The Trump Administration continues to show its cards
Typically, a single policy dominates each year after a new administration is elected (e.g., tax reform in 2017, trade war in 2018, COVID-19 in 2020, and industrial policy/CHIPS Act/IRA in 2021). However, Trump 2.0 is tackling multiple policies simultaneously. The noise-to-signal ratio is exceptionally high—focus on what matters and what we know, as described below. Much of the tariff debate falls into the “known unknowns” category, with scope and sequencing still uncertain.
What we know:
1) Tariffs: currency markets are where trade policy shows up most, and currently, markets are pricing in a scenario similar to a global tariff. Trump wants countries to negotiate directly with him. He threatens reciprocal tariffs to get countries to talk to him (an example is Modi). If reciprocal tariffs are enacted, emerging market countries will be the most affected (India, Argentina, Mexico, Brazil, Vietnam, Taiwan, Indonesia). From an investment perspective, we believe that service sectors will perform better than goods sectors.
Companies in favor of border-adjustable taxes (winners): Boeing (BA), General Electric (GE), Caterpillar (CAT), financial entities like Bank of America (BAC), JP Morgan (JPM), Mastercard (MA), Prudential (PRU.L). Companies against border-adjustable taxes (losers): Walmart (WMT), Nike (NKE), Gap (GAP), Toyota (TM).
Finally, we believe that China is treated differently than other countries. Trump does not want any U.S. company operating in China, period. U.S. companies leveraged in China will continue to be under pressure.
2) Historically, stocks perform well in the first year of a new president, unless there is a recession. The last four first-year presidential cycles have produced returns of +20%. It is the second year when stocks are pressured as policies filter through the economy.
3) Since 1973, finance has outperformed the S&P 500 in every first year of a new president (except one year, the financial crisis of 2009). Healthcare stocks have outperformed the S&P 500 in the first year of every Republican administration since Reagan, 1981.
4) What financial market indicators are the most important for the new administration (according to Treasury Secretary Scott Bessent's recent interview with Larry Kudlow)? 1. 10-year yield, 2. Oil price. 3. Gold price: we monitor these to gauge the direction of policy.
5) If Congress wanted to make unpaid tax cuts, the bond market would be punished. Therefore, focus first on reducing spending to historical levels (DOGE). Sectors under pressure due to declining spending: consumer staples, energy, education, transportation. Positive for defense stocks.
6) For the first half of 2025, we believe the U.S. market is well supported by liquidity provided by the U.S. Treasury. On January 21, the United States reached its debt ceiling (the U.S. cannot issue new net debt). Instead, the Treasury is now paying its bills, a tailwind of liquidity (400-500 billion USD) for the markets (keeping yields low), financial conditions are easing. Effectively, similar to quantitative easing. This will continue until Congress raises the debt ceiling (can issue new debt), and until then it will help keep yields/USD in check. Opposing forces (higher yields) are: 1. Rigid CPI, 2. Tariffs, 3. Budget deficit.
In summary: Trump's political strategy 2.0, particularly regarding tariffs, is creating a high level of uncertainty in the markets. Key sectors likely to perform better include financial services, services, and companies with border-adjustable taxes, while those exposed to China or dependent on global trade may face pressures. U.S. Treasury liquidity and a weakened dollar could support the market in the first half of 2025, but risks persist, including tariffs and ongoing inflation.
Expectations for the upcoming elections in Germany
Polls show that the CDU/CSU leads comfortably, followed by the AfD in second place. The SPD and the Greens are in a tight race for third place, while the FDP, Die Linke, and BSW are fighting for the five percent threshold. Key questions remain: how strong will the CDU/CSU perform, what coalition partner will they choose, and will one partner be enough? With CDU leader Friedrich Merz ruling out cooperation with the AfD, the 2029 election could become significantly more interesting, especially if support for the AfD continues to grow.
Markets may react in the short term in the event of an unexpected outcome or difficult coalition negotiations, but long-term factors such as interest rates, inflation, and the global economy remain more crucial.
DAX Analysis: A week before the German federal elections (Sunday, February 23), the DAX continued its record rally while the German economy remains in recession. This apparent discrepancy is easily explained: DAX companies generate most of their revenue abroad. In major export markets like the United States, China, and France, conditions are not perfect but remain better than in Germany. Global giants like SAP, Siemens, and Infineon benefit from megatrends like digitalization, automation, and renewable energy.
These German stocks should be on your watchlist: key challenges include infrastructure expansion (ThyssenKrupp, Hochtief, Bilfinger), reducing bureaucracy and digitalization (SAP, Software AG, Bechtle), energy transition (Siemens Energy, Nordex, Encavis), housing (Vonovia, LEG Immobilien), future technologies (Infineon, Carl Zeiss Meditec), and reforms in pensions and healthcare (Fresenius, Siemens Healthineers, Media).
Germany stands firm on its debt brake: with a debt-to-GDP ratio of 63 percent, Germany remains solid by international standards. Japan is four times more indebted, at 250 percent, while Italy (135 percent) and the U.S. (123 percent) have roughly double the debt levels. To reach a debt ratio of 101 percent like the UK, Germany would need to take on about 1.59 trillion euros in additional debt. Even a fraction of this could fund much-needed investments without jeopardizing long-term fiscal stability. Notably, Germany is the only country in our comparison (see chart) with a declining debt ratio over the past 20 years.
Debt alone will not solve Germany's structural problems: its low debt levels provide significant fiscal room for growth and crisis management, an opportunity that remains largely untapped.
In summary: it is unlikely that the upcoming German elections will disrupt the markets unless coalition negotiations prove unexpectedly difficult. Investors should focus on structural issues, digitalization, automation, and energy transition, while keeping an eye on potential fiscal changes post-elections, particularly regarding infrastructure and industrial policy.
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