"Top five theories for the kick-start of Markets 2025"

The markets in 2025 have rarely gotten off to a brilliant start. At the same time, the new US administration is causing a lot of turmoil. Investors must learn to separate the wheat from the chaff. Ali Masarwah, fund analyst and Managing Director of envestor, explains in five theses what investors should look out for.

27 January 2025 FRANKFURT (envestor): There is a metaphorically apt term in English for “hitting the ground running”. It describes the situation of investors at the start of Markets 2025 pretty well: they had to shake off their New Year's Eve hangover very quickly and find their bearings in the hustle and bustle of the markets. They have to find their way in a new and dynamic market environment. Here are five theses:

1. USA dominates the global financial sector, and this means that investors cannot avoid US assets. 

This is especially true for the equity market. Yes, US equities are expensive, and yes, if a market is expensive, there is much to suggest that future returns will be lower than past returns. But this is a relative game. I have repeatedly read warnings of a crash in US equities over the past few days. That is garbage. No one can know if, let alone when, there will be a crash. The situation in the USA is not comparable with the Tokyo real estate bubble in 1989, nor with the situation on the Nasdaq in March 2000. Since the profits of US companies have risen steadily over the past few quarters, the high valuations have been justified time and again. This does not mean that the global stock market will be “eaten up” by US companies in the next few years. But it does show that even expensive markets can continue to outperform for quite some time. We have known for ten years that US equities are expensive. Ten years is a long time for us. In the history of the capital markets, ten years is no more than the blink of an eye - around 100 to 150 milliseconds. If the doubts about an imminent crash in US equities are justified, then it would be foolish to say goodbye to them. Perhaps only an alternative weighting in the portfolio is appropriate? If 70% of the MSCI World is currently made up of US equities, could we make our equity portfolio 50% US equities - and not just focus on the Magnificent 7, but reflect the breadth of the US market? And what about the Donald Trump factor? Yes, the USA could mutate into the world's largest kleptocracy under Trump. Or the rule of law could contain the enfant terrible, yes: Trump could give the US stock market another “sugar flash” with tax cuts. What cannot be modeled should not determine our actions on the stock market. And what about US government bonds? More on this below.

2. The US supremacy is one thing, the other is market technology. 

This is where André Kostolany comes in. The real economy is the master, the stock market is the dog: sometimes the dog moves away from the master, but in the end the master has the leash in his hands and determines the path. This year, the DAX, the Italian MIB 30, the SLI Swiss Leader and the MSCI Greece have all ... outperformed the Nasdaq 100! This was also, but not only, due to the euro gaining strength against the dollar. Even if the thesis on US supremacy is correct, this does not mean that the US equity markets will consistently and forever outperform Europe. European equities have been outperformed by their US counterparts for 15 years. It is clear that at some point there will be a reversal in the other direction. No one knows when, why or how long this trend reversal will take, but it will come. Which is why it always pays to diversify.

3. Opinions differ on cryptos, 

but ... investors should not let their personal preferences cloud their view of these assets. Nobody has to pay for their bread with Bitcoin or Trumpcoin. However, the combination of AI and crypto opens up new investment horizons that are worth exploring. Many former crypto suppliers are now AI champions - Nvidia is an eloquent testimony to this. Former miners sometimes become data center operators and cloud infrastructure providers. Crypto exchanges, like conventional marketplaces, are the winners when there is more trading, regardless of whether prices rise or fall.

4. Rise in yields on the bond market again this year has surprised many investors, but it is no cause for alarm. 

At least not immediately. First of all, rising yields are a positive thing: they are an expression of a robust global economy. Interest rates will not fall to zero outside the eurozone in the foreseeable future, which is why times still look pretty good for interest rate investments and will remain good for the foreseeable future. However, it is worth keeping an eye on rising yields. You don't have to believe in the legendary bond vigilantes to identify risks on the bond market. If the USA continues to lack any fiscal discipline, investors could demand ever higher yields. Then Trump's dream of a “golden age” for the USA could vanish into thin air. If the bond market burns, the corporate world will also suffer. If the recession that was on everyone's lips a year ago (and is now a foreign concept) comes, the cards on the markets will be completely reshuffled.

5. Investors should exercise caution with government bonds worldwide. 

Because the maturities of government bonds have been extended further and further in recent years, the risk of interest rate changes is high. At the same time, increasing government debt raises the question of creditworthiness for many countries. In 2023, the credit rating of US government bonds was downgraded by Fitch - the second rating agency to do so after S&P in 2011. Doubts are also repeatedly expressed about the UK's budget stability - and not just in the days of Liz “Lettuce” Truss. Investors are therefore well advised to treat longer-dated (government) bonds with a good deal of skepticism, especially in the USA. But there is good news: As shaky as the prospect of a “term” premium is, credit and illiquidity premiums are still bubbling up in view of the decent interest rate floor - even if the bacon is no longer quite as plentiful as it was 1 or 2 years ago. Moreover, in addition to high-quality corporate bonds with high-yield bonds, CLOs and other loans, catastrophe bonds, emerging markets, smaller, illiquid issues, often without ratings, as well as niches such as microfinance, there are many sources of yield that can be tapped in the bond market - many of these instruments have credit risks, but limit maturity risks and thus hedge a significant risk of the traditional bond markets.

By Ali Masarwah, 27. January, 2025, © envestor.de