Multi-asset strategy

Review of the second quarter – lots of volatility, little trend

Trump’s announcement of reciprocal tariffs on 2 April trig-gered the fastest and sharpest sell-off in equities since the COVID-19 crisis. Volatility also rose to its highest level since March 2020. The uncertainty on the markets was so great that Trump suspended the announced tariffs for 90 days just a few days later. The same step was only taken for China after a further escalation in May. The stock markets subsequently recovered from their correction and are now close to the levels seen at the start of the quarter. It became apparent that the budget deficit in the US is likely to increase further. In line with this, the rating agency Moody’s downgraded the creditworthiness of the US. Yields on long-term US government bonds rose and the US dollar depreciated further. Fears about growth weighed on industrial metals and, together with announced OPEC production increases, depressed the oil price until the Israel-Iran conflict gave them tailwind. The price of gold continued to rise.

Economic outlook – data in summer not very meaningful

With the tariff chaos, negative US growth in the first quarter and negative US economic surprises, the consensus expectation for US growth in 2025 has fallen by around 1ppt from its high in February to 1.4%. Companies are holding back on investments and consumers on spending. In Europe, expectations are only slightly lower but a recovery appears to be delayed. Earnings growth expectations for 2025 have also been revised downwards globally, for example for the S&P 500 from 14% at the start of the year to just 8% at present, despite the positive Q1 reporting season. The reduced expectations are much more realistic, especially for US earnings, which are benefiting from the weak dollar. More clarity on tariffs and prospects of US tax cuts increasingly support the economy. However, the economic and earnings data for the second quarter are unlikely to provide a clear picture. The underlying picture is overshadowed by tariff effects. For example, high imports (pull-forward effects) weighed on US growth in the first quarter. The collapse in imports in the second quarter could now support growth. US inflation is likely to pick up again and the Middle East conflict is causing higher oil prices. Uncertainty will remain high.

Trump's race for the midterm elections is likely to determine a lot

At around USD170bn, Elon Musk's American savings efforts (DOGE) fall short of his target of USD1trn-2trn and are likely to come to nothing with his departure. Instead, the Trump administration is now trying to “grow its way out” of the debt crisis by means of tax cuts. Whether this will succeed is unclear. What is certain is that the plans will initially result in even more debt – an estimated USD2trn-3trn over 10 years, most of it in the next few years. The details of the tax plans and their implications are likely to be among the defining issues in the third quarter. It is unlikely that the plans will be adopted before August or September. However, Trump is under pressure to deliver on his election promises and stimulate the flagging economy, as the mid-term elections are less than 18 months away and his approval ratings are in the basement. To avoid looking like a “lame duck” afterwards, Trump needs a strong labour market, a robust economy and low interest rates.

Rising sovereign debt: Risk for government bonds and the dollar, opportunity for tangible assets (equities, gold), global diversification

However, higher debt, robust growth and persistently high inflation argue against falling yields. In the coming years, the US government will probably have to find buyers for an additional USD500bn-600bn in government bonds every quarter. This is only likely to succeed with high yields and an even weaker US dollar, especially as rising government debt is a global phenomenon. The IMF recently emphasised that in countries that account for 80% of global GDP, government debt is higher than before the pandemic and the increase is accelerating. Trump can hardly hope for lower interest rates from the Fed in the short term either. Federal Reserve chairman Jerome Powell is still in office until May 2026. Trump’s only option is to determine his successor early on with someone who is in favour of interest rate cuts, renewed quantitative easing or even control of the yield curve – in the hope that the markets are already pricing this in. Whether this will help to stop the rising bond yields of longer maturities seems questionable to us, however.

Government bonds are the victims when high, rising and pro-cyclical fiscal spending makes a recession less likely, increases the supply of bonds and supports equities, gold and other commodities. Last, but not least, the associated inflation risks make the protection of purchasing power more important for investors. We have long argued that an environment of rising government debt, increasing fiscal dominance and financial repression to ensure the debt sustainability of the state argues for a significant proportion of investments with a tangible asset character in the portfolio, at the expense of bonds. In recent decades, the price of gold has risen in parallel with US debt. If both continue to develop in parallel, the price of gold is likely to reach USD6,000 per ounce in 2035. This would correspond to an annualised yield of 6.3%. We consider further increases in US bond yields for longer maturities to be the main risk for the markets. However, a weakening US economy could temporarily reduce this risk. The US dollar is likely to weaken further in the medium term, similar to the phase from 2003 to 2008. A normalisation of the valuation of the US dollar and of US dollar investments in the coming years is likely, which points to a better medium-term relative performance of investments outside the US. In particular, investors who have bet heavily on US investments in recent years should reconsider this.