In a nutshell
Political uncertainty and growth concerns in the US are likely to persist and economic weakness there has become more likely, but we do not see a recession.
Europe’s strong outperformance may falter initially. However, it has further potential over the medium term.
Inflation risks have increased further. Gold and base metals remain in demand.
Sharper setbacks in equities in the coming months should offer opportunities over the medium term.
Risks: Sharper-than-expected US downturn, rising inflation, no viable solution to the Russia-Ukraine war.
Portfolio positioning at a glance
We started the year overweight in equities and commodities relative to bonds and cash. After a strong start to the year in equities and commodities, we took some profits at the end of January. We reduced equities to neutral and closed the overweight in the US and the underweight in emerging markets. This left us in a balanced position as equity market volatility increased. Given the economic and political risks, a balanced portfolio positioning regarding equities and bonds remains appropriate, as does our overweight in commodities with a focus on precious and industrial metals. After Europe’s strong outperformance, we have no regional preferences for the time being as the financial conditions in the US are improving. US government bond yields have fallen significantly and are not very attractive given the inflation risks. In Europe, bond yields have risen sharply on the back of rising government debt and positive economic stimuli. We remain cautious for the time being and continue to favour corporate bonds, especially in the financial sector, and local-currency emerging market bonds. The latter are benefiting from the weaker US dollar, possible peace in Ukraine and stronger growth in China.
Berenberg Asset Allocation
First quarter review: Europe surprises many
At the beginning of the year, the “higher for longer” thesis dominated financial markets. Growth was a foregone conclusion. Almost all assets performed well in January. However, when Trump really got going in mid-February, things became predictably uncomfortable, volatility rose with political uncertainty and investors began to question everything. The laggards of recent years, European and emerging market equities (especially China and eastern Europe), surprised with strong gains. US equities, the winners of the last two years and overweighted by the market consensus at the beginning of the year, fell sharply, especially the technology sector and the Magnificent Seven. Gold, industrial metals, energy commodities (natural gas) and bonds outperformed the global equity index. Bond yields fell in the US on rising growth concerns and rose in Europe, especially Germany, on the announcement of massive new borrowing for defence and infrastructure. The US dollar weakened as a result. Within bonds, our preferred emerging market local currency bonds were the best performers.
Trump’s political uncertainty adds to volatility
Economic policy uncertainty in the US is at its second highest level since 1990 and equity volatility has increased since mid-February.
Economy and politics continue to favour a tough bull market
Our expectations for the economy and financial markets in 2025 have changed little since the beginning of the year. The global economy is likely to grow at a similar pace as in 2024, slightly weaker in the US and slightly stronger in Europe. Central bank interest rates will initially continue to fall (Europe) and last year’s cuts will continue to have a positive effect (US). In this environment, corporate profits are likely to rise, mergers and acquisitions will increase, investors will move money out of short-term interest-bearing assets and the bull market in risky assets will continue. However, after two good years for equities, with high valuations, optimistic sentiment and high investor confidence – especially in the US – and given the uncertainty created by Trump’s trade and foreign policy, it is likely to be a much more difficult bull year, with setbacks, higher volatility and ultimately less potential for equity markets. This has been evident since mid-February, after an initially calm and positive start to the year.
Strong first quarter for European equities and commodities (precious and industrial metals); US equities, Dollar and euro bonds weaken
US economic slowdown more likely
Tighter financial conditions at the start of the year (higher bond yields, stronger US dollar, higher oil price), political uncertainty, tariffs, austerity measures (DOGE) and lower immigration are weighing on the US economy. Consumers are reluctant to spend and businesses are reluctant to invest. US economic data has been disappointing of late. However, a temporary economic slowdown could work in Trump’s favour to prevent tariffs from further fuelling inflation, to persuade the Fed to cut interest rates and to ensure lower bond yields and a weakening of the overvalued US dollar. The second quarter of 2025 is likely to remain characterised by high economic uncertainty in the US. However, US bond yields have already fallen significantly, the US dollar has weakened and energy prices have fallen. This easing of financial conditions could support the US economy in the second quarter. A recession remains unlikely.
Macro data: Eurozone surprises on the upside, US disappoints
Since the beginning of the year, the surprise indices for economic data in the eurozone and the US have diverged significantly.
European equities with further medium-term potential
The strong rally in European equities was initially driven by tactical investors. There has been no broad rotation of investor money out of the US and into Europe. There has been little change in the positioning of global investors. There is therefore a chance that the current sentiment rally could turn into a structural recovery rally if global investors actually start to build up their positions in Europe. However, this will require more than hope. Peace negotiations in the Russia-Ukraine war will have to lead to a viable outcome for Ukraine too, the European economy will have to recover, European corporate profits will have to rise more strongly, and Europe will have to act as one and stand up for its interests, even without the US if necessary. Recent political developments in Germany, in particular the infrastructure package passed and the easing of the debt brake on defence spending, give us hope in this regard. However, after the strong relative performance since the beginning of the year, Europe’s relative outperformance may initially falter, especially as Trump also threatens to impose tariffs on Europe. However, international investors are likely to take advantage of any major setbacks in Europe.
Euro and European equities benefit, euro bonds fall
The euro, European bond yields and European equities rose sharply relative to their US counterparts in the first quarter.
Keeping an eye on medium-term inflation risks
In addition to the structural trends of demographics, deglobalisation and decarbonisation, other drivers of inflation include rising government debt in Europe, rearmament, infrastructure investment, rising global tariffs and immigration restrictions in the US. In addition, inflation is still too high, especially in the US. All this reinforces our expectation in recent years of higher inflation in the medium term and increased inflation volatility. A significant portfolio position in real assets, especially commodities, diversification beyond developed market equities and bonds, the addition of hedging strategies and increased tactical trading remain important.
Longer legs likely for Trump’s political stock market
Persistent volatility, declining liquidity and worsening seasonality argue against aggressive positioning. Moreover, investor positioning is still not low, despite weaker sentiment. However, we stick to our guns: 2025 is likely to be another bull year, albeit a much tougher one. Major pullbacks are likely to provide opportunities.
Author
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