Dear Readers,
Optimism about US equities was high after Donald Trump’s election victory, and market expectations, as measured by equity valuations and investor positioning and sentiment, were even higher at the end of 2024. As it turned out, European and Chinese equities, which had been scorned, made a spectacular comeback that few expected. Even our optimistic target of 22,000 points for the DAX by the end of 2025 was shattered in February. This shows once again that diversification pays off just as much as healthy scepticism when the market consensus is too strong and sentiment too extreme. For investors, it was initially a good start to the year, with the vast majority of investment opportunities performing positively. This changed with the inauguration of President Trump, the political uncertainty and the resulting market volatility. US equities in particular corrected. Winners in the first quarter included European equities, emerging market equities and precious and industrial metals.
We had expected markets to be more challenging following Donald Trump’s inauguration. The combination of tighter financial conditions in Q4, austerity measures (DOGE), immigration restrictions, rising tariffs and high uncertainty is likely to lead to a contractionary economic impulse in the US, at least temporarily – US economic data has been disappointing of late. This could play into Trump’s hands, as weaker growth is already leading to lower interest rates and a weaker US dollar, and could also lead to a reduction in still too high inflation, all of which are medium-term pro-growth goals of the Trump administration. Combined with the withdrawal of liquidity due to the capital gains tax for the year 2024 due in the US in April and the typically weaker equity seasonality from May onwards, the period of increased market volatility is likely to continue for the time being – Trump’s political stock markets are likely to have longer legs. Inflation in the US is still too high and tariffs are not helping to bring it down. Now that Europe’s public debt is also likely to rise more sharply, with defence and infrastructure spending on the rise and with it demand for commodities and labour, investors should not lose sight of the medium-term inflation risks. As a result, bond yields are likely to remain volatile. Commodities remain an attractive addition to any portfolio. European equities have further potential if international investors seriously change their allocation. However, the strong relative performance could be tempered for the time being by tariffs against Europe and improved financial conditions in the USA. Markets are likely to remain challenging in the second quarter and a balanced positioning is therefore appropriate. In the medium term, we remain optimistic and could see ourselves adding to our holdings on stronger corrections.
In the Insights interview on page 14, Kay Eichhorn-Schott, an equity portfolio manager specialising in the healthcare sector, talks about what makes the sector interesting for investors at the moment, and which trends and sub-sectors he finds particularly exciting.
Publisher
Prof. Dr. Bernd Meyer
Prof. Dr. Bernd Meyer has been Chief Investment Strategist at Berenberg Wealth and Asset Management since October 2017, where he is responsible for discretionary multi-asset strategies and wealth management mandates. Prof. Dr. Meyer was initially Head of European Equity Strategy at Deutsche Bank in Frankfurt and London and, from 2010, Head of Global Cross Asset Strategy Research at Commerzbank. In this role Prof. Dr. Meyer has received several awards. In the renowned Extel Survey from 2013 to 2017, he and his team ranked among the top three multi-asset research teams worldwide. Prof. Dr. Meyer is DVFA Investment Analyst, Chartered Financial Analyst (CFA) and guest lecturer for "Empirical Research in Finance" at the University of Trier. He has published numerous articles and two books and received three scientific awards.
Prof. Dr. Bernd Meyer
Chief Investment Strategist and Head of Multi Asset