The economy
Awaiting the new Trump administration
- The inauguration of Donald Trump as US president ushers in a new political cycle, marked by a shift toward isolationism.
- The many economic measures announced by Trump include trade tariffs on China and Europe, which constitutes a de facto tax on American consumers with questionable repercussions.
- Apart from the insecurity generated by the arrival of the new administration, spending continues to deliver upside surprises in the US economy, where optimism prevails. This is in stark contrast to the European economies currently mired in pessimism.
- This optimism is underpinned by the economic outlook for 2025: the IMF projects +2.7% growth in the US, relative to only +1% in the eurozone and +3.3% for the economies as a whole.
- This context poses a dilemma for the Federal Reserve which, in September 2024, began a cycle of interest-rate cuts (anticipated by the market) that it has since had to curtail due to good employment data in the US.
- For the ECB, the path to rate cuts is clearer given the eurozone’s sluggish growth.
Markets
Investor frenzy
- In this uncertain macroeconomic and political environment, equity investors are more optimistic, driving share prices up (S&P 500 +4%; MSCI World +3.6%).
- Increases are slightly more diversified than in 2024, which was characterised by a strong concentration of returns mainly in the tech sector.
- Debt markets are seeing higher yields (IRR) due to growing inflation expectations in the medium and long term, prompted by negative price adjustments.
- There is no doubt that anxiety about the rising debt-to-GDP ratio in the US underlies the increased demand for profitability.
Investment policy
Risk management: no to “indexing”
- The overwhelming optimism about US equities is based on expected deregulation (finance, energy) and tax cuts. History demonstrates that this type of consensus is always dangerous and serves as an invitation to long-term investors to be cautious.
- The valuations (P/E ratios) of many tech companies consider very high growth rates—which are unsustainable indefinitely—in their future earnings.
- It is these very demanding valuations—and not 2025 profit growth—that are the Achilles’ heel of the US stock market. This makes the share price of many securities vulnerable to potential changes in market sentiment or shifts in monetary policy and the “vigilance” of bondholders.
- EDM’s approach to equities, which is based on the individual analysis of companies (vs. aggregate, as is the case with indices), allows us to identify outstanding companies with healthy prospects where we can invest at much more reasonable valuations.
- This situation abounds in Europe which, though enmeshed in an ongoing existential crisis, appears increasingly aware of the need to make long-awaited decisions (Draghi and Letta reports). Going forward, Germany will play a pivotal role after the general elections on 23 February.
- We therefore remain apprehensive toward the suggestion of a looming correction that would allow us to strengthen our positions in quality companies at more reasonable prices.
- In short, portfolio indexing today entails an obvious risk, though it is possible that risk may not materialise.
- With regard to fixed income, we have opted to strengthen our position in investment-grade bonds while waiting for the high-yield equivalent to offer more attractive opportunities. In the meantime, yields from our bond portfolio remain above 3%.
LEGAL NOTICE
1) The preceding information is provided for promotional and information purposes only. It is not, and is not to be taken as, investment or legal advice; is not intended to take the place of necessary investment advice; and is neither an offer to sell nor solicitation of an offer to buy.
2) All the views and forecasts expressed are based on what are believed to be reliable sources. Nevertheless, EDM Gestión, S.A. SGIIC cannot guarantee their accuracy or completeness and takes no liability for any direct or indirect losses ensuing from using the information provided here.
3) EDM Gestión, S.A. SGIIC calls attention to the fact that past performance is not a reliable indicator of future performance.
4) EDM Gestión, S.A. SGIIC is a Spanish public limited company with tax identification number A58217175, registered on the Spanish National Securities Market Commission's Special Register of Collective Investment Scheme Management Companies under number 49 and at the Companies Registry of Madrid in volume 36739, page 52, sheet M-658326. Its activities include discretionary portfolio management and representing, managing, and administering funds and investment companies incorporated and located in Spain.
