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Institutional Investors Are Bullish

February 22, 2025

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

  1. Japan’s economy grew a lot more than expected.
  2. UK wage growth accelerated to an eight-month high.
  3. And inflation in the country rose to its highest level in ten months.
  4. Institutional investors are showing the biggest willingness to take risk in 15 years.
  5. European stocks hit a record high.

Dig deeper into these stories in this week’s review.

Japan

New data on Monday showed Japanese GDP exceeded forecasts in the three months to December, with business spending and net trade helping drive a third consecutive quarter of growth. Asia’s second-biggest economy expanded at an annualized rate of 2.8% last quarter from the one before – a marked acceleration from the previous period's 1.7% pace, and handily beating estimates of 1.1%. The strong end to the year allowed the economy to eke out 0.1% growth for the whole of 2024, defying market expectations of a small contraction.

Japan’s economy expanded for the third straight quarter. Source: Bloomberg
Japan’s economy expanded for the third straight quarter. Source: Bloomberg

The figures indicated that Japan's economy remained in decent shape despite the disruptions caused by the Bank of Japan's move last year to "normalize" monetary policy and initiate a series of interest rate hikes. The central bank is widely expected to continue increasing borrowing costs this year, with traders betting that’ll do so at least once – most likely at its July meeting. That prospect of higher interest rates, combined with the better-than-expected GDP numbers, sent the yen higher at the start of the week.

UK

New data on Tuesday showed UK pay growth accelerated to an eight-month high, while employment unexpectedly increased, signaling a resilient job market despite the Labour government’s upcoming payroll tax hike. Average earnings excluding bonuses jumped 5.9% in the final quarter of 2024 from a year earlier – up from 5.6% in the three months to November. The acceleration in wage growth was stronger in the private sector (a key measure for the Bank of England), where average earnings, excluding bonuses, grew 6.2%. Public sector pay, meanwhile, grew by 4.7% in the period.

UK pay growth accelerated to an eight-month high. Source: Bloomberg
UK pay growth accelerated to an eight-month high. Source: Bloomberg

Economists were closely monitoring the jobs data to gauge the impact of the government's October Budget on the labor market. The chancellor’s decision to raise employers’ national insurance contributions and increase the minimum wage – both set to take effect in April – raised concerns about a potential slowdown in hiring. However, the number of payrolled employees rose by 21,000 in January, leaving the total down by less than 20,000 since the Budget was announced. All in all, the figures are likely to support the BoE’s cautious approach to interest rate cuts, as it navigates the challenge of balancing sluggish economic growth with persistent inflation and a resilient labor market.

UK employment is holding up better than feared. Source: Bloomberg
UK employment is holding up better than feared. Source: Bloomberg

Speaking of stubborn price pressures, data on Wednesday showed UK inflation accelerated by more than expected to hit a ten-month high. Consumer prices increased by 3% in January from a year ago – a marked acceleration from December’s 2.5% pace and above the 2.8% forecast by economists. The jump was driven by several factors, including the cost of airfares, motor fuel, and food, as well as the imposition of value-added tax on private school fees. Meanwhile, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, rose to 3.7% – the highest since April. Finally, services inflation – a measure closely watched by the BoE for signs of domestic price pressures – accelerated less than expected to 5% in January from 4.4% the month before.

UK inflation is picking up again. Source: Bloomberg
UK inflation is picking up again. Source: Bloomberg

The latest pickup pushes inflation further away from the BoE’s 2% target, with many economists predicting that higher energy bills will continue to intensify price pressures later this year. The central bank expects inflation to peak at 3.7% in the third quarter before falling back to its target. Traders seem to believe it: they’re still sticking to their bets that the BoE will deliver two additional quarter-point cuts to interest rates this year, after having already lowered borrowing costs earlier this month.

Stocks

Every month, Bank of America conducts a global fund manager survey to gauge institutional investor’s positioning and latest thinking. And the most recent one, conducted in February, revealed that investors are showing the biggest willingness to take risk in 15 years, with fund managers’ cash levels dropping to their lowest since 2010. What’s more, 34% of participants said they expect global stocks to be the best-performing asset in 2025, while a net 11% indicated they were underweight bonds. This bullishness on world equities was underpinned by optimism about AI and expectations of robust economic growth and lower interest rates this year, according to the survey. Finally, about 89% of respondents said US stocks were overvalued – the most since at least April 2001.

Global stocks have rallied on the back of optimism about AI and expectations of robust economic growth and lower interest rates. Source: Bloomberg
Global stocks have rallied on the back of optimism about AI and expectations of robust economic growth and lower interest rates. Source: Bloomberg

As a result, investors have been flocking to cheaper European equities, causing the Stoxx Europe 600 Index to surge nearly 9% this year and hit a new record high. In addition to more attractive valuations, European stocks are benefiting from a positive macro backdrop. The economy is expected to recover, borrowing costs are coming down, Germany’s election on Sunday has raised hope for new fiscal stimulus, and there is potential for the bloc to escape a worst-case scenario trade war. Talks over a ceasefire in Ukraine have also lifted the mood. Finally, optimism about profits, share buybacks, and earnings upgrades are adding to the momentum.

Next week

  1. Monday: Earnings: Zoom.
  2. Tuesday: US consumer confidence (February). Earnings: Home Depot, Intuit.
  3. Wednesday: US new home sales (January). Earnings: Nvidia, Salesforce, Snowflake, Synopsys.
  4. Thursday: Eurozone M3 money supply (January), minutes of the ECB’s latest meeting, US GDP (Q4), US durable goods orders (January). Earnings: HP.
  5. Friday: Japan industrial production and retail sales (January), US personal income and outlays, US trade balance (January).
  6. Saturday: China PMIs (February).


General Disclaimer

This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.

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