2025 – Surprises, Shocks and Wins
Article by Beat Wittmann, Chief Investment Officer @ Key Family Partners
The Geopolitics of US Plutocracy, EU Technocracy and Chinese Autocracy
The year 2025 will be unpredictable, full of surprises and the occasional shocks. All against the backdrop of the three competing global superpowers – the Donald Trump Plutocracy, the Ursula von der Leyen Technocracy and Xi Jinping Autocracy.
In an environment of epochal changes dominated by nationalist politics, creative destruction in business and technological breakthroughs success will only come with thinking the unthinkable and the agility and resilience to adapt and to stand up against disruptive, protectionist and revanchist actions.
The defining battle of our age is ongoing between the US-led Global West and China-led Global South. We are convinced that open and capitalist economic systems and democratic and pluralistic societies will prevail. The very ideas that a BRICS coalition and currency will replace the Western multilateral order or a cryptocurrency could be an alternative to the USD is sheer delusion. Quite the contrary, autocracies could face sudden changes in leadership such as China, Iran and Venezuela as their respective toxic combinations of increasing political repression and economic mismanagement will no longer be tolerated either by their inner-circle elites or populations.
The biggest uncertainty this year stems from the Ukraine and MidEast conflicts likely to drag on and freeze giving way to new power and economic formations. In addition a few European democracies face challenges by their far-right parties championing the erosion of societal and economic liberties. 2024 was globally the biggest election year on record and characterized by rejected incumbent leaders and the polarization between identity-driven protectionist nationalism and free-market driven multilateralism. The next indicator will be German elections on February 23rd 2025.
Global Economy – All About the US Bond Market
Politics keep dominating economics and business. Globally, the focus is on national security, being the foundation of both sovereignty and prosperity as well as the original and existential responsibility for any state. It encompasses politics, external and internal security, the economy and all areas of critical infrastructure.
US equity markets having performed strongly in 2023 and 2024, 20% plus each year, are highly valued and, thus, set to consolidate and correct. In addition, the sheer size of combined US capital
markets relative to world markets is at its peak in history.
The incoming Trump presidency will measure its success by well performing US capital markets and is lucky to inherit a solid US economy at the cusp of a major productivity up-cycle. It will, however, prove challenging to lower corporate taxes, push for falling interest rates, impose tariffs and mass-deportation of immigrants while anchoring inflation expectations and the debt situation. Crucially, be reminded that not the US President is the master of the universe but the US bond market – so keep watching it.
Investment Favorites – Europe, Financials and Defense
In 2025 the G7 equity markets remain our asset class of choice, however, it will be a year for traders and contrarians. The US and its leading financial, technology, energy and defense sectors continue to be the world economy’s backbone and the FED and US consumers, in their respective functions, lenders of last resort.
Contrary to consensus, we favor European to US equity markets in 2025. The optimism about US exceptionalism and performance is fully reflected in US asset prices already. Europe has massively underperformed in recent years as a result of weak growth, high energy prices, over-generous welfare states, complex and excessive regulation, lack of structural reforms, paralyzed and polarized politics and fragmented key industries ranging from financing to defense. In our view, pessimism about European prospects, massive undervaluation and underperformance relative to US markets is out of line with reality. We expect crucial factors to work in Europe’s favor including a forceful EU leadership pushing relevant reforms addressing lack of competitiveness politically benefitting from the power vacuum in Berlin and Paris. The ECB will engage in growth supportive monetary easing thanks to the tailwind of falling inflation rates. In Germany, we expect a new conservative Government reforming the debt brake as a starting point for expansive fiscal policy combined with supply-side reforms. In Ukraine, a likely end of the hot phase in the war is set to give way to reconstruction as well as economic and defense integration into Europe.
Speaking investment sectors, a favorite of ours remains the financial sector with US financials continue to lead supported by the Trump Administration with lower corporate taxes and deregulation pushing a boom in deal making – and private markets. European banks are poised to continue their strong performance of last year with the effect of falling interest rates overcompensated by steep, lingering discounts to book-value and EU policymakers taking decisive steps towards capital market union and overdue consolidation of the European banking sector – just think of Unicredit/Commerzbank as a test case.
Our clear favorite for 2025 continues to be the defense sector as spending in Europe will massively increase in the long run as a response to the Russian military threat and the retreating US. The current 2% of GDP defense spending will increase into the 3-5% range as the new normal. Increased defense spending, however, can only be efficient if industry fragmentation across Europe is reduced, the EU Commission more effective, public and private capital mobilized in size and defense bonds issued. The military-industrial complex includes land, sea, air, space and cyber divisions. Europe has strongly performed in this area in absolute and relative terms ever since Russia’s invasion of Ukraine in 2022. We expect investment in this sector to be gradually de-stigmatized and to outperform for years to come.
Watch This in 2025!
US President Trump seeks the Nobel Prize for peace – a war-ending deal in Ukraine and/or the MidEast could do the job.
The Chinese are an educated, hard-working and commercial people but governed and held back by a Marxist/Leninist leader – something will have to give.
