Analyst Weekly February 17, 2025

We proceed our evaluation of Trump 2.0. Sometimes, a single coverage dominates every year following a brand new administration’s election (e.g., tax reform in 2017, the commerce conflict in 2018, COVID-19 in 2020, and industrial coverage/CHIPS Act/IRA in 2021). Nevertheless, Trump 2.0 is addressing a number of insurance policies concurrently. The noise-to-signal ratio is exceptionally excessive—concentrate on what issues and what we all know, as outlined beneath. A lot of the tariff debate falls into the class of “identified unknowns,” with each scope and sequencing nonetheless unsure. 

What we all know: 

Tariffs: FX markets are the place commerce coverage exhibits up essentially the most, and at present markets are pricing in a situation resembling a worldwide tariff. Trump desires nations to barter with him immediately. He threatens with reciprocal tariffs to get nations to speak to him (working example, Modi). If reciprocal tariffs take impact, EM nations shall be hit worst (India, Argentina, Mexico, Brazil, Vietnam, Taiwan, Indonesia).

a) From an investments perspective, we expect that providers sectors will outperform items sectors. Firms which can be pro-border-adjustable tax (winners): Boeing (BA), Common Electrical (GE), Caterpillar (CAT), financials akin to Financial institution of America (BAC),  JP Morgan (JPM), Mastercard (MA), Prudential (PRU.L). Firms that are anti-border-adjustable tax (losers): Walmart (WMT), Nike (NKE), Hole (GAP)., Toyota (TM).

b) Lastly, we expect China is handled in another way than different nations. Trump doesn’t need any US firm to function in China, interval. US firms levered to China will proceed come underneath strain.

Traditionally, shares do nicely within the 1st 12 months of a brand new president except there’s a recession. The final 4 cycle of 1st years of a president have produced +20% returns. It’s the second 12 months when shares come underneath strain when insurance policies filter by way of the financial system.
Since 1973, financials have outperformed the S&P 500 throughout each 1st 12 months of a brand new president (aside from one 12 months, 2009 monetary disaster). Healthcare shares have outperformed the S&P 500 within the 1st 12 months of each Republican administration since Reagan, 1981.
Which monetary markets indicators matter essentially the most to the brand new administration (per Treasury Secretary Scott Bessent’s latest interview with Larry Kudlow): 1. 10-year yield, 2. Value of oil. 3. Value of gold – we monitor these to gauge the path of coverage.
If Congress needed to do an-unpaid-for-tax cuts, the bond market would ship a punishment. Therefore, concentrate on reducing spending to historic ranges first (DOGE). Sectors that come underneath strain resulting from decreased spending: shopper staples, vitality, training, transportation. Constructive for protection shares.
For H1 2025, we expect that the US market is nicely supported by liquidity equipped by the US Treasury. On January twenty first, the US hit the debt ceiling (US can’t difficulty internet new debt). As a substitute, Treasury is now paying its payments, a liquidity tailwind (400-500 USD bil.) for markets (preserve yields low), monetary situations loosen. In impact, much like QE. This can keep till Congress raises the debt ceiling (can difficulty new debt), and till then assist preserve yields/USD in examine. Counter forces (larger yields) are: 1. Sticky CPI, 2. Tariffs, 3. Funds deficit

Bottomline: Trump 2.0’s coverage method, significantly round tariffs, is making a excessive degree of uncertainty within the markets. Key sectors prone to outperform embody financials, providers, and border-adjustable tax firms, whereas these uncovered to China or reliant on world commerce might face strain. Liquidity from the US Treasury and a weakening USD may assist the market in H1 2025, however dangers stay, together with tariffs and sticky inflation.

In Focus: German Elections; DAX on File Run Regardless of Recession

Expectations for the Upcoming Election: Polls present the CDU/CSU main comfortably, adopted by the AfD in second place. The SPD and Greens are in a decent race for third, whereas the FDP, Die Linke, and BSW wrestle with the five-percent threshold. Key questions stay: how robust will the CDU/CSU carry out, which coalition companion will they select, and can a single companion suffice? With CDU chief Friedrich Merz ruling out cooperation with the AfD, the 2029 election may turn into considerably extra attention-grabbing, particularly if the AfD’s assist continues to develop. Quick-term market reactions are attainable in case of an surprising consequence or tough coalition talks, however long-term elements like rates of interest, inflation, and the worldwide financial system stay extra essential.

DAX Evaluation: One week earlier than the German federal election (Sunday, 23 February), the DAX continued its record-breaking rally, whereas the German financial system stays in recession. This obvious discrepancy is well defined: DAX firms generate most of their revenues overseas. In key export markets just like the US, China, and France, situations are usually not good however stay higher than in Germany. International giants like SAP, Siemens, and Infineon profit from megatrends akin to digitalization, automation, and renewable vitality.

These German Shares Belong on Your Watchlist: Key challenges embody infrastructure enlargement (ThyssenKrupp, Hochtief, Bilfinger), paperwork discount and digitalization (SAP, Software program AG, Bechtle), vitality transition (Siemens Power, Nordex, Encavis), housing (Vonovia, LEG Immobilien), future applied sciences (Infineon, Carl Zeiss Meditec), and reforms in pensions and healthcare (Fresenius, Siemens Healthineers, Medios).

Germany Sticks to Its Debt Brake: With a debt-to-GDP ratio of 63 %, Germany stays strong by worldwide requirements. Japan is 4 occasions extra indebted at 250 %, whereas Italy (135 %) and the US (123 %) have roughly double the debt ranges. To succeed in a debt ratio of 101 % just like the UK, Germany would want to tackle round €1.59 trillion in extra debt. Even a fraction of this might finance much-needed investments with out jeopardizing long-term fiscal stability. Notably, Germany is the one nation in our comparability (see chart) with a declining debt ratio over the previous 20 years.

Debt Alone Gained’t Clear up Germany’s Structural Points: Its low debt ranges present vital fiscal leeway for development and disaster administration – a possibility that is still largely untapped.

Bottomline: The upcoming German election is unlikely to disrupt markets except coalition negotiations show unexpectedly tough. Buyers ought to concentrate on structural themes, digitalization, automation, and vitality transition, whereas monitoring potential fiscal shifts post-election, significantly concerning infrastructure and industrial coverage.

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