Quarterly Investment Review – Q1 2025

The EU was formed in order to screw the United States

President Donald Trump 26 February 2025

Quarterly Investment Review – Q1 2025

The first quarter saw the inauguration of President Trump and almost immediately this led to a series of dramatic changes in the political climate. Final detail on many policies hasn’t always been clear but among the more significant policies that have been indicated has been the proposal to raise tariffs on various goods, a decline in the importance of the climate change narrative, the abandonment of Ukraine and corresponding greater accommodation of Russia, a fracturing of the NATO alliance, and the suggestion that Canada, Greenland and Panama come under US control. These pivots in American policy signal the end of the post 1945 Settlement and led directly to Germany’s government voting through a €1 trillion bill to increase spending on defence and infrastructure, casting aside their fiscal and military restraints, a major reversal. An equal impact on markets was the announcement in January by a Chinese firm called Deepseek that its semiconductor chips could perform as well as some of those of the American giants at a fraction of the cost, thereby challenging American leadership in AI, which has become the most important trend in the stock market in the last few years and was the embodiment of US exceptionalism. These events generated a mass of noise and commentary. Yet at the end of the quarter most markets were affected much less than might be thought. The S&P fell 4.6%, The MSCI World index fell 2.7%, the US 10- year bond market rose 5.5%, and the US dollar fell 4%. Gold rose 19%.

The levels of debt and deficits in the Western world mean that Governments have started to face significant issues as global bond markets question the sustainability of this vast debt load being supported by flimsy growth. Nonetheless it is impossible to predict what level of debt creates extreme stress. Japan has shown that fiscal stress is not guaranteed even where the government debt has been ballooning for decades. The most important market is the US, where Government expenditure is running at a rate of 6% above receipts. Worryingly this is during a period when the economy is reasonably strong, which begs the question of what would happen if a recession arrived. The US needs to refinance $7.6 trillion of maturing debt in 2025, in addition to issuing new bonds to meet any budget deficit, and as interest rates rise the interest bill rises commensurately. US interest payments are now the second highest item in the US Government budget (greater than the defence budget), and the stock of Government debt is increasing by $1 trillion every 100 days. Elon Musk is attempting to make inroads on Federal spending, but even the Trump Administration has said that its target by 2028 is to lower the fiscal deficit from 6% to 3%. Deficit spending is entrenched, and this at a time when both tariffs and reshoring of industry will keep upward pressure on inflation and interest rates. One solution to reduce the debt is to raise taxes. US taxes are low relative to National Income which is one reason that stock market profits have been so high. However, Trump looks unlikely to take this path having been elected on a low tax agenda. Europe’s debt problems are even more acute because the tax burden is already high. Europe’s expansion of the welfare state has crowded out other priorities which has led to the confrontation with Trump who has insisted that they bear more of their defence expenditure. With no appetite for austerity most European Governments are having to confront tough choices. These decisions are all the harder given that despite the spending binge of the last decade few of the citizenry in western nations feel satisfied.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the Month – How to become friends with Mr Market

How to become friends with Mr Market

 

MSCI WORLD PRICE – MSCI WORLD EPS – MSCI WORLD PRICE EARNINGS RATIO

In his famous 1949 Book “The Intelligent Investor”, Ben Graham speaks about Mr Market.
Mr Market is a strange fellow with some specific attitudes:
Mr Market is very emotional. He can be euphoric or totally depressed.
Mr Market is often irrational
But Curiously Mr Market is frequently efficient, but not always. You never know with him…
Also, Mr Market is quite sarcastic at times and he loves wrongfooting investors.

Who is this guy, Mr Market? He offers you transactions, at your option. You’re never obliged to accept, because he comes every day with new deal offers, and at new prices.
With this in mind, thanks to him you can buy low and sell high. And he makes you feel like the King of the hill. But you can unfortunately buy high and sell low. And you feel like a victim.
But it is never Mr Market’s fault: it’s you who pushes the button to buy or sell, and he serves you, because once again he’s there every day. He never forces you.

So, you get the point: Mr Market is extremely emotional in his behaviour.
But he is totally agnostic to the people working around him.
Mr Market is certainly one of the most scrutinized characters in the world and in history: scientists, strategists, economists, politicians, portfolio managers work hard to try to anticipate his mindset. To try to read his mind?
And what about the immense computer work being done on that purpose!

But Mr Market has absolutely no sentiment.
He neither hates, nor loves any single investor.
Conversely, investors switch from one sentiment to another quite frequently: when they make money, Mr Market is so nice, so smart…. In this case investors feel like they have a superior IQ. They tend to claim loudly that they understand Mr Market, he’s a good friend, they know him very well.

But sometimes the same people will not find enough insults towards Mr Market: when they lose money, he’s stupid, irrational, crazy…… they will never ever again do business with him…
The main problem with Mr Market, the source of his versatility, is that he often becomes obsessive.
The topic of his obsessions changes all the time: it can be interest rates, oil prices, monetary policy, inflation, politics or geopolitics……. This makes a lot of things to worry about.
Easy to guess that so far in 2022, Mr Market has been extremely obsessed by geopolitics with the Russia-Ukraine war, but also by inflation.

But thankfully or not, his obsessions tend to be short-lived. Except the most important: Mr Market has one and only one long term obsession: corporate earnings. If he’s confident they will rise, then he will rise accordingly. If he believes earnings might disappoint, he will discount this setback and turn pessimistic and depressive.

Like for Mr Market, earnings should be investors’ first preoccupation. Investors tend to be blinded by short term factors, forgetting the big picture.
The second preoccupation for investors should be valuations. How much do you pay for a future flow of earnings and dividends?

As shown on the Chart of the Month, Mr Market offers you today transactions at prices that are not unattractive.
Prices have come down while future earnings should rise, hence valuation have shrunk to the levels observed in 2015, 2016 and 2017.
The estimated Price Earnings Ratio for the MSCI World stands at 16 today; this is not as low as it was at the end of 2018 or in March 2020 (it was 13.5), but it is much lower than during the last 18 months (it was closer to 21 times).
This is all investors should worry about long term: are earnings expected to rise, and are valuations reasonable?

This being said, we might be witnessing a change in leadership in markets, from large caps growth, essentially Information Technology and Communication Services, to a more broad-based leadership which would include Financials, Industrials and Energy for example, and this would be healthy.

In this context, we maintain our view that a well-balanced approach with a strong focus on quality will be the right strategy going forward.
Looking back in a few years, hopefully we will claim that Mr Market is a good friend of ours, although we know, Mr Market has no friends.

 

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.  Additional information is available on request.

© NS Partners Group