The return of uncertainty and volatility!
Donald Trump’s re-election was widely celebrated on U.S. financial markets right up to his inauguration on 20 January: there was strong demand for U.S. equities and investments that were seen as winners of a Trump presidency, such as cryptocurrencies and the U.S. Dollar. Suspected losers such as European and Chinese shares were sold off.
After the inauguration, however, there was an unexpectedly rapid and massive trend reversal, so that it can now be stated that all ‘Trump winners’ have recorded losses, whereas ‘Trump losers’ have almost exclusively recorded gains.
A ‘Trump bump’ turned unexpectedly into a ‘Trump slump’!
How could such a strong trend reversal occur so quickly?
On one hand, the situation can probably be explained by the simple fact that many of the presumed winners such as technology stocks, cryptocurrencies and the U.S. dollar were valued expensively and significantly represented in many portfolios. So, where should the additional buyers have come from?
Conversely, the presumed losers had already been sold in the run-up to Trump’s inauguration and were often trading at very favourable valuations. European and Asian equities were particularly cheap at the start of 2025.
This was certainly compounded by the fact that parliamentary elections in February resulted in relatively stable government conditions in Germany, which stabilises the European economic engine, so to speak.
The swift abolition of the debt brake by the Bundestag and Bundesrat also means that the future of the German economy is likely to be brighter than had been assumed at the end of 2024.
As far as Asia and China are concerned, it should be noted that the Chinese government should still not be seen as a friend of the financial markets, but Xi Jinping was nevertheless willing to meet with prominent representatives of the private sector, including Jack Ma (founder of Alibaba). This must be seen as a strong signal to stabilise the Chinese economy.
Let us also not forget that the Chinese AI company ‘Deep Seek’ has proven that not only American Internet companies will dominate the market for AI, but that less well capitalised companies can also participate in this growth market. This simple announcement resulted in a major correction for U.S. technology stocks.
All in all, there were good reasons for long-term investors to return to European and Asian stock markets.
This shift away from relatively expensive American equities towards cheaper international stocks was then accelerated by the fact that Donald Trump is adamant that he needs to impose high tariffs on his trading partners and allies, especially also Canada.
Initially, market participants had assumed that he would see the threat of high tariffs primarily as a bargaining chip. However, it is now clear that he really believes that major tariffs on imports will bring lost jobs back to America.
Added to this is the fact that Trump and his team are permanently offending all their longstanding partners, which seems to lead to a disintegration of established networks such as the G7 Group or Nato.
The ultimate consequences of Trump’s erratic demeanour are very difficult to assess but have already led to a climate of caution and a lack of willingness to take risks on the financial markets.
As far as the equity markets are concerned, comparatively expensive assets and frothy market segments (Magnificent 7, cryptos, highly valued quality stocks) were sold and swapped for comparatively cheaper assets (international stocks, value strategies, dividend strategies, etc.) in the first quarter.
Regarding the most popular equity factors of the MSCI family (momentum, size, value and quality), this means that the so-called size, quality and momentum factors performed significantly worse than the MSCI World Index in Q1.
In contrast, the so-called value factor (low book value) developed very well and shows significant gains so far, this year. This last happened in 2022.
The value factor complements the quality factor extremely well and can currently be used to complement quality factor investments whilst they’re still comparatively expensive.
The MSCI World Multi Factor Index, which weights the four factors equally, also outperformed the simple MSCI World Index in Q1 2025. Dividend strategies, which can also be categorised as ‘value investing’, also had a good quarter and closed with significant gains.
As far as bonds are concerned, we can speak of a two-tier market:
U.S. Dollar bonds have generally risen in price because the uncertainty in U.S. politics has led to a shift from stocks to bonds in March. Especially long-dated bonds were bought because medium-term inflation expectations have fallen due to fears of a recession in America. Long-dated bonds benefit most from a fall in inflation. The higher their duration, the higher the gains (the higher their duration in a rising interest rate environment, the higher the losses!).
In the Eurozone, however, there has been an opposite movement, as the de facto abolition of the German debt brake has led to the assessment that the upcoming investment projects in Germany should lead to rising prices and thus also rising interest rates.
As European bond prices are normally priced off German bonds, interest rates at the long end have also risen somewhat in the rest of Europe (except for Switzerland). This has led to some losses, especially for long duration Eurobonds.
Bonds with very short maturities and money market paper were able to deliver stable returns.
Bonds in special income segments such as high-yield bonds, subordinated bonds and bonds from developing countries performed well in both Euros and U.S. dollars in the first quarter.
The Euro improved very strongly against the U.S. dollar, gaining almost 5%.
Global commodity markets also had a good first quarter, most of all gold, which continued to make strong gains after a brief respite at the end of February.
As far as the comparison between index strategies and actively managed strategies is concerned, almost all active bond strategies outperformed their benchmark indices in the first quarter. An investment in active funds was therefore better than an investment in index funds or ETFs.
However, very few active equity managers were able to outperform their benchmark indices. This is probably since they generally put together more concentrated portfolios, which often leads to a temporary underperformance during market corrections. A pure index investment would therefore have been better in Q1.
As far as private assets are concerned, it can be said that both private credit and leveraged buyout strategies (LBOs) had a good first quarter.
Whilst we’re not necessarily enthusiastic about private assets, we’ve found several good ideas in the space and are happy to add these to our client portfolios.
Development of our safety investment components (FairHorizons purple to green):
Even though the ECB lowered its key interest rates twice in the first quarter, the Fed has held back with further rate cuts. Due to their significant interest rate cuts in 2024 and the persistent core inflation, this is likely to remain the case for the time being.
Long-dated European bonds have fallen somewhat in price due to the quasi abolition of the German debt brake which led to rising interest rates at the long end.
This decision by the outgoing parliament is currently being widely criticised, but it should not be forgotten that interest rates for long-dated German government bonds are still quite low at around 2.70% p.a. The capital market therefore continues to have great confidence in Germany’s ability to keep its debt under control. The critics should also not forget the fact that Germany’s neighbours have long been asking the country to spend more money.
U.S. long dated government bonds lost a little bit of value into Trump’s inauguration as he was expected to implement inflationary policies. This led to the 10-year Treasury yielding close to 4.80% p.a.
As the ‘Trump bump’ has now turned into a ‘Trump slump’ on U.S. equity markets, 10-year Treasuries are now seen as a haven, which has brought their yield down to about 4.20% p.a.
Such yield reductions are always associated with price increases, which is why all our investment grade bond components are showing nice returns between 1 and 4.5% for the year. The longer the duration of a bond building block, the higher the return in Q1 2025.
Safety investment components with money market securities, variable interest rates or short maturities, which we use as ‘flexible piggy banks’ (P5 to P7), are all showing good returns because they continue to benefit from higher interest rates and do not carry any significant draw down risk due to their very low duration.
The same applies to the portfolio investment components Portfolio 1 to Portfolio 3. All show gains for the first quarter.
The Portfolio Investment building blocks Portfolio 1 to Portfolio 3 are reliable low-cost solutions for short to medium-term investment horizons (see FairHorizon concept on page 6). This is why we like to use them as benchmarks for our client discussions and quarterly reports.
Experience shows that investors who want to beat inflation as well as earn attractive long-term equity premiums should increase the equity allocation of their portfolios in line with their investment horizon. That’s why Portfolio 2 and Portfolio 3 contain a certain equity allocation in addition to bonds. This is highly recommended, especially also for cautious investors who struggle with the idea of buying equity investments!
Development of our high return investment components (FairHorizons yellow to red):
Apart from global value and dividend strategies as well as special situations in Europe and Asia, all globally diversified equity strategies suffered losses in the first quarter of 2025.
This is largely attributable to the fact that shares of large U.S. companies and tech stocks suffered significant losses. As these shares are dominating many popular indices, such as the S&P 500, Nasdaq 100 and MSCI World/FTSE Russel Indices, the correction has been quite widely spread.
Due to the rise of many OECD currencies against the U.S. dollar, many global strategies currently appear particularly poor if calculated in currencies other than USD.
The global growth and quality strategies that I personally favour, such as the MSCI World Quality Factor ETF (O19) or active managers such as Threadneedle Global Focus (O11), often had holdings of more than 70% in U.S. equities.
They therefore suffered losses in the first quarter which slightly exceeded the losses of globally benchmark indices (e.g. MSCI World/FTSE Russel All World). This is annoying, but also part of our long-term investment strategy.
All mentioned factor strategies will underperform at some point, even if they tend to out-perform in the long run.
As far as the factor investment building blocks of the MSCI family are concerned, i.e. MSCI World Value, Size, Momentum and Quality (building blocks O17-O19 and R4/R5), value and dividend strategies are ahead at the beginning of the year and are showing gains. All other factors, including MSCI’s multi-factor strategy (O22), are showing losses.
The multi-factor indices of the Dimensional family, which we use as easily investable standard portfolios (Portfolio 4 to Portfolio 6), also had a weak quarter, but were able to outperform the standard indices of the MSCI and FTSE Russel families somewhat. This is because they slightly overweight the value factor, which did well in Q1.
It should be noted that the Dimensional equity portfolios are very broadly diversified and cover considerably more shares than the MSCI World or the FTSE All World Index (13,000 versus a maximum of 8,800 shares). They are therefore less heavily invested in the ‘Magnificent 7’ and are recommended as a good complement to our popular quality factor modules.
Each strategy (standard index, factor index, single factor index or manager) has its day in the sun and works well over the long term in achieving the savings goals of our community. The strategies should therefore not be changed, as it is not possible to determine when which strategy might be ahead in the short term.
All our high return modules should be able to achieve or exceed the targeted equity risk premiums of 6 to 8% in the long term!
The new high return module (Y6) Algebris Financial Credit Fund, which invests in bank capital, also performed very favourably in the first quarter of 2025. We see it as an attractive long-term addition to the portfolio, but not as a core component like O1, for example.
Commodity investments, including gold, had a very good first quarter and are benefiting from the current uncertainty on global financial markets.
Apart from the performance of the individual components, it is particularly important to combine high return and safety components to the extent required by an investor’s personal situation and expected cash flows.
We have therefore developed the concept of FairHorizons (page 6) to make it very easy to determine the right combination of ‘safety’ and ‘return’.
An investor must therefore first and foremost think about his cash flows and consider carefully when he requires money to spend. Once this has been clarified, creating the right portfolio is child’s play thanks to our colour system.
Generally, the proportion of equities in a portfolio should be increased as the investment period increases.
Development of portfolio building blocks and building block combinations:
Our combinations of high return and safety building blocks, which we provide as ideas and sample portfolios have all done well so far in 2025.
The model portfolios represent tried and tested strategies of investment icons such as Jack Bogle (buy the haystack at a low price), Eugene Fama & Kenneth French (optimise the haystack at a low price) as well as Warren Buffet & Charlie Munger (focus on the flowers in the haystack and don’t overpay if you find one).
Fundamentally, portfolios with a higher proportion of bonds have recorded gains, while portfolios with a high proportion of equities have had to accept small losses.
So far, there has been no significant difference between our three favoured investment styles in 2025.
Outlook
In view of the weak performance of U.S. equities and the daily announcements made by Donald Trump and his team, some investors will be asking themselves whether they should be more cautious and withdraw from global equity markets for the time being.
Experience shows that this makes no sense, as financial markets have a life of their own and broadly diversified equity investments in particular ‘fluctuate upwards’ in the long term.
In this context, I would therefore like to refer you to page 9 of this publication, which shows the development of our 6 basic strategies since Das Family Office PTE. LTD. obtained its fund management license from MAS in 2018.
It’s obvious that stock market fluctuations are part of our everyday life, but that we can rely on sensibly composed portfolios to fulfil their investment purpose and reward long-term oriented investors!
We had already pointed out last year that the so-called Magnificent 7 were highly valued and therefore offered little scope for further gains. This inevitably made them susceptible to profit-taking, which has since materialised.
Market segments that were not expensive corrected considerably less or even rose in valuation.
To provide a quick and easy overview of market valuations, we have created our skyscraper charts, which you can find on pages 10-12. They display current market valuations versus history, and in comparison, to minimum investment hurdles such as breakeven inflation rates and equity risk premia of at least 6% p.a.
In addition, we’ve added traffic light illustrations to show whether the valuation of an asset class is considered cheap, fair or expensive relative to its history.
So, if current valuations are sensible, medium to long term investment success is almost guaranteed. However, if current valuations are high, the likelihood of disappointments increases!
Whilst it looks like a simple tool, the skyscraper chart has proven a very useful investment compass.
Looking a bit closer at individual asset classes, we can state that even though the Nasdaq 100 Index, the Mangificent 7 and the MSCI Quality Index have fallen somewhat, they still don’t display attractive valuations for long term investments.
Apart from these indices, we see attractive valuations for Asian, European and global indices which hold less than 50% in U.S. stocks. We would therefore not shy away from investing fresh money in these markets.
Even though China is currently attracting more interest again, we would only invest in China via broadly diversified Asian
indices or managers, which have the flexibility to invest in the country or stay away from it.
Indian equities, which we like in the long term, are now somewhat cheaper and can be considered again, albeit in moderation.
Bonds look attractive across the board, especially when compared with breakeven inflation rates.
So, despite the current political noise, investors are faced with a relatively normal financial market and should therefore not hesitate to develop sensible asset allocations based on our FairHorizon concept (page 6) and the model portfolios on pages 30ff.
It is important to organise a long-term portfolio in such a way that it takes account of the saver’s personal situation, income and a realistic investment horizon.
We would therefore recommend the following strategy for the coming quarters:
– (purple colour) Invest money that will be needed in a maximum of one year in the money market building blocks P5 to P7, or Portfolio 1.
– (blue colour) Invest money that will not be needed for a maximum of 4 years in portfolio building block Portfolio 2 or combine building blocks B15 and O1 in a ratio of 80/20;
– (green colour) Invest money that will not be needed for up to 7 years in portfolio module Portfolio 3 or combine modules B15 and O1 in a ratio of 60/40;
– (yellow colour) Invest funds that will not be used for up to 10 years in portfolio module Portfolio 4 or combine modules B15 and O1 in a ratio of 40/60;
– (orange and red colour) Invest money that will not be needed for more than 10 years in portfolio module Portfolio 6 or our various portfolio strategies based on the wisdom of Warren Buffet/Charlie Munger, Eugene Fama/Kenneth French and Jack Bogle.
In times of rising interest rates, please make sure that you do not take on too much credit.
Loans with interest rates of well over 7% p.a. should always be repaid first before investment concepts are tackled. Otherwise, you will end up in the hamster wheel of negative compound interest!
Please contact us if you have any questions or concerns. We are always here for you!
With best wishes for a beautiful Spring!
Yours,
Mario Becker
