MARKET INSIGHT – March 2025

MARKET INSIGHT

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

When the music slows down a bit

February could be seen as a month of paradoxes. A declining American market, as if suddenly filled with doubts about the “exceptionalism” of the United States and even certain concerns regarding the actual profitability of the huge investment plans linked to artificial intelligence. At the same time, European shares have continued their excellent start of the year, although no new wind of optimism is blowing through the EU economies.

The antics of the US president and, to a lesser extent, his faithful second-in-command Elon Musk seem to have somewhat cooled the ardor of some investors, who had no doubt forgotten how confusing Trump’s communication strategy can be from an investment perspective. Between the multiple tariff announcements and the use of singular methods (to say the least) in view of a ceasefire in Ukraine, the attitude of the White House has added a layer of uncertainty in a market already scrutinizing the slightest sign of a slowdown in the US economy.

American films depicting the world of Wall Street are often caricatures and convey a certain image of finance to the general public. The excellent “Margin Call”, released in 2011, is not in line with this tradition and describes the realization of a young engineer working for a large investment bank that its balance sheet is riddled with subprime mortgages, thereby compromising its future. One of the most famous scenes in the film is when the young employee explains to the bank’s board of directors in the middle of the night how dangerous the situation is. Faced with the irritation of the cynical owner, masterfully played by Jeremy Irons, and not very receptive to the technical terms of his young recruit, he attempts an analogy. He explains that in a game of musical chairs, the music has recently slowed down yet not stopped.

The subprime crisis is a thing of the past and the current market situation bears no resemblance to that of 2008. However, for other reasons, one gets the feeling that during this month of February the music has slowed down somewhat.

The first implementations of President Trump’s tariff agenda, coupled with the emergence of doubts as to the merits of the gigantic investments in the AI ecosystem (data centers, energy, semiconductors) and of course a geopolitical situation that remains very uncertain, culminating in Donald Trump’s “go-it-alone” in the resolution of the conflict in Ukraine, are all headwinds for investor confidence.

Overall, the consensus for a strong US economy in 2025 remains, but inflation is still a key concern

Overall, the consensus for a strong US economy in 2025 remains, but inflation is still a key concern. The latest US CPI data remain clearly above the level required by the FED to continue its process of lowering interest rates, and wages now appear to be the crucial factor to watch in Uncle Sam’s country.

In Europe, February was mainly marked by the German elections, which gave rise to legitimate fears of a breakthrough by the far right. The results of the ballot box finally confirmed the polls with a victory for the traditional right. However, the search for a coalition excluding the AFD, which came second, is going to prove complicated. So, less electoral uncertainty, but an additional delicate political situation within the EU, besides the one in France.

Another significant development for the old continent in recent weeks has been the recent attitude of the United States, its historical ally. Vice-President JD Vance’s controversial speech in Munich and the feeling of being relegated to the sidelines in the resolution of the conflict in Ukraine seem to mark a turning point in the relationship between Europe and the US. As with the energy crisis in 2022, this could have the merit of “waking up” the Member States and could help to attenuate the image, real or imagined, of a slumbering beauty often associated with Europe.

To continue with the paradoxes, February also saw a sharp rise in Chinese stocks, without the government in Beijing announcing any specific measures to get the country out of the dire economic situation that has now prevailed for many quarters. Investors welcomed the “official” entry of Chinese tech heavyweights into the AI race and the surprise reappearance of Alibaba boss Jack Ma. A few signals here and there seem to indicate that Beijing could adopt a more business-oriented attitude toward its national champions, at a time when President Trump seems determined to flex America’s technological leadership muscles and when his rapprochement with Moscow has the potential to isolate China.

If we focus our rapid overview to a more micro level, it is worth remembering that February also saw numerous corporate releases, with Nvidia’s, one of the most eagerly awaited, having just come out. Without going into the details of the reported results, it can be said at this stage that the exceptional nature of the figures from the number one semiconductor company is now in line with the expectations, also exceptional, of investors. Hence less surprise effect and, a priori, a certain normalization.

More generally, it is worth bearing in mind that in 2025, despite often good results, the “Magnificent Seven” are by no means the driving force behind the S&P 500 index. Instead, the US market saw intense sector rotation in February. With the technology sector losing some of its momentum, it was the healthcare, financial (insurance in particular) and consumer staples sectors that benefited from this change of heart among market participants. Similarly, European stocks (including Swiss ones), aided by a catch-up effect with their US counterparts, also found favor with investors.

As stated in this newsletter last month, more volatility does not necessarily mean lower performance. February was not marked by any major shocks for equities, but did provide a few reminders of the importance of diversification, particularly in terms of sectors and geography.

The virtual standstill of the US market has not prevented our allocations from performing well in recent weeks. Directional exposure to the healthcare, consumer staples and financial sectors, our diversified investments in European and Swiss equities, as well as the bond and alternative (including gold) pockets of our portfolios have compensated for an S&P 500 index whose tech engine has stalled.

It is worth bearing in mind that in 2025, despite often good results, the “Magnificent Seven” are by no means the driving force behind the S&P 500

We attach great importance to the risk/return profile of our multi-asset allocations. We need them to pack enough of a punch to capture the upswings, while retaining flexible strategies capable of absorbing shocks when they occur.

In this respect, the bond portion of our portfolios, in terms of both market segments and duration, combines responsiveness and protection.

The significant diversification of our equity component does not preclude it from being directional. In other words, we capture bullish market movements in a satisfactory manner, without having to take reckless risks.

Finally, as usual, it is worth mentioning once again the importance of the alternative strategies we hold in our portfolios, such as our gold position. The decorrelation benefits of this part of our allocations have been tried and tested in recent years, in very diverse market environments. The return of a little more volatility should provide an adequate playing field for these products this year.

This quick overview of the last few weeks does not in any way lead us to change our mind about the central scenario for 2025. To use the analogy of “Margin Call”, the music is showing some signs of slowing down, but the tempo has been fast for the last two years and a change of rhythm should not be mistaken for a wrong note.