Looking ahead to 2025: How MAPFRE AM managers are preparing their portfolios

2025 is already here, and this new year is shaping up to be filled with both challenges and opportunities for the markets. The imminent return of Donald Trump to the White House, geopolitical tensions, monetary easing, and a potential decline in inflation are just a few of the key factors expected to influence the coming months.

Given this backdrop, fine-tuning and defining both fixed income and equity strategies is essential. Here are the main lines of actions MAPFRE AM is focusing on:

Equity strategies: diversification and key stock selection

When it comes to sectors and regions for 2025, Cristina Benito Ayuso, Equity Investment Manager at MAPFRE AM, explains that they're leaning toward defensive sectors in European equities, while keeping an eye on opportunities in certain cyclical sectors. Among these, stocks related to the energy transition and electrification stand out, offering attractive valuations. Utilities and renewable energy are also favored sectors, as they benefit from the cycle of interest rate cuts and favorable regulations.

As for the banking sector, the outlook is moderately optimistic. While the European Central Bank (ECB) has embarked on a cycle of monetary easing, European banks have managed to reduce their sensitivity to lower rates, improving their earnings visibility for 2025 and 2026. "Valuation strength remains key, and we believe a price below tangible book value undervalues the sector's current double-digit return on tangible equity (RoTE)," explains Benito Ayuso.

Geographically, Benito Ayuso is positive about the US market, thanks to the expansionary policies expected under the Trump administration. However, she points out that Europe offers more attractive upside potential given its lower relative valuation.

"While the US market has already priced in much of the impact of these policies, European valuations remain more attractive, and the discount to prices also offers upside potential," she notes.

Balancing growth and value

The debate between growth and value strategies is still very much alive. As Benito Ayuso explains, growth stocks have led the market in recent years, driven by the strong performance of "the Magnificent Seven."

In the current market, and considering a monetary easing that doesn’t seem likely to push rates as low as they were after the pandemic, MAPFRE AM is focused on combining both strategies to diversify risks and seize medium-term opportunities.

Risks to watch in the equity market in 2025

Benito Ayuso highlights the main risks that have been identified:

• Impact of Trump's policies: These could affect trade and regulation, increasing the risk premium in Europe.
• Slowdown in China: Slower growth in China could negatively impact export-driven sectors such as automotive, luxury goods, and semiconductors.
• Political instability in Europe: Tensions in France, the UK, and Germany could weigh on European markets.

Fixed income outlook: focusing on corporate credit

In fixed income, David Iturralde, Fixed Income Manager at MAPFRE AM, explains that the strategy is centered on capitalizing on opportunities arising from the rate-cutting cycle initiated by central banks.

This has led MAPFRE AM to prioritize corporate credit over public debt, due to factors such as the strength of corporate balance sheets, improved growth prospects, and the stabilization of global default rates. The strategy focuses on senior tranches with maturities of 3 to 5 years and issuers with the ability to generate consistent cash flows and maintain contained debt levels. Meanwhile, public debt is losing its appeal as governments' financing needs grow.

The (ECB) forecasts growth of 1.1% in 2025, up from 0.7% in 2024, with inflation hovering around 2.1%. Although defaults have risen in Europe, their pace has stabilized, creating a favorable environment for investment-grade credit—particularly in Europe—thanks to lower rates and access to cheap financing.

According to Iturralde, companies and banks are showing stronger balance sheets, which could pave the way for mergers and acquisitions in the banking sector, despite some resistance from governments. “We believe that the process of domestic and cross-border mergers and acquisitions in the banking sector could start to pick up, and while some governments remain hesitant, this could be a game changer for many players,” he explains.

However, growing government financing needs are making public debt less appealing. Instead, the focus remains on issuers with steady cash flows, stable businesses, and low levels of net debt. “We will continue to prioritize names in our portfolios that demonstrate the ability to generate steady cash flows, operate stable businesses, and maintain contained net debt,” says Iturralde.

MAPFRE AM's commitment to sustainability

Despite a less favorable political climate under the Trump administration, MAPFRE AM remains steadfast in its focus on ESG strategies. While 2024 proved challenging for these investments, managers remain confident in their long-term importance. ESG-related issuing reached €314 billion in 2024, with a notable increase in corporate issuing. However, Europe faces the challenge of balancing its decarbonization objectives with maintaining industrial competitiveness.