Monthly Report 02/2025

These tariffs are likely to be just a first salvo and thus a foretaste of what is to come. The tariffs that have been threatened would be the highest since 1930, when the US resorted to this measure in the midst of a major global economic crisis.

The US is even threatening to impose tariffs of 100% on the BRICS countries (Brazil, Russia, India, China, South Africa and, from January 2025, Indonesia) if they continue to try to replace the US dollar as a reserve currency. This would hit companies such as Tata Steel, Reliance Industries, Adani Ports, JSW Steel, Indofood and Freeport Indonesia quite hard, both directly and indirectly.

Two BRICS member states, Russia and China, have proactively and publicly pushed for dedollarization in recent years, increasing their currency reserves, primarily with gold, which has driven the gold price to an all-time high.

India, on the other hand, is not pursuing a currency policy of dedollarization, and the US remains India’s main export market. India also wants to use the “hard” dollar to pay for its IT service centers. Over the last 50 years, the Indian rupee has depreciated from 8 per dollar to 87 per dollar (92% depreciation). Indonesia does not explicitly advocate dedollarization, but it would like to conduct bilateral trade in the respective currencies, which ultimately amounts to the same thing.

Tariffs are and remain a favorite instrument in Donald Trump’s political toolbox. He pays little attention to international agreements. He is concerned with “America first,” and if necessary, with the use of brute force. But tariffs do not help US brands.

Trump claims that American cars are being discriminated against by the EU. Yet fewer than 7’000 American-made cars, including large SUVs, were sold on the German market in 2024 that were produced in North America (0.24% market share). Mercedes and BMW SUVs made in the US, which were subject to the same tariffs when imported into the EU, sold ten times better.

This is the important lesson from decades of economic research on tariffs: those who surround their own market with a high tariff wall create false incentives. US automobile companies are almost only competitive in their home market. Internationally, they are falling behind.

When the US was still the largest car market in the world, General Motors and Ford could dream that the cars that are good for the US could also be good for the rest of the world. But now China is the largest car market, and even the newcomer Tesla has major problems establishing itself there.

The credit markets do not believe in the savings of Elon Musk’s DOGE (Department of Government Efficiency). Rather, they expect more tax cuts and larger budget deficits. Someone has to plug the holes in the national budget. Foreigners from China, Japan and Europe are doing this less and less. That is why they are being threatened with tariffs if they do not buy US Treasury bonds as they used to.

Since March 2022, the Fed has signaled in its monetary policy that it will no longer step in to cover the horrendous budget deficits by buying government bonds. Until then, it had bought a large proportion of new issues. Now, the credit markets are bracing themselves for a wave of issues that will hit them. The budget deficit will probably remain huge over the next few years and will probably increase further.

In the short term, the “independent” Fed will not be forced to buy the newly issued government bonds. This might work in Turkey, but even there only by accepting massive currency devaluation with correspondingly high inflation. But Donald Trump promised his electorate a return to low inflation rates, which is why he fears severe currency devaluation.

Fifteen years ago, US government bonds were just as popular as German Bunds. Swiss bond yields were slightly lower, around 1% to 1.5%. This is no longer the case. The phase of bonds as a “safe” investment is also over. Yields are reacting ever more sensitively to fiscal policy news and are shaking prices back and forth. The volatility index of US government bonds (Move) is at 95, around 50% higher than in the pre-pandemic decade.

The bond market is stronger than the US president or even the Republican-controlled Congress. It is the only authority that can really force the government to get its finances in order.

Recently, British Prime Minister Liz Truss resigned after six weeks because the financial markets rejected her economic program. They drove the pound down and yields on government bonds up. As a result, the Bank of England had to rescue numerous British pension funds whose bonds suffered massive losses.

With yields on government bonds at 5%, interest rates for new mortgage loans are at 7% and those for leasing installments at 8% to 10%. Credit card overdrafts cost 12% to 16%, depending on credit scoring. The new US Treasury Secretary, Scott Bessent, is aware of the fragile equilibrium.

As a hedge fund manager, he knows the speculators. If he fails to compensate for the tax cut plans with credible savings, there is a risk of turbulence in the US bond market, which is of global systemic importance.

Corporate bonds remain an interesting asset class that we use depending on the risk profile of our clients (see monthly report January 2025). We distinguish between two main types. One is associated with more risk than the other (ZIF) because of the lower credit rating of the companies (“BB” on average for the COF), whose credit rating is on average “A”.

We are only writing this because the historical volatility of the COF over the past year was 2.1%, a third lower than that of the ZIF. If you associate volatility with risk, you could counterintuitively analyze that corporate bonds with a lower credit rating are less risky than those with a high credit rating. This observation may well be true in the short term, but the real reason for the higher volatility is not the credit rating, but the duration.

Bonds with a high residual maturity fluctuate much more than those with a low residual maturity. It is therefore worth taking a look at the duration.

It is structurally lower for corporate bonds with a lower credit rating. These companies typically borrow capital for four to five years. For companies with a high credit rating, investors are also willing to provide funds for ten years or more.

This ultimately also explains why the duration in the COF is 2.5 and in the ZIF 5.3. To a certain extent, interest rate risk is the main risk for the ZIF; conversely, interest income is the main source of income. The credit risk premium fell to 85 basis points in January. This corresponds to the additional income compared to a duration-adjusted government bond. In view of the high average credit rating, defaults are not expected.

At COF, credit risk premiums are the main source of income. At 417 basis points or 4.2% p.a., significantly more income is expected. But this premium implicitly recognizes the possibility that from time to time one or more debtors could run into financial difficulties.

Given the current economic cycle, we expect a default rate of 1.2%, which should eventually result in a net yield of 3.0% above the yield of risk-free government bonds. In order to minimize the effects of a possible delay or prevention of an interest payment or repayment, we diversify the portfolio. The COF includes 199 bonds from 172 issuers, while the ZIF has 303 bonds from a total of 201 issuers.

Just 26 months after the peak of 3.5% inflation in August 2022, it is already back down to a low 0.6% in Switzerland. This enabled the Swiss National Bank to lower key interest rates and thus also improve lending conditions for mortgage debt. The observation that loans can now be financed again from 1.2% is undoubtedly leading to increased demand from private households.

By contrast, the increased demand from institutional investors is related to the yield outlook. On the one hand, alternative sources of returns in Swiss francs with a comparably stable cash flow structure are hardly discernible. On the other hand, the general vacancy rate is typically below 1.0%.

The ongoing trend towards individualization is creating greater demand for apartments. The Federal Statistical Office assumes in its medium population scenario that by 2050 the average household size will fall from 2.22 at present to 2.15.

This may not sound like much, but it means that even if the residential population remains the same, 130’000 more residential units will be needed in 2050 than today. Immigration is also creating robust additional demand for rental apartments – even with rising rents.

The Swiss real estate market is characterized by “tension-free” growth. The conflicts in Ukraine and the Middle East and the measures implemented by Donald Trump to strengthen the US as a business location are having little effect. The downside risks are relatively low.

Residential property prices are likely to increase in all segments. The further interest rate cuts expected over the next two quarters should further increase the relative attractiveness of home ownership over renting.

A more cautious approach is required for office and retail properties. Here, it is not possible to speak of a shortage. The real estate experts surveyed by FPRE in fall 2024 expect market rents for office space to move sideways for the most part over the next 12 months, with around 30% of respondents expecting rents to fall.

In the case of retail properties, a relaxation in vacancies is more likely in A locations, while an increasing number of tenant changes and corresponding fluctuation vacancies are to be expected in B and C locations. Shopping centers with a catchment area that is too small and an outdated offering already have increased vacancies and are not likely to see any relief from the market in 2025.

It is undisputed that at least some of the “Magnificent 7” US tech stocks should be held in a portfolio. They are currently characterized by impressive margins and growth rates. We are particularly impressed by Nividia, Amazon, Microsoft, Alphabet and also Apple, which performed differently in January – partly due to the shock caused by the Chinese start-up DeepSeek. Their services are less dependent on the trade rhetoric coming out of the White House, but the uncertainty regarding future sales, margins and earnings is palpable.

The global equity component is enriched and diversified with European companies that operate globally. These include companies such as SAP, Allianz, Siemens and Schneider Electric. Declining interest rates and rising real wages are currently accelerating the recovery in Europe from a low level.

However, the focus is on Swiss companies. These are companies with strong growth, high and stable margins, solid balance sheets and low volatility. In many cases, their markets have high barriers to entry. In addition, they are consolidating their medium and longer-term market position by investing heavily in research and development.

Some of these companies, such as Roche, Nestlé and Novartis, are interesting because their valuations have fallen significantly for several quarters. Over the past year, like many large European companies, they have underperformed high consensus expectations. Although their profits continued to rise (faster than the rest of the market), their valuations fell sharply. The downgrading of Nestlé’s valuation, for example, was accompanied by a downgrading of the entire consumer staples/food sector.

Because they are more defensive in nature, they tend to perform better even when global economic growth slows. But in recent quarters, we have seen a surprising, technology-driven acceleration. Rather than sliding into a recession, the global economy is in a supercycle-related phase of rising investment and rapid adaptation of new technological opportunities. But tech stocks currently appear to be maxed out.

Not so our stocks, which are selected after rigorous screening and with which we are currently well ahead of the World Equity Index (+3.1% at the end of January). Roche and Novartis also presented a confident outlook for 2025. Nestlé, which will announce its guidance on February 13, could also surprise on the upside

The unrelentingly cold winter in Europe is keeping gas and electricity prices relatively high on the continent. Large industrial consumers are also feeling the effects, particularly in Germany, the only G-20 nation without nuclear power plants. However, it is importing nuclear energy from France to bridge the gaps in supply during the winter period.

The global energy consumption associated with new data centers is increasing rapidly and will double between 2024 and 2030. Determining the location has to do with competitive energy prices. In this respect, Germany has made a “historic mistake” with its one-sided focus on climate protection, according to the International Energy Agency, and is paying for it with a significant decline in international competitiveness.

Germany can currently offer neither competitive energy prices nor a secure energy supply. The situation is different in the south and north of Europe, as well as in France and Switzerland. That is why these regions are among the preferred locations in Europe’s growing landscape of data centers and industrial production facilities.

63 modern reactors are under construction worldwide at the end of 2024. In the future, thanks to new technological advances, even smaller modular reactors, known as small modular reactors in technical jargon, will be added. The Paul Scherrer Institute of ETH Zurich is also conducting research on these. Ultimately, however, it is not about the core technology per se, but about numerous innovations and their fields of application in business and science.

Classic thinking, that 1% to 2% more energy would be needed every year, is currently being fundamentally questioned by disruptive technologies. High-performance computers can now perform previously unthinkable calculations and thus help to gain a new understanding of chemical reactions, and to improve product properties and production processes.

In materials science, we are on the verge of developing new types of batteries. There are also quantum leaps in the entire field of logistics, the chain management of goods from raw materials to private households that trigger purchases. This list could be continued at will.

In many areas, a global development competition is underway between the USA, China and Europe. Thanks to decades of successful research, Switzerland and Europe as a whole are still reasonably well positioned. We have the chance to continue to play a leading role, but this requires a willingness to take risks, long-term commitment and a strong partnership between business, science and politics. And an undogmatic way of thinking and acting with regard to energy.