The Return of the Law of the Strongest

• A chaotic start to the year: high volatility, global slowdown, and tariff increases.
• The announcement of Trump's tariffs triggers a shockwave: a sharp market correction and escalating tensions.
  
• Trump's strategy redefines the global economic balance, with major repercussions.

The first quarter of 2025 unfolded in an environment of high volatility, marked by notable divergences between asset classes and geographic regions. On the macroeconomic front, the data confirmed expectations: a global slowdown in economic activity coupled with persistent inflationary pressures, without major surprises.

However, the return of Donald Trump to the White House in January has been a true upheaval. His aggressive agenda has quickly redefined the international order. On the trade front, the sharp increase in tariffs targeting major global economies has reignited fears of a trade war. Regarding defence spending, his demands for increased budgetary efforts from European allies, coupled with the threat of partial military disengagement, has forced the European Union to urgently rethink its security strategy. His foreign policy, more unpredictable than ever, has exacerbated tensions with China, adopted an ambiguous stance on Ukraine, and revived controversial projects such as the annexation of Greenland or the transformation of Gaza. Finally, his rejection of climate standards and opposition to European digital regulations has deepened the ideological divide between Washington and Brussels.

All of these proclamations have disrupted financial markets, which, it is true, had been accustomed to a relatively stable upward trend for two years. The MSCI World Index ended the quarter down -2.1%, weighed down by a marked correction in March (-4.2%), something which heavily impacted overall performance.

This decline was mainly attributed to the underperformance of the US markets, which were heavily exposed to the uncertainties related to Trump’s economic agenda. The S&P 500 recorded a decline of -4.6%, its worst quarter since Q3 2022. Technology stocks, which had been market leaders for many years, were the hardest hit. The Nasdaq dropped by more than 10%, impacted by a sharp revaluation of valuation multiples. The launch of DeepSeek’s artificial intelligence model reignited fears of a bubble in the sector. The famous "Magnificent 7" companies recorded a spectacular drop of -16% during the period.

In contrast, European markets outperformed, supported by a significant budgetary shift. In the face of growing geopolitical tensions, Europe seems to have recognized the strategic challenges ahead, leading several countries to adopt ambitious recovery plans, particularly in the defence sector. This dynamic sparked renewed investor interest. The STOXX 600 index recorded its largest relative outperformance compared to the S&P 500 in more than ten years, ending the quarter up 5.2%, while the German index rose 11.3%. The Swiss SMI index, boosted by the rebound in Nestlé, also posted robust performance, with an increase of 8.6%.

Fixed Income markets evolved in a contrasting manner. In the United States, fears of recession and the search for safety supported demand for government bonds, causing the 10-year yield to drop by 36 basis points to 4.21% at the end of March. In Europe, the prospect of increasing debt led to higher yields, with the German 10-year Bund yield rising by 37 basis points, to 2.74%. In this uncertain climate, gold was the best performer of the quarter, reaching a historic record of $3,124 per ounce, with a 19% increase, its largest quarterly rise since 1986. Finally, foreign exchange markets reflected capital movements: the dollar lost -3.9%, while the euro appreciated by 4.5%, reaching 1.08.

Source : Bloomberg / Banque Heritage

"Liberation Day"

In the first three months of the year, markets reacted with a certain complacency to the US administration's desire to reduce the trade deficit. The tariffs proposed by Donald Trump were primarily seen as a political pressure tool on trade partners, as well as a way to strengthen the Republican base. In this context, tax reforms and deregulation were considered secondary.

However, the situation changed significantly last week with the announcement of new much more aggressive tariffs than expected, affecting all major trade partners. This event, which the Trump administration called "Liberation Day," has caused a genuine shock in global financial markets. Import tariffs in the United States have surged from 2.4% to 23.3%, reaching their highest level since 1930, a period marked by the Great Depression. Some countries like Mexico, Canada, and India were relatively less impacted by these measures, while nations like Switzerland and Japan are bearing the brunt of the consequences. For now, Europe remains relatively unscathed, with an average tariff rate of 20%.

Although these measures were presented as a negotiation strategy, the risk of escalation is now very real, and markets are struggling to incorporate this new reality. The multilateral era that has characterized the last 80 years seems to be coming to an end, giving way to a phase of bilateral negotiations. The law of the strongest is making its grand return!

Source : DR

This global shock has led markets to adjust their expectations, incorporating concerns about a potential economic slowdown, renewed inflationary pressures, and the possibility of a recession. Since the announcement of these new measures, the market correction has been rapid and brutal, and many investors are struggling to regain their composure.

What to Expect?

Trump's strategy is becoming increasingly clear. Faced with a trade deficit and a payments imbalance, his goal is to redefine the global economic balance by reducing the role of the United States as a growth engine. Three priorities are emerging:

• Stimulating American exports,
• Encouraging foreign companies to produce on US soil,
• Weakening the dollar.

This shift could profoundly transform the global economic order, and we are likely to witness a lasting reorganization of global trade, with major strategic implications. In the short term, the focus will be on the reactions of other nations, particularly China, which has already taken action. However, the scope of these responses remains uncertain: will they be limited gestures or a broader confrontation? It is also possible that rapid bilateral agreements will materialize with countries like India or the United Kingdom. On the other hand, negotiations with larger blocs, such as the EU or China, are expected to be long and complex.

Our Positioning

In the absence of clear visibility on how the scenario will evolve, we believe it is essential to remain calm. We have weathered numerous crises in the past, and markets have consistently shown remarkable resilience in recovering. For example, since the onset of the global financial crisis in March 2007, the S&P 500 has risen by 232%, equating to an annual return of 7.1%. According to our internal analysis, without a clear de-escalation initiative from the United States, markets will likely continue to incorporate increasing uncertainty and a higher risk of recession.

At our latest Investment Committee meeting, we swiftly took measures to reduce portfolio volatility and position ourselves to seize future opportunities. We reduced our exposure to small-cap US equities, as well as the financial and materials sectors, which are the most vulnerable to an economic slowdown. We also took profits on our CLO exposure, reducing our high-yield bond allocation after several years of strong performance. Additionally, we strengthened our underweight position in the U.S. dollar. Donald Trump’s intention to weaken the currency, the potential for Federal Reserve rate cuts, and the declining global appetite for U.S. assets all point to additional downside risks for the dollar. In terms of opportunities, we are increasing our exposure to U.S. and European sovereign bonds, anticipating upcoming interest rate cuts. We are also expanding our allocation to global convertible bonds, which are now near their bottom after the market correction, making them particularly attractive.

In these uncertain times, it is crucial to remain disciplined and proactive, which is exactly what we are doing.

👉Downlaod the CIO Letter: CIO Letter - April 2025