Investment Strategy – All Balls in the Air
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
The Trump Court
President Trump has entered the White House with all predictable unpredictabilities and with a toxic mix of delusion of grandeur, threats, promises and executive actions.
The new administration’s menu features insults for friends and foes alike, land grab threats (Greenland and Panama), punitive tariffs (Canada and Mexico), demands on Saudi Arabia to invest in the US and lower oil prices, pressure on the FED to lower interest rates, exit of multilateral institutions and contracts (Paris Climate Agreement and WHO) and interference into UK and German domestic politics including the support of far-right extremist causes and candidates.
It is clear, so far, that Trump is hell-bent on testing the limits of his presidential mandate, US rules and institutions, capital markets and the economy, the resilience of his financial backers and the hopes and expectations of his political sycophants.
Economic Cycle Dynamics – It is the US Consumer, Stupid!
The US economy has been the undisputed leader in terms of growth, productivity and performance ever since the 2008 global financial crisis and the COVID pandemic. No doubt, the Biden administration has handed to Trump a country with a lead and strategic autonomy in technology, energy, defense and capital markets.
Ironically, for Trump, America cannot be made great again – it was already great. Quite contrary to the prevailing excessively optimistic view and richly valued financial assets, Trump faces the clear and present risk that the US economy will first overheat and then drift into recession.
The sharply punitive tariffs, particularly, against neighbors such as Canada and Mexico will be highly and immediately damaging and lead to economic fragmentation along geographic and sectorial supply chains, losses and volatility in capital markets, triggering businesses, investors and consumer confidence to plunge.
Trumps economic and capital markets motto, clearly, should not be ‘drill, baby, drill’ but rather ‘spend, baby, spend’ because the US consumer is the world’s most important economic support factor.
2025 Investment Strategy is for Contrarians and Traders
Just days before the DeepSeek shock, I participated on a panel for an audience of distinguished global market practitioners and hedge fund managers discussing the 2025 market outlook. A fellow participant and Wall Street veteran claimed with radical conviction that the business cycle is dead and abolished, that crypto currencies will replace the fiat money system and that Trump with his tech billionaires will take over the world economy. The German proverb ‘Hochmut kommt vor dem Fall’ was spot on.
Let us put this radical view into context of the prevailing consensus on the global economy and markets. The widely perceived downside risks are ranking in importance as follows – persistent inflation, tumultuous geopolitics and protectionism. The perceived upside risks include a recovery in China, a resilient US consumer, lower taxes and deregulation, disinflation and geopolitical peace.
The best way to go forward is not to over-analyze the news and noise radiating from Washington but to watch capital markets, namely US government and corporate bonds, US equities and the US Dollar. Undoubtedly, the signs are already on high alert as US equities and the USD are at risk to follow the falling US bond markets.
The Number One Trump Trade is the European Defense Sector
Any hostile actions from the Trump administration towards Europe will lead to retaliation and increased political cohesion – in this very sense, the Trump effect would lead to unintended, yet, beneficial consequences.
Clearly, stagnating Europe needs growth, deregulation, investment and overcoming fragmentation. Expect initiatives by the majority of willing nations with the odd opt-out of obstructive members (Hungary) and opt-ins of non-EU members (Norway, UK and Switzerland).
In sharp contrast to the consensus that the US is the place to be we clearly favor Europe as the most attractive investment destination. In our view, Europe is at the cusp of relevant structural reforms, benefits from falling inflation and interest rates and offers highly attractive valuations. The pendulum will swing back from the current overwhelmingly pessimistic investors’ sentiment.
Europe is in crucial and urgent need of a capital market and banking union. Significant and long-term investments in defense and energy transition are crucial. We expect the European defense sector to continue to be the performance leader again in 2025.
Three Key Risk Factors to Watch
Should Trump enact Canada and Mexico style tariffs against China and Europe the US would suffer massive retaliation and the global economy would enter recession.
The DeepSeek shock is a timely and relevant reminder that we live through epochal changes marked by geopolitical disruptions, technological innovations and creative destructions.
The very important German federal elections will take place in three weeks time with conservative leader Friedrich Merz set to become chancellor leading a center-right and centre-left coalition government.
