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US EXCEPTIONALISM?

EMR February 2025

Dear Reader

To some extent, we are all aware of the impact of election years, not only in relation to the United States, but also in European markets and Japan. Consequently, we consider the current environment to be particularly challenging in terms of the short to medium-term outlook for equity markets.

The past two rounds of the U.S. presidential election have been truly surprising. Donald Trump played and continues to play a decisive role, not only for the US stock market, but also for other stock markets.

In the present EMR, we will focus on the performance of stock indices that we consider particularly important. In the chart below the respective indices are indexed to January 3, 2020, to make comparability clear and understandable.

The graphical representation of the selected share indices displays two similar developments:

  • The first rises from the beginning of January 2020 to around the end of 2021 / beginning of 2022 while
  • The second rises from late 2022 / early 2023 to late 2024 / early 2025.
  • The specific periods of growth/correction require special attention, as the corresponding rates of change vary greatly from index to index.

Contextually we can ask ourselves how the indices might behave in 2025. From a trend perspective, the performance of the individual indices – in the respective reference currency – is quite similar. The commitment to technology is really remarkable. It is noticeable that both the uptrends and the short-term corrections correspond relatively well. The respective shares of technology content vary considerably over time. The worst performing indices are the FTSE100 and the SPI. Overall, the performance of the European indices is the worst. A consistent comparison should also focus on the respective currency fluctuations, as the rises and falls are considerable in each case.

At this point in time we believe that the economic performance of individual countries is difficult to assess with significant precision, when compared to the outlook concerning the United States. Particularly tricky and difficult to assess – is and will be – the impact of highly deterministic tech stocks in relation to business fixed investment and consumer spending.

One specific and deterministic impact, which goes mostly unnoticed, concerns the trend change in productivity. An almost unnoticed “fact” is that U.S. entrepreneurs invest more in the future than European and/or Asian entrepreneurs. What does this attitude imply about investment allocation? As Swiss investors, we continue to prefer CHF investments over EUR and USD investments. However, a thorny issue concerns the Trump administration’s “heralded” America First policy, which calls for increasing and maintaining investments in the United States. Why, one must ask? Well, the repatriation of production lines is already visible in imports of goods and services, for example, from China.

We have been told time and again, that Central Banks should further cut interest rates in order to stimulate economic activity. In our most recent economic reports, we somewhat disagreed with these requests and expectations. Our assumption has been, and continues to assume, that the measures taken by central banks will help determine the direction of the economy and consequently to some extend also the performance of the stock markets. At this juncture, we kindly ask the reader to take a closer look at the chart above. What we are after is why are the reactions, e.g. of the indices expressed in EUR, so significant different over the both examined periods of growth and contraction? Contextually we ask ourselves also in connection with this, we also ask what we can expect for the year 2025 with regard to the DAX, the CAC40 and the FTSE100 compared to the American and Swiss indices.

At the same time, we are asking ourselves how the central banks’ interest rate measures are curbing inflation. However, the impact of inflation on wages is a constant puzzle. We fondly remember the great economist Milton Friedman’s statement of so many years ago that wages always follow inflation. The data for the period from 2021 to today speaks the language of Friedman, doesn’t it?

SUMMING UP. WHAT DO WE EXPECT FOR 2025

Given the political, economic and social environment, the outlook for 2025 looks like a “very complicated and rather difficult task,” does it not? Are we still of the opinion that inflation is the main enemy of policymakers and/or investors and therefore should be eliminated or at least contained, or do we begin to look at which economic sectors promise better results?

In the event that the authorities remain focused on fighting inflation through interest rate management, the outlook for returns remains rather subdued. Why, one may ask? In times of war, the continuing Russian invasion of Ukraine, and similarly absurd developments in the Middle East, one might wonder how changes in interest rates might reduce the price of crude oil, especially in Europe? We should not forget that two of Europe’s largest economies (France and Germany) are going through a very tangled political situation, namely a serious lack of economic, social and political leadership. We view this context as quite problematic, if not dangerous.

Should investors start focusing on sectors such as technology, and financial industries, as has been and should continue to be the case in the US, then the outlook might significantly “brighten”. Certainly, at this crossroads we cannot predict what the new US administration will really undertake, as the possibility of an America First policy is at the forefront.

Despite all the forecasting difficulties in timing, as Swiss franc investors. we prefer our home market, primarily for currency reasons. We assume that the CHF will continue to be in high demand.

International diversification speaks, in line with the technological developments once again for investment in the USA.

Regarding the EUR and GBP exposures, we persist in being somewhat concerned about the political uncertainties especially in France and Germany.

Suggestions are welcome.

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Disclaimer

The news is for your information only and does not constitute an offer, solicitation or recommendation for the purchase or sale of certain financial instruments. We have used reliable sources for all information but do not give any representations and warranties with respect to its correctness. Trading CFDs carries high risks. This financial instrument is not suitable for all investors. Therefore, make sure that you fully understand the risks involved and seek independent advice if you are an inexperienced investor. Historical results do not represent a claim to future performance. This information document is intended exclusively for distribution and persons in Switzerland. It does not constitute tax advice. Please note that tax laws can change and seek independent advice on tax matters.