March 24th, 2025 - Staying calm through volatile times.

As our readers and clients know, we generally chose to be positioned somewhere in the middle between greed and fear. This means avoid chasing momentum stocks, sectors or regions higher when and if the fundamentals have divorced reality and not letting volatility and journalists' headlines drive us into fear, two sentiments which usually lead to investment mistakes. With Mr. Trump as the new President, this mental balance has been put to test, for sure. In this weekly review, we examine briefly the current market pricing in equities and bonds, in order to find where greed and fear exists.

European equities are being bought like there is no tomorrow, US stocks are starting to price a recession and EUR bonds are selling off. We must highlight that all these three movements cannot continue simultaneously for ever, as they imply scenarios which are mutually exclusive. For starters, a US recession, if it happens, will not leave Europe unscathed, which means that EUR bonds will have to rally and EUR equities will have to fall from their current or higher levels. The sharp rise in EUR yields (and the equivalent fall in prices) is attributed by market participants to the expected increase in supply of EUR bonds to finance the infrastructure and defense spending. But first of all this 1trn+ EUR spending will span for more than 10 years and of course the last thing Germany would want is see its borrowing costs skyrocket at a time when it has made the decision to get rid of its debt limit and increase spending. And if interest rates remain at these or higher levels, then the real economy will face a major drag, even larger than the benefit of the government spending, so back to square zero. And this is also bad for equities and hence EUR bonds look like a bargain. If a recession is not to hit the US , then the region's equities also look rather attractive and especially some mega cap Tech, worth scooping up (Microsoft, Apple, Alphabet for instance).

Diversification and quality should provide cushion against Trump's erratic behavior and volatility. In the fixed income space, the low-grade high yield bonds are at risk, if yields rise further and/or a recession eventually hits the US and then Europe. We need to make sure that the selected high yield funds have moved up from a quality perspective and single-B and lower exposure should be avoided. The rise of long term EUR yields by more than 50bp since the start of the year looks like a solid buy, which can be implemented through positions in high quality bonds in the 5-6 year maturities. In equities, the equal weight S&P500 can offer protection for the period we are in, where Technology seems to be derating to lower valuations from the recent extremes, but with specific names currently attractive, as mentioned above. In Europe, maintaining positions in economic sensitive sectors such as Energy, Banks, Materials and select Consumer names provide exposure to the positive scenario and takes advantage of the rotation out of the US. Defensive sectors such as Healthcare and Staples should still be an integral part of portfolios, and especially in the US. Emerging Markets and China could be beneficiaries of the rotation of foreign capital out of the US and we have recently increased exposure.

The FED left rates unchanged, at 4.50%, as expected. They also maintained their forecast for two rate cuts this year, although the market is pricing three. On a negative note, they lowered their forecast for economic growth, while raising their forecasts for inflation and unemployment due to the macroeconomic uncertainty caused by tariffs, a scenario which in one word is described as stagflation. This would be the worst outcome for bonds and equities, and hence for invested portfolios. In the press conference, Chairman Powell downplayed the recession scenario by saying that chances are not high, while acknowledging that they have increased and mentioned that that they do not expect a lasting impact on inflation because of the tariffs. The markets chose to focus on his words and rallied.

The Swiss National Bank cut rates by 0.25% to 0.50%, as expected. The rate cut was motivated by "low inflationary pressure and the heightened downside risks to inflation", according to the statement, while it also reiterated the willingness to intervene in FX markets. The key message in the press conference was that the SNB felt another rate cut was needed but remained uncommitted towards the future rate path. Chairman Schlegel referred to the uncertainty coming from US tariff policy (which he said could hit Switzerland through weaker growth abroad) and potential upside risks from more fiscal spending in the EU (which would be growth positive for Switzerland in his view). When asked about the potential for further policy easing, he said they would decide in June, but he crucially avoided any explicit reference to negative rates. All in all, perhaps one more rate cut to bring rates back to zero is to be expected.

US February Retail Sales were better than feared. The headline number rose 0.2% vs expectations for +0.8% but when the sales of motor vehicles & parts and the sales at gasoline stations are stripped out, then Retail Sales rose 0.5% over the month. On a more positive sign, sales at the control group of stores, which feed into the GDP calculations were up 1.0% over the month, relative to the 0.3% gain of consensus expectations. After a strong December and a soft January, today's data for February are broadly consistent with a step down in consumer spending in Q1 from the solid Q4 pace, but do not cause concern of further deterioration, despite the various warnings from US companies in the previous weeks.

US equities managed to break the losing weekly streak, by posting marginal gains. The S&P500 rose by 0.5% and Nasdaq a mere 0.2%, as Technology was essentally flat for the week. Energy (+3%) was the best performing sector both in the US and Europe , as markets continue to rotate towards cheap Value stocks and away from expensive Growth. Europe continued higher, but German stocks came under profit taking. Switzerland outperformed with a 1.2% weekly gain, benefiting both from a flight to safety and the cutting of interest rates by the central bank. There is increased chatter and leaks from the US administration that the 2nd of April which has been penciled in by President Trump as the "D-Day" of global tariffs implementation will not be as bad as originally thought. Already, exceptions are being discussed, reciprocal tariffs instead of universal tariffs on countries are being considered, in a sign that the recent market turmoil did have an effect on him. This should prove positive for equities at the start of the new week.

Bonds ended the week on a positive note, in another sign of markets becoming more defensive. The EUR yield curve moved to the lowest level in two weeks, with the 10yr bund falling to 2.75%. The US equivalent traded as low as 4.20% before returning to 4.25%, as equities were rebounding on Friday.

Chart of the Week : Europe 's valuation gap vs the US can close further.

Back in December of 2024, we had highlighted the record high discount of European equity valuations vs their US peers , having reached then the unprecedent level of 40%. This extreme was primarily the byproduct of the pandemic, which boosted the Technology sector, which has a large weight on the US broad index. We had noted that this is not sustainable, and just four months later this discount has already shrunk to 30%, with European markets rallying and US markets being negative for the year. The 30% discount still remains big, with historical standards and we can see in the below chart that during Mr. Trump's first term (red ellipse) the discount was around 15-20%. So there is more room for this "market anomaly" to revert to its historical standards, highlighting the end of US exceptionalism for now. Of course, the gap can close further in three ways, all other things being equal (ie EPS revisions): a) Europe continuing to rally and the US to rebound but at a slower rate, b) Europe could fall much less than the US , in case of a global equity market correction, c) Europe can move further higher and the US correct further lower, a scenario which carries the lowest probability at this stage. For the moment, the investor's mind is at rotating out of the US.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH/Factset, Photo: Alex Nabaum /WSJ