Monthly Market Monitor
March 2025
In a Nutshell
Our view on the markets
Germany has voted
The conservative CDU/CSU won the most votes by far in Germany’s recent Bundestag elections. The social-democratic SPD party registered severe losses while the liberal FDP and the newly founded BSW party both fell short of the 5% threshold to enter the Bundestag. The election outcome is both good and bad for the outlook for German politics. Although a reprise of the “grand coalition” is possible, the strong showing by the far right and left makes it difficult to reform Germany’s debt brake rules. It therefore will take political creativity to appropriate more money for collective European defense spending and to withstand the political pressure from America.
America lagging behind
After massively outperforming over the last two years, US stocks have gotten off to a different kind of start in 2025 for once. While the US market has been treading in place, the Euro Stoxx 50 and the Swiss Market Index have already advanced more than 10% year-to-date. There have been recurring brief surges by European stocks in recent years, but this time Europe’s relative strength may have a longer half-life. The trend in US Treasury bond yields has been pointing downward lately. Donald Trump is likely pleased by this because the bond market arguably will be his real gauge of success in the future. However, falling interest rates also reflect fears about economic growth.
Infrastructure: An asset class on the rise
The word “infrastructure” has always meant more than just roads and bridges (it also includes power plants, pipelines, and telecommunications networks), but infrastructure as an investment theme not infrequently used to seem rather boring. However, the market for (investments in) infrastructure has long since shed that dull image. The infrastructure sector, in fact, is benefiting these days from megatrends such as digitalization and decarbonization and is registering vibrant growth. More and more opportunities to partake in the return potential and defensive qualities of (private) infrastructure projects are presenting themselves today also for individual private investors.
Donald Trump considers “(punitive) tariffs” the most beautiful word in the dictionary, and everybody has been talking about them during the first weeks of his second term in office. Google search interest in the word “tariffs” at the start of February actually even surpassed that for other topics of concern in recent years such as “recession” and “inflation.” Tariffs do not cause inflation, they make the USA richer, and are simply only fair with respect to other countries, or so goes Trump’s theory, which only he, his advisors, and few others seem to share. In their way of thinking, whoever wants to avoid punitive tariffs should simply relocate their production to the USA. Whoever heretofore viewed Trump’s use of the tariff cudgel as merely a Trumpian negotiating tactic may be in for an unpleasant surprise these days. Tariffs remain on the agenda, are stoking uncertainty, and have already put a dent in risk appetite and business sentiment. M&A transactions in the USA, for example, fell 30% year-on-year in January to the lowest level since 2015.
escape | Tariffs stir emotions
Chart of the Month
The conservative CDU/ CSU won the most votes by far in Germany’s recent Bundestag elections.
Macro Radar
Taking the pulse of economic activity
Germany has voted
In Germany’s recent Bundestag elections, the conservative CDU/CSU won the most votes by far (28.52%). The social-democratic SPD party (16.41%), in contrast, registered severe losses, shedding 9.3 percentage points compared to the 2021 elections. The liberal FDP (4.33%) and the newly founded BSW party (4.97%) both fell short of the 5% threshold to enter the Bundestag. The election outcome means both good and bad news for the outlook for German politics. Although a reprise of a “grand coalition” consisting of the CDU/CSU and the SPD is possible and a more complicated “Kenya coalition” together with the Greens (11.61%) isn’t absolutely necessary, the strong showing by the AfD (20.80%) and by the leftist Linke party (8.77%) means that the two-thirds majority needed to reform Germany’s debt brake rules cannot be obtained without their consent. Hence, it will take political creativity to appropriate more money for collective European defense spending and to counter some of the pressure from the new US administration. Declaring a national state of emergency would be an alternative but merely ephemeral solution for increasing Germany’s financial leeway.
Trump 2.0 causing uncertainty
A political vacuum prevails in Europe’s largest national economy at a (worst conceivable) time of geopolitical upheaval. Germany’s future federal chancellor, Friedrich Merz, has thus set a goal of forming a new government capable of taking action by Easter. Meanwhile, Donald Trump has continued to surprise foe and friend alike lately – while Russia is rejoicing that it is no longer considered the aggressor in the eyes of the USA, Ukraine finds itself facing an awful natural resources “deal.” But the US president’s modus operandi is provoking mixed emotions not just outside America. In the USA as well, sentiment slowly is starting to tip, in no small part because Trump may be viewing punitive tariffs as more than just a means of exerting pressure, but to a greater degree also as a permanent source of revenue. The concerns are visible in more than just the recent sharp jump in US consumers’ inflation expectations (which are heavily skewed, though, by political affiliation). Moreover, the corporate euphoria at the turning
of the year has quickly given way to disillusionment and uncertainty. The Trump 2.0 era is still young, and a lot is in flux. However, if the new administration’s cabinet stays on a confrontation course, geopolitical collateral damage not only looms, but so does a dip in economic growth.
No
easy job for the Fed US Federal Reserve Chairman Jerome Powell’s job is more difficult than ever in the current unpredictable political climate. The new Trump administration has held back on calling for interest-rate cuts in recent weeks. The Treasury secretary instead wants to bring long-term market interest rates down to lower levels indirectly through his policies. But even so, the situation is challenging enough for the Fed as is. On top of the rise in inflation expectations and in addition to the inflationary tariff and deportation policies, actual inflation in the USA of late has mildly reaccelerated. Although Fed officials still believe that inflation will soon drop back to below the 2% mark, the timing of that happening is uncertain, so further interest-rate cuts in the near term are off the table for the time being. The European Central Bank and the Swiss National Bank, in contrast, both look set to loosen the interest-rate screw again in March, the former in view of weak economic activity and the latter in light of very low inflation.
The election outcome means both good and bad news for the outlook for German politics.
Asset Allocation
Notes from the Investment Committee
Fixed Income Global
Sovereign bonds
Corporate bonds Europe
Microfinance UK
Inflation-linked bonds
High-yield bonds
Emerging-market bonds
Insurance-linked bonds
Convertible bonds
Currencies
US dollar
USA
Japan
Emerging markets
Alternative Assets
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Duration Hedge funds
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Equities: America lagging behind
• New year, new luck(?). After massively outperforming the rest of the world over the last two years, US stocks have gotten off to a different kind of start in 2025 for once. While the US market has been more or less treading in place, the Euro Stoxx 50 and the Swiss Market Index have already advanced more than 10% year-to-date. A number of different rotations underlie the shift in investors’ stock preferences. In the USA, the Magnificent Seven have lost some of their luster for the time being. That’s because, on one hand, investors’ heightened expectations have become harder and harder to beat. And on the other hand, there has been a recent emergence of doubts about whether the enormous investments in infrastructure for artificial intelligence will ever pay off at all, particularly in light of much cheaper AI models from China. Meanwhile, investors’ sudden desire for defensive stocks, which tend to be less expensively valued, has invigorated European markets. The ranks of the winners in recent weeks included the Swiss heavyweights Nestlé and Novartis as well as the European arms industry.
• There have been recurring surges by European stocks in recent years, but they consistently were of short duration. However, the odds that Europe’s relative strength will have a longer half-life this time are better than they were in the past. One reason why is because investors’ cognitive dissonance reAsset Allocation
Infrastructure
Real estate
Scorecard
Macro
Monetary/fiscal policy
Corporate earnings
Valuation
Trend
Investor sentiment
garding the US market has intensified lately. In a January survey conducted by Goldman Sachs, 58% of the institutional investors questioned said they expected the USA to achieve the best performance once again this year. Meanwhile, more than 80% of the investors in a February survey of fund managers conducted by Bank of America said they considered US stocks overvalued. Those combined assessments harbor a lot of potential for disappointment if US economic activity and/or US corporate earnings perform less well than expected in the quarters ahead. Although earnings expectations for Europe are also ambitious, the region’s much cheaper valuation acts as a buffer to a certain degree if those projections aren’t entirely met. And, finally, a potential end to the war in Ukraine could also boost sentiment toward Europe.
• However, investors shouldn’t jump the gun on the heels of the torrid rally in recent weeks. Raising the weighting of European stocks is more a long-term
There have been recurring surges by European stocks in recent years, but they consistently were of short duration.
question of strategy and less a short-term tactical drill. Keeping a cool head and taking some profits where appropriate is the thing to do also with Chinese (technology) stocks, which have been the real star performers in this still-young year. Stocks have mixed prospects for the months ahead. The low cash allocation held by globally oriented fund managers (3.5%, the lowest level in 15 years) and negative technical divergences in US indices advise caution. At the same time, though, sentiment among US private investors has already gotten so bad again that another buy-the-dip opportunity may soon be in the offing. In sum, volatility looks set to stay elevated in the near term.
Fixed income: A Trump trade of an opposite kind • Bond markets have heaved a gasp of relief in recent weeks, albeit in an unusual manner, because fears that the yield on 10-year US Treasurys would climb to new highs above 5% in the wake of Donald Trump’s election victory haven’t come true thus far. On the contrary, the trend in long-term market interest rates has been pointed distinctly downward since Trump’s inauguration. That, however, has been caused by a different fear: to wit, that the saber-rattling with more and more new tariffs and the resulting uncertainty could stifle the US economic upturn and make more interest-rate cutting necessary over the further course of this year than has been priced in of late. The US president and his Treasury secretary, Scott Bessent, likely approve of the current trend in market interest rates because Trump may view the bond market even more than the stock market as his real gauge of success in his second term in office. Lower long-term interest rates mean lower interest expenses for the government and may be part of the formula for consolidating the USA’s public debt. They also indirectly stimulate economic activity (due to lower mortgage rates, for example). It remains to be seen whether this theory pans out. In any event, the new US administration’s unconventional actions at present risk dealing a shock to economic growth that could lead to a recession in the worst case. In the midst of this set of circumstances, government bonds at the moment resume fulfilling the function of providing insurance for investors against downside risks to economic activity. Meanwhile, riskier segments of the fixed-income market, which currently offer only a razor-thin risk buffer like in the case of high-yield bonds, should continue to be underweighted.
Alternative assets: Gold remains a safe haven
• Gold in recent weeks has once again been the biggest beneficiary of the rampant (geo)political uncertainty. The yellow precious metal has proven its qualities as a safe haven in uncertain times over and over, and those qualities are in high demand right now. The price of gold has climbed further, rising
more than 10% already in the first two months of 2025. The USD 3,000-per-ounce “sound barrier” appears within reach, but could present a tough obstacle to lastingly overcome in the near term. Cryptocurrencies, in contrast, have not been a safe refuge so far this year. US Bitcoin ETFs registered net outflows in February for the first time since their launch a year ago. The crypto euphoria in the wake of Trump’s election victory appears to have faded for the time being as massive price losses on prominently advertised meme coins have tarnished the most important cryptocurrency. Bitcoin’s drop below the USD 90,000 mark in late February ultimately was a negative sign also from a technical analysis perspective. Although similar price patterns last year turned out to be false signals, this time the path to new all-time highs seems blocked for the time being because many investors who have climbed on board since last December at prices close to six digits are currently under water.
Currencies: The US dollar is following the template
• EUR/USD: The EUR/USD exchange rate continued in February to work on establishing a floor. From a technical analysis perspective, this is healthy and necessary in the aftermath of the sharp downward trend in the fourth quarter of 2024. The stabilization has been underpinned lately by a mild improvement in macroeconomic data (at a low level) in the Eurozone and by concurrent data disappointments in the USA. However, these recent tendencies would have to continue for longer in order to bring about a genuine uptrend for the euro. Support is also needed from the interest-rate side. That could come if a dip in economic growth induced by Donald Trump indirectly compels the US Federal Reserve to cut interest rates.
• GBP/USD: Against the British pound as well, the greenback lately has been following the template set during Trump’s first term in office, which saw the dollar rise to a temporary high shortly after his inauguration. The GBP/USD exchange rate thus looks set to remain a plaything of dollar settlement. But sterling may perform relatively more weakly compared to the euro. The latest economic activity and inflation data reflect a stagflationary environment in the UK, which makes a case for further rate-cutting by the Bank of England and for a downward drifting pound.
• EUR/CHF: The EUR/CHF exchange rate has held extremely steady so far this year, hovering around the 94 centimes mark with little volatility. Given the looming tariff war, the franc looks set to remain in demand and stay strong for the time being. Although the Swiss National Bank will probably cut its policy rate again in March to 0.25%, the low interest-rate level alone is unlikely to be enough to make the franc look attractive as a borrowing currency for carry trades in the current geopolitical climate.
Bond markets have heaved a gasp of relief in recent weeks, albeit in an unusual manner.
Warren Buffett’s keen nose for bargains on the stock market is legendary, and it has made him one of the world’s wealthiest investors. At the moment, though, the “Oracle of Omaha” seems to be having a hard time finding attractively valued companies on stock exchanges. Buffett’s investment company, Berkshire Hathaway, has consistently been on the net seller side in each of the last nine quarters. It did some large-scale profit taking, for example, on banking giants Citigroup and Bank of America as well as on Apple, and sold off its entire stake in HP. Berkshire Hathaway’s liquidity cushion grew considerably as a result and amounted to a record-high USD 334 billion as of end-2024. Although Buffett, in his latest letter to shareholders, assured investors that he would never prefer ownership of “paper money” (read: government bonds) over ownership of good businesses, he failed to provide a good explanation for the high cash allocation. Investors are probably well advised to rate this as another warning sign of a rather loftily valued US equity market. Buffett’s money quote: “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.” Investors likely will have to wait a while yet for the latter to happen.
Chart unter der Lupe
Record-high cash allocation | Does Warren Buffett know something that others don’t?
Share of cash and cash equivalents on Berkshire Hathaway’s balance sheet
Bloomberg
Source:
Theme in Focus
Infrastructure: An asset class on the rise
The term “infrastructure” has always meant more than just roads and bridges (it also includes power plants, pipelines, and telecommunications networks), but infrastructure as an investment theme not infrequently used to seem rather boring. However, the market for (investments in) infrastructure has long since shed that dull image. The infrastructure sector, in fact, is benefiting these days from megatrends such as digitalization and decarbonization and is registering vibrant growth. More and more opportunities to partake in the return potential and defensive qualities of (private) infrastructure projects are presenting themselves today also for individual private investors.
Everybody wants in Infrastructure is riding a tailwind, is taking off and/or is bristling with energy. Whatever image one employs – be it a wind turbine, an airport, or a power plant –, the actual message stays the same, i.e. the market for (investments in) infrastructure is registering rapid growth. The amount of fixed capital invested in private infrastructure projects has increased by a factor of 5x over the last ten years and by now totals more than USD 1 trillion, and more and more players want to get in on the action. There accordingly is a long list of takeovers that asset managers have made in recent years to strengthen their capacity in the infrastructure sector. European private markets giant CVC Capital Partners, for example, took over Netherlands-based infrastructure manager DIF Capital Partners (assets under management (AuM): EUR 16 billion) in September 2023. In February 2024, Swiss private bank Vontobel announced its acquisition of a majority stake in Ancala Partners (AuM: EUR 4 billion). But the biggest coup last year was scored by BlackRock. With its USD 12.5 billion acquisition of Global Infrastructure Partners (AuM: USD 100 billion), the world’s largest asset manager became
one of the top three global infrastructure managers in one fell swoop and is now on an equal footing with its rivals Macquarie and Brookfield in terms of total infrastructure assets under management. Meanwhile, the infrastructure theme is increasingly in demand on the part of both institutional and individual private investors.
Protection against inflation…
Investors’ increasing interest in infrastructure is no accident. There are good reasons for it. Infrastructure assets, along with gold and real estate, have always been regarded as a protector against inflation. During its roughly 25 years of existence thus far as an asset class, the infrastructure sector never had to furnish actual proof that this inflation-protection attribute was more than a mere presumption or perhaps just a marketing slogan, at least until the COVID-19 pandemic came along. That was the real litmus test of the purchasing power preservation qualities of infrastructure assets, which passed the test with flying colors. In the year 2022, when the global inflation wave reached its crest, (private) infrastructure assets – unlike stocks, bonds, and most other asset classes – not only registered a positive nominal performance, but also delivered a positive real return after subtracting inflation. This pleasing behavior of infrastructure assets from an investor’s perspective in times of elevated inflation was neither an anomaly nor a bug, but rather an inherent feature of this asset class because normally, the cash flows of infrastructure assets are contractually or regulatorily linked to inflation and accordingly increase when price indices rise. However, high inflation isn’t absolutely necessary in order for investments in infrastructure assets to perform well. Even in periods of below-average inflation and regardless of whether economic activity is strong or weak, in the past infrastructure has delivered a positive return in any combination of inflation (high/ low) and economic growth (high/low).
…and defensive qualities
Where do the defensive qualities of infrastructure come from? “Infrastructure classics” like toll expressways, ship ports, and airports in particular are hard to replicate, and high barriers to market entry exist. Moreover, the cash flows of infrastructure assets (and the dividends they pay) often are secured not only by regulations and long-term contracts, but are also safeguarded by constant or very inelastic demand from end-users. A hydroelectric power plant, for instance, is a “classic” example here from the energy supply sector.
“Old” infrastructure as well as infrastructure 2.0 (5G cell towers, data centers, fiber optic networks, wind and solar power) render essential services that are vital to our daily life. Last but not least, every type of infrastructure is ultimately underpinned by “hard” assets that have a long service life and an inherent value that normally tends to increase. All of those attributes make infrastructure an asset class that delivers good risk-adjusted returns and few surprises regardless of market cycles. (Private) infrastructure assets frequently even act as a parachute for an investment portfolio that opens precisely when you need it because they exhibit a relatively low performance correlation particularly to liquid assets like stocks and bonds. They provide effective diversification and stabilize a portfolio during turbulent market phases.
Private capital against the infrastructure gap In the past, it was mainly the governments of this world that stepped up as investors in infrastructure, but private capital has become increasingly more important in recent decades. The trend that began in the 1990s with the privatization of state-owned infrastructure assets in Australia has since spread to the USA and Europa and finally also to emerging-market countries. This has happened not just because growing piles of debt are rapidly diminishing governments’ financial possibilities, but also because governments often lack the expertise needed to build and operate infrastructure projects that constantly are tending to become more and more complex. Moreover, government spending policies are increasingly being shaped by short election cycles in which a quick but non-durable repairing of timeworn infrastructure often seems politically more expedient than allocating funding for fundamentally new projects. Private (infrastructure) capital, in contrast, not only has deep pockets, but also has a longterm investment horizon. Over the last two-and-a-half decades, private infrastructure funds have proven that they operate infrastructure assets not just efficiently, but usually also better than public authorities do while at the same time being able to meet their investors’ return requirements. They thus by now have become an integral part of the infrastructure ecosystem in many countries around the world, and their role only looks set to grow bigger over the next two decades. According to calculations by the Global Infrastructure Hub, a G20 initiative, the world needed nearly USD 100 trillion
A crisis-proof asset | Infrastructure outperforms during recessions
Average quarterly return one year before and during the financial crisis/COVID-19 recession
Sources: KKR, Bloomberg
Good risk-reward tradeoff | Solid returns with low volatility Returns and volatility (2004–2023)
Sources: KKR, Bloomberg
The widening infrastructure gap… | …presents an opportunity for investors Infrastructure investment need vs. current spending trend (in trillion US dollar)
Source: Global Infrastructure Hub (G20 Initiative)
in infrastructure investment between 2015 and 2024. If future spending isn’t ramped up more than heretofore earmarked, the gap between necessary and actually undertaken investment over the next 15 years looks destined to amount to USD 15 trillion. The current boom of the infrastructure theme and the increasing demand on the part of managers as well as investors thus have come at the right time.
Converging megatrends
Transportation infrastructure and traditional forms of energy production will continue to account for a large part of the trillions in annual investment needed in the years ahead, particularly in emerging-market countries. But the fastest-growing infrastructure areas today are digital (e.g. data centers and fiber-optic networks) or are related to the energy transition (e.g. renewable energy and battery storage). The worldwide volume of created, consumed, and stored data has exploded by a factor of 100x between 2010 and 2025 alone. Experts estimate that it will increase further by a factor of 4x over the next five years. It is not just artificial intelligence that needs and generates oodles of data and devours zettaflops of computing power – social media, cloud migration, and widespread content streaming also lead to a lot more data. Besides massive investments in data centers, a continued buildout of fiber-optic and cellular networks and further upgrades to the 5G standard will be necessary to accommodate the rapid growth of the innovation economy and the Internet of Things.
With regard to the energy transition, the International Energy Agency (IEA) estimates that renewable energy sources will meet 80% of the world’s energy needs in the year 2050. Here, too, it is again artificial intelligence (AI) that is practically forcing the convergence of two megatrends – digitalization and decarbonization – before our very eyes as a result of its meteoric advancements. AI’s hunger for energy is immense. In the USA, for example, the electricity consumed by data centers looks set to increase by 150% during the short period from 2023 to 2027 alone, and two years from now it will already amount to around 380 TWh annually, accounting for approximately 8.5% of total US power consumption. It appears obvious to the largest users of data centers – the big US technology companies –that the enormous energy demand must be met by low-emission sources. Google and Microsoft have been the most ambitious voices in this debate thus far. They have set themselves the goal of operating completely CO2-free around the clock by the year 2030. Alongside wind and solar power, hyperscalers also see big future opportunities in the nuclear power sector to reach their ambitious targets. But the infrastructure story doesn’t end with energy production. In order to meet the growing demand for electricity in the USA, which looks set to increase by around 40% over the next ten years, substantial investment in the country’s 40-year-old (on average) power grid is absolutely imperative. It is estimated that the power grid’s capacity must double over the next 12 years to keep pace with the growing demand for electricity.
Private is preferable to exchange-listed
The investment case for infrastructure is plain to see. But what is the best way to invest? Exchange-listed vehicles mostly with daily liquidity – such as ETFs, mutual funds, or stocks in traditional infrastructure sectors – and the fast-growing but illiquid market for private infrastructure assets both court the favor of investors. The performance of the liquid segment did not disappoint in the past; it in fact delivered very solid returns. However, the correlation between exchange-listed infrastructure assets and equity markets was very high and their price performances were similarly volatile, especially when prices headed downward. Moreover, undynamic “old” infrastructure sectors heavily predominate in the exchange-listed segment. The preferable way to build up exposure to infrastructure assets, in our view, is to do that through private markets. Only private markets enable investors to directly partake in the huge growth potential of themes of the future like digitalization and decarbonization. Investments in private infrastructure assets have outperformed over the last 20 years by a wide margin and with much less volatility than the exchange-listed alternatives. In contrast to
the liquid markets, they thus better reflect the stability of the underlying infrastructure assets. Adding private infrastructure to a mixed portfolio of stocks and bonds has noticeably improved the efficiency of investment portfolios in the past. In a macroeconomic environment shaped by a tendency toward higher and more volatile inflation and increased (geo)political and economic uncertainty, (private) investments in infrastructure assets are bound to continue to provide valuable diversification in the future. However, this portfolio parachute ultimately comes at a certain price. Investors must be aware that they have to forsake liquidity to earn the illiquidity premium associated with private markets. Although semi-liquid options make it no longer necessary to lock oneself into private-market investments for ten years or longer these days, investors in private infrastructure assets should nonetheless have an investment horizon of at least three to five years.
KKR, Bloomberg
The Back Page Asset Classes
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