MARKET INSIGHT – February 2025

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

Executive orders, publicity stunts and volatility to get you off to a good start!

He said he would, and he did! Unsurprisingly, Donald Trump, the new American president, quickly got down to business.  With a series of executive orders proudly brandished in front of the cameras, revealing his XXL signature in large felt-tip pen, the timely launch of a cryptocurrency bearing his image, and the announcement of a gigantic investment plan in artificial intelligence, January marked the return of political showmanship in the United States. The President was also able to count on his now loyal ally Elon Musk, equally lavish with controversial statements, taking on the role of sole head of the already famous DOGE (Department of Government Efficiency).

In contrast to all this hoopla so familiar to financial markets after the Trump 1.0 mandate, the arrival at the very end of the month of a Chinese artificial intelligence boasting results similar to those obtained by American tech behemoths, but with significantly lower development costs, took traders by surprise. They even panicked for a day, suddenly doubting the continuation of massive investment in semiconductors and, more broadly, in the whole AI eco-system.

In 2024, best-selling author Yuval Noah Hariri remarked that “our institutions and technologies have changed, but our emotions are still from the Stone Age”. There is no doubt that, with a man like Donald Trump at the helm of the world’s leading power and the kind of performance we have seen in many technology stocks over the past two years, this statement is likely to be proven true more than once in financial markets during the current year.

Beyond technological advances and Donald Trump’s return to business, it is crucial to bear in mind a number of major economic, financial and geopolitical issues when it comes to managing multi-asset portfolios in 2025. The economic circumstances of the United States, Europe and China are very different. American exceptionalism contrasts with near-zero growth in Europe, and the situation in China remains worrisome, with no concrete signs of improvement in the country’s severe real estate crisis. These major differences in economic dynamics should not, however, lead us to give up on portfolio diversification. In other words, placing too much weight on US technology stocks alone in 2025 would be a mistake, which we are fully aware of.

Placing too much weight on US technology stocks alone in 2025 would be a mistake, which we are fully aware of

Admittedly, Uncle Sam’s economy is still firing on all cylinders. Unemployment is low and leadership is strong in many areas. But interest rates remain high, and the Chairman of the US Federal Reserve is likely to be quickly blamed by the Trump administration for not lowering them fast enough, owing to the pesky inflation that the introduction of tariffs and the deportation of illegal workers seem capable of fuelling. Caution is therefore called for stocks with heavily indebted balance sheets, as well as for US small caps, which face a challenging refinancing environment.

In terms of interest rates, the European situation paradoxically offers greater visibility. Weak growth on the Old Continent leaves little room for the ECB to prevaricate. The market is therefore legitimately expecting a series of rate cuts this year, and this should help European equities to do well, after two years in which the Stoxx 600 index failed to deliver even half the performance of the S&P 500.

The uncertainty surrounding Europe relates above all to economic growth and the perception (real or exaggerated) of a certain lack of dynamism on the part of European companies, which are allegedly bogged down by too many regulations when, on the other side of the Atlantic, deregulation and efficiency are the Trump administration’s catchwords. The sector mix of the European economy is also very different from that of the United States, with a much lower weighting of technology and the presence of many major players in the luxury goods, automotive and healthcare industries.  What is more, this year’s performance in the first two sectors is likely to be heavily dependent on a rebound in Chinese activity.

Speaking of which, the situation in China is still very different from that of the two Western blocs. As often described in this document last year, the Chinese economic slowdown is profound, and the transition to the New Year (of the Snake!) is unlikely to produce any miracles. The arrival of Donald Trump and his potential tariffs on Chinese imports could, however, prompt the government to take more aggressive, or at least better-targeted, economic stimulus measures to ease the ankylosis that has been afflicting the Chinese consumer for so long. Should this be the case, we could then see the beginning of a way out of the crisis, which would also be beneficial to many European players, as we have just explained.

Our ongoing assessment of the economic situation in the three major blocs – the United States, Europe and China – will be at the heart of our investment process this year. However, we are not forgetting geopolitics, where, once again, the return to power of the new American president is likely to be a catalyst for change… positive or otherwise. The end of the war in Ukraine, so often announced by Donald Trump during his campaign, could reshuffle the cards in the energy sector. Furthermore, the duration of the ceasefire in Gaza and, of course, China’s attitude towards Taiwan will remain potential vectors of market volatility this year.

Our commitment to building robust portfolios capable of withstanding major upheavals is not new, and will continue into 2025. Volatile markets do not necessarily entail disappointing returns, and our central scenario is by no means negative, just as it was not in 2023 or 2024. On the other hand, we have to be even more mindful of the high valuations in the United States, the high sector concentration in technology, and the change of US administration, with its attendant peculiarities, particularly in terms of communication.

In this respect, we maintain the broad diversification of the bond portion of our allocations, both in terms of market segments and duration.  Our exposure to gold also remains unchanged, as the yellow metal is probably not done rising and remains an effective hedge in the event of investor concerns.

Volatile markets do not necessarily entail disappointing returns, and our central scenario is by no means negative, just as it was not in 2023 or 2024

On the equities front, we remain confident in our exposure at the end of 2024, which of course gives ample weight to US equities, though not just technology. We are also maintaining our sector bets on healthcare and consumer staples, as well as energy in the broadest sense (oil & gas, renewables and services). Europe and Switzerland continue to be held in a diversified way in all portfolios, whether through ETFs or actively managed funds.

Finally, we should not overlook the alternative portion of our allocations, which has delivered excellent results in all market environments since 2022. We therefore remain confident in our long/short alternative managers, both in bonds and equities, whose decorrelating qualities will provide a much-appreciated safety cushion in the event of overly negative reactions on the part of investors.

In response to the uncertainties prevailing in financial markets and the unpredictable behavior of the American president, we will continue to apply the recipes that have made our allocations so successful over the past two years: diversification, flexibility and pragmatism in management.

January has already confirmed what we wrote in this same newsletter at the end of 2024, namely that we would enter 2025 with fewer certainties, particularly political and geopolitical, and more stock market volatility. It is hard to imagine the US economy slowing abruptly at the moment, just as it seems unlikely that someone like Donald Trump would not do everything in his power to galvanize his voters, for whom Wall Street’s performance matters a great deal.  Even so, our experience of the markets leads us to expect the unexpected, with vigilance preventing neither optimism nor performance.