Tareno View January 2025

A rapid replacement of US dominance is not in sight, which is why a good portion of the USA still belongs in the portfolio. However, other regions and market segments also offer attractive opportunities. In any case, diversification and a dynamic allocation remain crucial in view of the increasing market concentration and the numerous challenges. Read this Tareno View to find out how Tareno is positioned for your mandates.

published: 13.01.2025

The US is key

Whether the economy, currencies or stock markets – the United States of America continued to set the course in 2024. As in previous years, the strength of the US economy was an important pillar of global growth, and the impressive earnings growth of US technology stocks boosted the stock markets. A rapid replacement of US dominance is not in sight, which is why a substantial portion of US stocks still belongs in the portfolio. However, other regions and market segments also offer attractive opportunities. However, diversification and a dynamic allocation remain crucial given the increasing market concentration and the numerous challenges.

Macroeconomic setting

The Fed between chair and bench

Growth drivers Asia and the US

Global economic output has grown by an average of 3.3% over the past two years — a pace that is expected to continue in the coming years. However, growth is unevenly distributed: Asia remains the biggest growth driver with over 5% growth, while the US stands out among the industrialised countries. With a growth rate of around 3%, the US economy continues to grow well above its trend. Government-induced investment in production capacity and innovation is creating jobs, rising corporate profits, higher real wages and asset growth.

Europe and China, on the other hand, are struggling with structural problems. China’s property oversupply and government intervention in the market are weighing on growth. Europe is suffering from a lack of investment activity and an environment that is not very business-friendly. We derive two central theses from this:

  1. The US will continue to grow faster than most other industrialised countries due to its clear locational advantages: in particular the size of its capital market, its technological leadership, its strong entrepreneurial environment and its homogeneous market.
  2. Global economic growth will remain robust and the probability of recession low thanks to continued high growth contributions from the US and Asia.

US interest rate reduction cycle over?

Inflation has returned to the central banks’ target range in most economies, but remains structurally higher than before the inflation shock. The reasons for this are labour shortages, increasing protectionism and high government deficits. In the US in particular, the decline in inflation has stagnated at around 3% for several months. Against this backdrop and in view of the new US government’s potentially pro-inflationary political agenda, the US Federal Reserve is likely to find it increasingly difficult to justify further interest rate cuts. At the upcoming meetings, it will have to decide whether it wants to tolerate the higher level of inflation or fight it consistently. It is attempting this balancing act by holding out the prospect of an interest rate path that is based on the upcoming labour market and inflation data (which is lagging behind reality). In doing so, it runs the risk of once again reacting too late and triggering strong market fluctuations with its policy changes.

 

Market comment

US Tech – The envy of the world

Between optimism and caution

Increasing market concentration

The dominance of the US on the global equity markets is impressive. The US equity markets clearly outperformed the other markets in 2024 as well. Over the last five years, the performance gap to the rest of the world has totalled 65%.

 

The main drivers of this development are US technology stocks. High price gains have increased the weighting of the seven largest technology stocks (Apple, Microsoft, Amazon, Alphabet, Tesla, Meta and Nvidia) to 32% of the US equity market and 22% of the world equity index. This means that index investors and investors who align their equity portfolios closely with the world equity index are consciously or unconsciously assuming a growing cluster risk in the major US technology stocks. Following the significant valuation expansion of recent years, these stocks have a diminishing upside potential and an increasing potential for disappointment.

With such a high portfolio concentration on a small number of stocks with the same performance and a significantly lower risk/return ratio, it is advisable to realise some of the gains and diversify into other market segments.

This is where US mid-caps come in, as they are valued much more moderately and are more strongly geared towards the domestic market, which means they benefit in particular from the favourable conditions in the United States.

Let us be clear about this: US technology stocks remain a central element of the portfolio due to their profitability and long-term growth. However, we clearly question whether it needs to be a quarter of the portfolio for risk/return reasons.

Positive signs for 2025, but…

In view of rising corporate profits, falling interest rates and moderate valuations outside the US, we continue to see good opportunities for attractive equity returns, especially if European industry emerges from its two-year contraction phase. However, this positive outlook is clouded by a number of uncertainties. A protectionist US policy under President Trump, increasing concerns about sovereign debt or geopolitical escalations could become negative factors for the stock markets.

 

Investment policy

Tracking down yield potential

Investors are able to look back on another successful year: Equities and bonds achieved above-average returns for the second year in a row. Gold and Bitcoin made particularly strong gains, contributing noticeably to the returns in our portfolios.

However, high returns in the past also have an unpleasant side effect: they reduce the return expectations for the future. After two very profitable years, it will be difficult to repeat the above-average returns of recent years in the coming years. Nevertheless, we continue to see considerable potential for returns in various asset classes and market segments. Active and disciplined portfolio construction is therefore becoming increasingly important. In our view, the following components are particularly attractive:

Swiss quality

Swiss equities are attractively valued by historical standards and relative to other asset classes. At 3.1%, the dividend yield is significantly higher than the bond yield of 0.7%. We see great potential in defensive heavyweights, infrastructure companies and fast-growing mid-caps.

Profitable growth markets

The impressive performance of the major US technology stocks highlights the potential of companies that benefit from structural growth and operate in markets with high entry barriers. These characteristics are particularly noticeable in companies from the cyber security, artificial intelligence, water and energy infrastructure sectors.

Private market investments

Private equity, private debt, infrastructure and property offer attractive returns and diversification opportunities. The growing number of evergreen funds facilitates access for private investors.

Portfolio protection with potential

Gold and Bitcoin remain attractive despite sharp price rises. In view of geopolitical tensions and inflation risks, we expect demand and prices to continue to rise.

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Disclaimer

The statements and data in this publication were compiled by Tareno AG to the best of its knowledge, in part from external (publicly accessible) sources that Tareno AG considers reliable, solely for information purposes. This publication is not the result of a financial analysis. Tareno AG and its employees are not liable for incorrect or incomplete information or for losses or lost profits resulting from the use of information and the consideration of opinions expressed. The statements and information do not constitute a solicitation or invitation, offer or recommendation to buy or sell any investment instruments or to engage in any other transactions. Nor do they constitute a specific investment proposal or other advice on legal, tax or other issues. A positive return on  an  investment  in the past is no guarantee of a positive return in the future. The statements, information and opinions expressed here are only current at the time of writing and may change at any time. Duplication or reproduction of this publication, even in part, is not permitted without the written consent of Tareno AG. The „Directives on the Independence of Financial Research“ of the Swiss Bankers Association do not apply.

Pictures: Marijke Vosmeer, Jürg Kaufmann, Unsplash

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