Financial markets entered 2024 with high hopes for a monetary policy pivot, against a backdrop of receding inflation. The Swiss National Bank, followed by the European Central Bank and, finally, the Federal Reserve fulfilled their wishes – propelling equity indices to new records. Neither the heavy electoral agenda, nor the complex and fast-evolving geopolitical situation, weighed much on investor sentiment. As such, balanced portfolios closed the year in solidly positive territory, those most exposed to the US “Magnificent 7” stocks obviously posting the strongest returns. As we move into a new year, can the investment picture get any better?

For this first Investment Letter of 2025, we thought it interesting – indeed also instructive and somewhat humbling – to take a look back to each of our 2024 issues. Such an undertaking not only provides a form of chronology of the past 12 months, but it also helps pinpoint the most important portfolio performance factors, positive and negative. And, of course, it raises interesting questions for the future.

In our January 2024 letter, we delved into the oil supply-demand situation, because of its importance for the inflation outlook and hence for central bank easing potential. We noted that the main surprise factor was on the supply side. And not to do with OPEC, which was sticking firmly to its production quotas, nor Russia, whose output was struggling just to remain stable, but with the US. Unlisted shale companies were again “drilling and pumping as if there was no tomorrow” we wrote. To the point that the US had become the world’s largest oil producer, with output of over 13 million barrels per day. We thus argued that the oil price was capped in the short- to medium-term, meaning that markets were correct in anticipating a monetary policy pivot. That said, we believed that the magnitude of rate cuts would be closer to central bank projections (the Fed “dot plot” was pointing at the time to three 25 basis point cuts) than to what financial markets were pricing in (six cuts). From a portfolio standpoint, the possibility that markets may have rallied too enthusiastically led us to advocate a slight shortening of our average bond holding (to ca. 5 years).

Our February letter was all about US regional bank woes. New York Community Bancorp had just surprised markets with a quarterly loss of USD 185 million and a 70% dividend cut, leading the KWB Regional Banking index to suffer its worst one-day decline since the fateful bank failures of March 2023. This time round, the problem was not to do with government debt write-downs and shaky depositors, but with a provision for potential commercial real estate losses. From a broader economic standpoint, however, data reports were still delivering positive surprises and the soft landing scenario was turning into an even better one: Goldilocks, i.e. the combination of reasonable growth and receding inflation. We chose to adopt a glass half full stance, writing that a slightly higher equity exposure could prove rewarding, provided it was well diversified. Indeed, the aggregate volatility of equity indexes was very low, but the same could not be said of individual stocks – particularly in the midst of a quarterly reporting season.

In our March letter we tried to fit together all the pieces of the economic and financial puzzle: no easy task! We signalled notably a rosier-than-consensus take on China, highlighting the prior month’s very sharp increase in Chinese iron ore and coal imports – imports of basic resources being a consistent indicator of a faster economic expansion ahead. We saw such a growth uptick as more of a domestic one, however, meaning that investments in very cheap Chinese equities should be focussed on domestic names, not on exporting companies. Indeed, the topic of US and European government subsidies to their own industries (car makers in particular) was already starting to make headlines. March was also the time of the US primaries, pointing to a remake of the 2020 Biden vs. Trump duel, with a “real chance” of the latter winning we wrote. The other moving parts that retained our attention were the equity/bond market decoupling under way since mid-January, the puzzling US Securities and Exchanges Commission decision to allow the launch of bitcoin ETFs and the all-time high just posted by gold, even though it usually shines during periods of investor angst and quest for safe haven assets.

In our April letter we spoke of course of the late March Swiss National Bank rate cut, the low level of domestic inflation having effectively given it the luxury of being the first among major Western central bank to cut rates. We noted that while investors were understandably cheering the news, they should be wary not to let stock prices get ahead of themselves. Among the strongest recent performers stood some European car makers, which led us to discuss the complex mechanics of the transition to electric vehicles. The Japanese stock market was also highlighted as boasting an impressive three-month performance – on the back of an all-time yen low against the greenback. We concluded that equity markets broadly seem poised to continue their upward trajectory for some time, ahead of the next rate cuts to come in Europe and the US.

In our May letter, we discussed the difficult last mile in the fight against inflation, because of the tightness of labour markets, of second-round price effects and of the rally in commodity markets. We even suggested an upping of official central bank inflation targets from 2% to 3%, which would make rate cuts more justifiable – and thereby also facilitate the sustainability of growing public debt. Political pressures were indeed mounting for the European Central Bank and the Federal Reserve to loosen their grip. We concluded by arguing for bonds over equities, pointing notably to the 4.5% yield on US 10-year Treasuries.

Our June letter delved further into the “mystery of the disappearing equity risk premium”, reflecting on an interesting piece of research by BCA that attributed the ongoing stock market rally to a “trickle-up” effect of the massive liquidity injections during and after the Covid crisis. Initially, this money largely went to low- and middle-income households, whose high marginal propensity to spend boosted overall economic growth. But once this pool of pandemic money had been spent by consumers, it did not disappear from the system. Rather it trickled up to the richest households (entrepreneurs and investors) in the form of company profit distributions. Such citizens having little inclination/need to spend, the money effectively remained stuck in the financial system. Worse, a good part of it was chasing a few darling stocks, in the AI and biotech fields in particular, quite regardless of valuations. A situation that made for increasing odds of disappointment in our view, hence our suggestion that bond exposure be increased somewhat, and that equity positions be trimmed slightly.

Our July letter focussed on Europe, viewing the recent political developments in the UK and France as two sides of a same coin: a vote of no confidence in prior leadership, considerable (albeit less than feared) gains by extreme right “protectionist” parties, and broad-based hopes for increased social spending. We argued, however, that the mechanics of debt are implacable. To the point that France had come under close monitoring of both rating agencies and EU authorities.

In August, we looked back at the eventful month of July, including the assassination attempt on Donald Trump, President Biden’s decision not to run for re-election and – albeit somewhat less in the limelight – China’s Communist Party deciding on a significant enhancement of the country’s social security system, in a bid to boost domestic consumption. Amid all these news, equity markets had undergone their first correction in many months, though far from sufficient in our view to bring the valuation of “magnificent” stocks back into attractive territory. We thus continued to argue for a cautious and highly diversified asset allocation. Among equities, choosing was difficult. Relative growth dynamics favoured US stocks, but their prices were high. Conversely, local Chinese companies were very cheap, but investing there involved hoping for a pick-up in domestic growth, as well as accepting unpredictable and arbitrary government intervention. On the bond side, the picture was somewhat simpler in our mind. Yields still appeared interesting, justifying the progressive increase in duration implemented during the prior few months.

In our September letter, we again discussed the heightened market volatility, reflecting a very uncertain economic and geopolitical situation. Every piece of data released was being closely scrutinised by investors in the hope of gaining clarity on two key questions: whether the US would be able to avoid a recession and by how much the Federal Reserve was to cut rates. One trend, however, seemed unstoppable to us, that of rising government deficits and debt. Which, combined with activity that would eventually slow, made for an unstable equilibrium. We elected not to change our asset allocation, keeping average fixed income duration on the longer side (to benefit from the pending drop in interest rates) and sticking to a rather “tactical” approach in equity markets: not too much exposure, ample diversification and some ammunition kept so as to be able to respond to temporary corrections.

Our October letter was largely dedicated to China’s “whatever it takes” moment, referring to the series of stimulus measures announced by Chinese authorities in the final days of September. Catching the financial world by surprise, this led to a very sharp rally in the – undervalued – local stock market. We cautioned, however, that Beijing had decided to rely on private capital rather than public money, which may limit the near-term economic impact of the stimulus package. The other major subject of focus was the Middle East, where the conflict between Israel and Palestinian Hamas was taking on a much broader turn. We notably discussed the potential (upward) impact on the oil price, should Iranian oil production facilities come under attack and/or the Strait of Hormuz be closed – two scenarios that, at the time, could not be ruled out. As such, we pointed to energy investments, alongside exposure to gold, as potential portfolio hedges against adverse geopolitical developments.

In November, our “gale force 9 warning” letter spoke of course of Donald Trump’s election. We discussed the reasons for his surprisingly unambiguous victory and, more importantly, tried to gauge the consequences for the US and beyond. In a nutshell, we anticipated higher US inflation ahead, we worried about an assault against regulatory bodies in the US and we stressed that the implications of the change in US administration would be felt across the globe. In particular, we described Europe’s unenviable position, both economically (with many policymakers trying to tighten budget strings and US tariffs lurking) and politically (given the lack of EU-wide investment plans/fiscal policy). Faced with such uncertainty, we held onto diversification as the key driver of our asset allocation: “spreading investments to the maximum (across all asset classes and currencies) seems the most appropriate way to catch the blip within the bump”.

Finally, in our December letter, we reflected on the form of revolution unfolding before our eyes. And this did not refer only to the US or the Middle East. We spoke indeed of the deep troubles faced by France and Germany and, more generally, of a threat to democracy in Europe too – with control of political and media levers taking a worrisome, US-like, turn. Accompanying the shift to the right of the Western world is of course an increasingly protectionist attitude, with economic consequences that we illustrated by delving into shipping trends. We thus closed the year again stressing the need for a cautious and selective approach. We signalled that, with the Federal Reserve likely to have less margin to cut rates, we had sold our long-term US bond holdings, but that the same did not hold for Europe. Last but not least, we reminded readers that we remain strong proponents of hedge funds, which we view as well positioned to benefit from future market volatility.

What next?

With the unpredictable President Trump taking “command” of the US this month, and his “assistant” Elon Musk increasingly moving into the international policy arena (e.g. supporting extreme right parties in Europe), anything could happen in 2025. For investors (and for us), this amounts to no less than a nightmare. How can we cope with all the “unknowns” of the coming months: will trade barriers be deployed (and to what extent), will Ukraine be forced to accept a defeat (against its will), will existing climate policies be reversed, will democracy survive, will NATO still be supported by the US, will the EU continue to exist in its current form, will government debt remain sustainable, will companies be able to adapt fast enough to new technologies (AI), will the situation in the Middle East run out of hand, will China remain a sleeping giant, will inflation be kept under control, etc. ?

Sure, the world has been in dire straits before, and we always managed to straighten things out and move forward – even if sometimes at a huge cost. This time will be no different we suppose.

Our aim, for now, must first be to protect our clients’ wealth and, second, to ensure that we do not miss the possible opportunity of roaring financial markets if everything were to turn out for the better. Indeed, some of the previously mentioned “unknowns” could prove positive for certain market segments.

How can that be done?

Rule #1 is to be as diversified as possible, with exposure to all asset classes, worldwide.

Rule #2 is not to panic, whatever happens. Investors should stay put on their positions: some will generate gains, others might lose some, but on average the outcome will be more or less ok in due course.

Rule #3 is to rely – for a part of the portfolio – on the most experienced and astute hedge fund managers. They should be able to surf the upcoming waves.

Rule #4 is to constitute a small “war chest”, meaning having some cash on hand or keeping some physical gold.

We wish you a healthy, happy and safe 2025 in what promises to be an unpredictable and very eventful year.