U.S. Stock Market Continues Strong Rally
The boom on the U.S. stock market continues! Though August is usually associated with higher volatility and losses, global investors were able to enjoy gains this year, except for Indian equities and long-dated government bonds in industrialized nations.
This was particularly evident on the U.S. stock markets, which have lagged over the course of the year but were able to celebrate strong price gains in August. All market segments, ranging from popular tech stocks to the shares of small and medium-sized companies, posted strong gains. Even the battered pharmaceutical sector was able to recover somewhat in August. The same applies to the biotechnology sector, in which we are invested via the ‘Polar Biotech’ portfolio.
In addition, the U.S. dollar continued to strengthen somewhat, which further improved the positive performance for international investors who are tracking their returns in non-USD currencies.
European Markets Show Resilience Despite Weakening Outperformance
The outperformance of Europe compared to America that has been observed since the beginning of the year weakened further in August, even though the valuations of European equities still appear very attractive. Nevertheless, European equities, led by the IBEX, DAX and MDAX, are still leading the scoreboard in 2025.
The same applies to Asian and Latin American equities, which are benefiting from an increasing rotation out of American assets, as can be seen from the various investment ideas that we’re highlighting on the following pages.
Strategic Approach to Chinese and Asian Markets
Why We Avoid Direct China Investments
Although we do not recommend any explicit China investments, all our Pan-Asian portfolio ideas benefit from the current upswing on the Chinese stock market. We continue to believe that Chinese equities are best embedded in an overall Asian strategy for global investors.
This is because of the disappointing long-term performance of Chinese equities since the opening of the Chinese stock markets in the early 1990s. The Chinese stock markets are characterized by high volatility, without any associated return compensation. This makes them unattractive.
At around 1.8% p.a. in USD based on the MSCI China since January 1993, long-term returns on Chinese equities are alarmingly low, which is why we have deliberately removed all ‘China only’ investment ideas from our recommendation list.
Superior Returns from Broader Asian Strategies
In contrast, the long-term return of the MSCI Asia ex Japan, which includes a certain China allocation, is at 6.7% p.a. in USD for the same period, which is in line with the expected equity risk premium of 6–8% p.a.
Indian equities have performed even better since 1993, returning 8.7% p.a. in USD, which is why we continue to include ‘India only’ investment ideas in our advisory universe. Even if the valuations for Indian equities are still on the high side, it seems that the current correction is slowly coming to an end, so that interested community members can start building positions.
Emerging Opportunities in Latin American Markets
We’re also seeing great opportunities in Latin America, which is generally dominated by Mexico and Brazil as measured by the MSCI Latin America Index. Brazil’s stock market seems to be waking up from hibernation and offers both short-term and long-term opportunities.
The market looks very cheap and seems to be receiving more investor attention after many years of neglect. We consider DWS Latin America to be the best solution for long-term participation here, as the fund has been beating its benchmark, the MSCI Latin America, by a wide margin and for many years.
The long-term return of the MSCI Latin America in USD terms has been 7.6% since 1993 (from 1987 to today even 11.70% p.a.), which is clearly in line with expected equity risk premiums.
The poor performance of Chinese equities since 1993 can therefore be seen as a ‘negative’ outlier in many respects. The explanation is probably the very high level of government interference in the economy as well as the low profitability of Chinese companies compared to other Emerging Markets.
Global Bond Market Analysis
Mixed Performance Across Bond Categories
Global bond markets also had a good month and recorded gains in August. Only long-dated government bonds in the U.S. and Europe saw losses. One could almost speak of a buyer’s strike here, as the high level of government debt and expected new borrowing tend to focus bond buyers on the ‘short end’.
Bonds with long maturities are only purchased selectively, and the market is currently testing at which interest rate levels buyers will start showing interest. Currently, the ‘5% handle’ for 30-year U.S. government bonds is on investors’ radar but may still only be an intermediate step towards 6%. At 6%, we can identify very strong technical support levels for long-dated U.S. Treasuries. The question is whether such high interest levels could be sustained without any FED intervention!?
European Government Bond Outlook
In Germany, an interest rate of 3.5% p.a. or even 4% p.a. seems possible for 30-year government bonds. This compares with 0% only four years ago. Previous buyers of these bonds are sitting on very high losses and will need a very long time to recoup them. Due to the current uncertainty regarding government finances in America and Europe, we would still advise against the purchase of long-dated government bonds.
Gold Market Reaches New Heights
Gold has now broken through the USD 3,500 mark per ounce and looks very strong from a technical perspective. Compared to recent inflation trends, a price between USD 1,000 and 2,000 per ounce would be more appropriate, which is why gold currently appears to be significantly overvalued and overbought.
Interested community members should be aware of these risks, even though gold is currently in great demand and is likely to continue to rise. We could see ourselves adding some investments in high-quality gold miners in a pullback.
Current Valuation Concerns and Portfolio Strategy
Tech Stock Valuations Return to March Levels
Due to the massive recovery on the global equity markets, we are now back at the valuation levels seen at the end of March, when we criticized the high valuations of shares in major U.S. technology companies.
Risk premiums have fallen back from 5.5% p.a. on April 7 to less than 4% p.a., which again reminds us to be cautious. At these levels, we would not buy the S&P 500 Index, the Nasdaq 100 Index or similarly allocated technology funds or ETFs. The same applies to the traditional MSCI World Index.
Recommended Investment Approaches
We would currently only invest in very broadly allocated global equity ideas such as the Dimensional World Allocation Portfolio or the MSCI AC World IMI Index, which represent between 9,000 and 15,000 global stocks and have a considerably lower proportion of large American companies and invest significantly in developing countries and small companies.
Community members who are heavily invested in the S&P 500, the Nasdaq 100 or similar investments should see the currently high valuation levels as an opportunity to rebalance their portfolios.
Attractive Opportunities Beyond U.S. Tech
Apart from these expensive equity market segments, valuations generally look moderate to favourable for global equities. Specifically, equity strategies that focus on low valuations and income (‘value’ or dividend strategies) are relatively cheap. The same applies to equities from developing countries, Europe and Asia. (See high-rise charts on pages 5 and 6). In India, the current correction seems to be slowly coming to an end and may invite long-term strategic investors.
Bonds look even more attractive, especially when compared to current or expected inflation rates. We would be happy buyers, except for long-dated U.S. Treasuries and Bunds. The expectation that the U.S. FED should continue to reduce interest rates is also favourable for global stock and bond markets.
Currency Considerations and Portfolio Allocation
The U.S. Dollar should normally continue to weaken if the FED continues to cut interest rates while the central banks in Europe and Japan stay put. Non-USD investors should take this into account when building and reviewing their portfolios.
In general, we can speak of a good environment for (re-)investing money or adjusting portfolios away from large U.S. (tech) stocks towards a more international strategy. In our opinion, a target size for American equities could now be in the region of 50% of an equity portfolio.
We have therefore expanded our range of European and Emerging Market investment ideas so that our community has many opportunities to react to changes in the global investment climate.
Portfolio Management Recommendations
Diversified Benchmark Portfolios
In this context, I would also like to point out that our investable benchmark portfolios (Portfolios 1 to 6) are very diversified and invest in more than 15,000 global stocks and bonds. They also have never been overly concentrated in American large-cap technology stocks. Community members who are already invested in them can therefore ‘sleep on’ with peace of mind, whereas community members who have perhaps found these building blocks too ‘boring’ so far should take a second look here!
Valuation-Based Investment Strategy
In my opinion, the best orientation for the composition of a new portfolio is the current valuation of an investment. This is because the valuation of an investment is a good indicator of the expected ten-year return. We have therefore supplemented our high-rise charts with the valuation traffic light. This traffic light has worked very well so far because high valuations (red) inevitably entail a higher risk of losses and lower expected returns than normal (yellow) or favourable (green) valuations. Therefore, please use our valuation traffic light for future investment decisions!
Investment Solutions and Next Steps
For ‘fresh money’, we recommend our proven concept of FairHorizons, which we have developed based on established asset allocation principles. It offers a simple way of creating portfolios that can beat inflation and earn attractive risk premiums.
Please also look at our standard investment portfolio ideas on pages 29 to 31, which follow the principles of investment legends like Jack Bogle, Eugene Fama/Kenneth French and Warren Buffett. Whilst all of them represent different investment philosophies, they’re all very effective and successful in the long term.
If you are worried whether your portfolio is well equipped for the significant changes in today’s world, just get in touch with us. We’ll be more than happy to check for you. Otherwise, I would be delighted if you could tell your friends and family about Das Family Office so that they can also become part of our community.
With best wishes for a wonderful September!
