of the COVID low, noting that past rapid US spending and inflation spurred significant market shifts. Looking ahead, he expects fiscal inflation in regions like China, Japan, and Europe to be offset by disinflation in the United States, which supports a favorable case for US Treasuries, international stocks, and gold, even as US household equity wealth may decline in the near term.
Recent market indicators suggest that China’s economic momentum is beginning to shift as signs of recovery emerge. The overall performance trends in Chinese equities have historically rebounded following policy interventions, and current developments indicate a similar, albeit more measured, recovery path. Increased global allocation to Chinese active mutual funds reflects renewed investor confidence and the anticipation of stronger domestic demand. Additionally, improving profitability metrics point to the effectiveness of corporate restructuring and cost optimization efforts, which are likely to boost future margins. Together, these factors signal that China’s demand recovery may be underway, setting the stage for a more robust economic outlook and potentially favourable investment opportunities in the near term.
