The stock market outlook for 2025 looks promising, with the Swiss equity market appearing particularly attractive. It currently offers a historically above-average risk premium, supported by a fair valuation and the persistently low interest rate environment.

The technology sector, particularly in the field of AI, remains a dominant theme on the global stock markets. The US stock markets in particular should continue to benefit from this momentum. However, earnings expectations for AI companies have risen significantly once again. This also increases the potential for disappointment. And in view of the high market concentration, price corrections in AI stocks would drag down the broader indices, especially in the USA. However, the "Magnificent 7" also have a high weighting in the global share indices. In the MSCI World, which covers the stock markets of advanced economies, they account for over 20 per cent of market capitalisation.

Many of these stocks have been able to meet the high expectations of recent years. However, we assume that investors will differentiate more clearly between companies in the future. Companies that succeed in effectively integrating AI and AI investments into their business models are likely to benefit the most - regardless of whether they are tech giants or companies from other sectors.

Sustainability continues to establish itself as a fundamental long-term trend. Companies that either develop solutions for climate protection or successfully implement sustainable practices in their business processes are particularly well positioned for the future.

The yield curves are likely to flatten further over the course of the year, driven by the central banks' interest rate cuts.

In the case of corporate bonds, credit risk premiums for investment grade (IG) bonds are expected to remain stable, while credit spreads on high-yield bonds are likely to rise slightly. However, a significant increase in default rates is not expected.

One focus topic for investors this year is likely to be rising government debt worldwide. This is partly because the fiscal policy regulations in the EU, which were suspended between 2020 and 2023 because of the COVID-19 pandemic and the subsequent energy crisis, were reactivated in 2024. In light of the pandemic, governments had loosened their fiscal reins considerably. To get debt under control again, governments would have to reduce their new borrowing. However, this is not always easy to achieve politically, as we have seen in France in recent months. The consequences can be seen on the bond markets. For example, the risk premium of 10-year French government bonds over German bonds reached its highest level since the euro crisis at the end of 2024. Unlike during the euro crisis, euro countries are not expected to see a yield premium across the board.

Debt discussions are also likely to be held in the US, especially as Donald Trump's policies are likely to lead to an increase in the already high level of debt and the US will reactivate its debt ceiling from January 2025.

Real estate and real estate products are benefiting from falling interest rates. The SNB's interest rate cuts and the prospect of further interest rate cuts are having a positive impact on the market for real estate. Listed real estate funds and share are the quickest to react to changes in the interest rate landscape. This is also reflected in the performance of the SXI Real Estate Funds Broad Total Return Index, which reached a new all-time high in December 2024. Due to the expected further interest rate cuts, property products are likely to remain attractive in 2025.

The market for rental flats is likely to remain tight in 2025. Immigration in 2024 will probably not quite reach the level of 2023 and has therefore slowed slightly. However, net immigration is likely to remain positive in 2025 due to Switzerland's relative attractiveness. The high demand due to immigration is offset by low new construction activity on the supply side. Although this could recover somewhat in 2025 according to forecasts by Wüest Partner, it will remain at a low level. Due to the fall in interest rates last year, the mortgage reference interest rate, to which rents are linked, is also likely to fall in the first half of the year.

The shortage of living space will intensify in 2025. On the one hand, building authorisation processes will become more complex and tend to take longer due to increasing regulations and requirements, e.g. with regard to sustainability. On the other hand, initiatives that severely limit the passing on of costs for refurbishments and stipulate a high proportion of affordable housing for new builds will inhibit investment activity.

In the last one to two years, a remarkable trend has emerged in the US senior secured loans (SSL) market: While "traditional" default rates (under Chapter 11) have remained largely stable and low (currently: 1.5%)* , the number of so-called "distressed exchanges" is increasing significantly (default rate including distressed exchanges: currently 4.0%)** . These are debt restructurings in which creditors often waive part of their claims to avoid insolvency. These transactions do not appear in the traditional default rates. From an investor's perspective, however, they have similar effects, namely in that part of the original investment is lost.

The rise in distressed exchanges is partly due to the high costs and complexity of traditional insolvency proceedings. Equity providers play a central role; in the case of SSL, these are usually private equity firms. Their aim is to protect their equity investment and avoid insolvency, which usually leads to the complete loss of their investment. To achieve this, they often rely on distressed exchanges and try to persuade creditors (i.e. loan investors) to make concessions and involve creditors directly in the negotiations. As distressed exchanges are faster, cheaper and more flexible than traditional insolvency proceedings, they are often favoured by equity investors.

However, this tactic is not without risk. An overly aggressive approach can shake the confidence of creditors and make future sources of financing more expensive for the company or other portfolio companies of private equity firms. Nevertheless, private equity firms rely on this strategy as it minimises losses in the short term and preserves the possibility of a successful exit at a later date. Some private equity firms have recently been regarded as particularly "aggressive" (from a creditor perspective). It can be observed on the SSL market that the loans of these private equity companies, which have been aggressive in the past, are traded at a significant discount. This also applies to solid loans that are not in distress. Loans from private equity companies with more creditor-friendly distressed exchanges are not trading at a discount. This means that market participants are "penalising" the aggressive private equity companies.

What does the trend towards distressed exchanges mean for investors who invest in SSL, corporate direct lending, or private equity?  

• SSL: SSL investors must focus on the default rate including distressed exchanges when estimating their returns (after taking defaults into account). 
• Corporate direct lending: Investors who invest in corporate direct lending must expect the "true" default rate to be in the region of 4% rather than 1%, although no significant increase in defaults is expected in 2025.
• Private equity: Investors must take a close look during due diligence and check whether aggressive distressed exchanges have been carried out in the past. This would mean that loan investors only provide debt capital if they receive additional compensation in the form of a higher coupon. This would lead to higher capital costs for the underlying portfolio companies. And for private equity investors, it means lower expected returns.

We are convinced that the original investment case for private assets (potential for higher returns than traditional investments, diversification, and stable income) still applies. However, due to the generally more challenging economic environment, we expect a broader spread of returns between first-class and less strong managers within a private markets asset class over the next five to ten years. The example of distressed exchanges described above is one of the reasons for this. This means that manager selection is becoming more important. 

  *: Source: J. P. Morgan; twelve-month trailing nominal value-weighted default rate as at 30 November 2024.

**: Source: J. P. Morgan; twelve-month trailing nominal value-weighted default rate incl. distressed exchanges as at 30 November 2024. Two years ago, the two default rates (i.e. incl. distressed and excl. distressed) were roughly equal at 0.7 per cent.