MARKET INSIGHT – April 2025

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

The end of some illusions

The financial markets have the capacity to abruptly challenge investors’ certainties. Since 2023, apart from a few brief periods of doubt, we had somewhat forgotten that sometimes the positive dynamics of the markets seize up, calling into question fashionable economic concepts and recent bullish trends. March more than confirmed the initial doubts of February regarding “American exceptionalism” and the scale of the monetary benefits of the huge investments in artificial intelligence by the US tech giants.

Unlike last month, the decline in US indices was not offset by their European counterparts, whose defense sector alone is not enough to make us forget the tariff war launched by President Trump, impacting many sectors of the Old Continent’s economy. The US government’s trade muscle contest is in full swing, making the coming months very uncertain as we approach the first quarter earnings season.

Just over 40 years ago, the English band Imagination released their hit “Just an Illusion”, with its neo-disco style that was so popular in the 80s. Beyond the catchy chorus, the lyrics describe a state of confusion where emotions blur the line between dream and reality. It seems unlikely that Donald Trump listens to this record before each of his speeches (of which there are many!) but the fact is that they tend to destabilize investors and, let’s face it, the whole world when it comes to geopolitics.

Whereas last month some market participants were still looking on with a degree of amusement at the actions and various provocations of the American government, it now appears that the Trump administration should be taken seriously on many issues. The omnipresent topic of tariffs materialized in March and should no longer be seen as a simple negotiating tactic brandished by the American president with the aim of signing deals, but rather as a concrete process disrupting, even redefining, world trade.

Added to this is an increasingly tense geopolitical climate in which the Oval Office has also been issuing more and more statements, sometimes provocative, including towards its allies. The fragile partial ceasefire obtained by the US administration from President Putin contrasts at this stage with the promises of the Republican campaign, where twenty-four hours would be enough for Donald Trump to end the conflict in Ukraine. It is also becoming much less amusing to realize that issues such as control of Greenland or the end of diversity programs promoted within American companies (and even foreign ones, if they wish to continue working with the American government!) are very real and not “Just an Illusion”.

The scenario of stagflation in the United States has therefore gained momentum in recent weeks

In such an environment, investors are understandably cautious, but beyond the current general context, it is the economic data and the initial statements from companies that have already released their figures (outside the usual calendar quarters) that are attracting our attention.

The current state of the US economy, some aspects of which became more apparent in March, is becoming increasingly clear. Growth is slowing down and consumption, which has been so resilient for more than two years despite inflation, now seems to be starting to slow down. Tariff uncertainty is making Americans more cautious in their purchases and is obviously not bringing down the prices they have to pay. The scenario of stagflation in the United States has therefore gained momentum in recent weeks. It goes without saying that this hypothesis, if it were to be confirmed by economic data, would greatly complicate the work of the Fed, which will do everything it can to contain a return of inflation.

On the European side, the stock markets have understandably not been able to maintain the pace they had been progressing at since the beginning of the year. The already weak growth experienced by the old continent will logically be impacted by the trade war. The situation in Germany, although now in principle less uncertain politically, can only suffer from the negative repercussions from the automotive sector. In France, there is no guarantee that the current government will last, and the latest figures for the public deficit do not suggest any improvement on this front. Not to mention, of course, the very many French products that may soon be taxed on American soil. However, there are some rays of sunshine coming from southern countries, Spain in particular, whose current economic strength is the result of past reforms and a tourism boom that shows no signs of abating for the time being. Another cause for satisfaction is that European inflation seems less likely to pick up than on the other side of the Atlantic. The ECB therefore appears free to continue its process of lowering interest rates and potentially make its contribution to a certain European “awakening”.

Finally, a few words, as every month, on the Chinese situation, whose recent economic developments continue to strike us as insufficient to truly revive the country’s growth and ward off the spectre of deflation. It should be noted that doubts similar to those surrounding the big names in American tech regarding their massive investment plans in artificial intelligence are starting to be heard. Alibaba chairman Joe Tsai recently spoke of a potential oversupply in the build-out of AI-related data centers, corroborating Microsoft’s abandonment of some of their projects in the field. Caution is therefore advised after the surge in Chinese tech stocks at the beginning of the year.

The last few weeks have been difficult for equities, especially for US technology stocks. No one would have bet at the end of 2024 that the “Magnificent 7” would experience a quarter as chaotic as the one just ended, nor would anyone has believed that Donald Trump would (temporarily) ignore a downward-trending S&P 500 index whose intense sector rotation of February seems to be gradually turning into a correction.

However, this is not the time to give in to the confusion evoked in the Imagination song. The actual economic indicators and the valuable information to come from companies that will soon be publishing their results remain our only guide for steering the asset allocation of our portfolios, even when the “noise” generated by the American president is deafening.

The actual economic indicators and the valuable information to come from companies that will soon be publishing their results remain our only guide for steering the asset allocation of our portfolios

In our assessment of the current environment, we are considering the fact that growth is becoming scarcer and that valuations in the US technology sector already seem to have anticipated a slowdown in Uncle Sam’s country (admittedly helped by the Deepseek episode). At this stage, many other sectors of the stock market do not incorporate potentially disappointing prospects for companies and rightly cause us to exercise a degree of caution.

It is worth noting that our allocations have weathered the past few weeks better than the handful of elements outlined in this newsletter might suggest. As in the occasional periods of volatility experienced over the past two years, our portfolio construction, which favors sector diversification and a moderate level of equity risk, has enabled us to sleep soundly and not see all the gains made during the first two months of the year evaporate.

Better still, the bond and alternative components of our portfolios made a positive contribution to performance in March. Without forgetting, of course, the part played by gold, whose significant weighting, in line with our recommendations, continues to act as a cushion to absorb the shocks sent by US equities.

Last month, we told our readers that the economic and financial environment had slowed down somewhat. This was confirmed in March and the markets paid more attention to it than before. It will therefore be key to distinguish illusion from reality over the next few weeks by being agile in our decisions, without forgetting that stock market excesses are also a source of opportunities.