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Monthly Market Monitor

April 2025

A handcrafted recession?

In a Nutshell

Our view on the markets

Buy the dip

US equities continued to plummet at first during the month of March as a selloff in the big technology stocks particularly weighed heavily on the market. But in the wake of a 10% stock-market drawdown, a familiar reflex kicked in as investors followed the motto “buy the dip.” That method, after all, has been extremely successful in recent years. For the moment, though, the recent rebound is merely an overdue technical reaction whose sustainability looks set to get tested in the weeks ahead.

Water: Elixir of life and strategic natural resource

In an age of accelerated climate change and increasing environmental stress, water is becoming an ever scarcer strategic natural resource. Water, however, is not just an elixir of life, but is also associated with environmental catastrophes and geopolitical conflicts. As the granddaddy of sustainability, the water theme offers huge potential for investors. Investments in innovative water enterprises generate not just a financial return and diversification, but also a societal dividend.

Tax cuts, extensive deregulation, and additional stimulative federal spending – not only MAGA fans, but also most investors had been expecting that Donald Trump would tick those items off their wish list during his second term in office. The new Trump administration, however, did exactly the opposite of that during its first ten weeks in power: it prescribed the patient a detox regimen, made spending cuts, and unsettled friend and foe alike, and investors along with them. At the same time, the Trump 2.0 presidency has brought about a change of heart in Europe at lightning speed, particularly in Germany, whose fiscal U-turn improves longterm economic growth prospects on the old continent while the US growth engine is being throttled back. Equity markets are reflecting these contrasting tendencies – Europe has outperformed the USA by a good 15 percentage points since January 20. Whoever was hoping that Trump will react to this signal could end up disappointed. The stock market no longer seems to be his most important feedback indicator.

Chart of the Month

A handcrafted recession?

Macro Radar

Taking the pulse of economic activity

Donald Trump continued to produce a constant stream of surprises and bafflement in March. He not only asserted that he doesn’t watch the (floundering) stock market, but also said that he doesn’t want to entirely rule out a recession, adding that the implementation of his policy agenda could definitely cause noticeable “friction.” Although a deliberately induced economic downturn doesn’t seem to be a direct aim of the US administration, people nonetheless are factoring in the possibility of collateral damage occurring. Unease among businesses and consumers has in fact further increased in recent weeks. While Trump is ignoring the equity market for the time being, its recent floundering is depressing public sentiment and consumer confidence. Although the risk of a recession in the USA is still small at present, the very optimistic economic growth projections at the start of this year are being continuously revised downward at the moment.

Fiscal U-turn in Germany

“Historical turning point” has become a bit of an overworked concept in recent years, but it is not an exaggerated description of the recent developments in Germany. The “debt brake” reform bill passed by the country’s parliament allows Germany to increase its spending on infrastructure and defense by around 1 trillion euros over the next 12 years. This fiscal policy U-turn could render the resurgent image of the “sick man of Europe” obsolete and could extricate Germany and the Eurozone from stagnation. Sentiment among market participants and corporations has picked up recently in monthly business surveys. Exuberant euphoria seems inappropriate, however, because the additional funds have to be put to use prudently and efficiently, which is a challenge not to be underestimated.

SNB at end of rate-cutting cycle

In March 2024, the Swiss National Bank (SNB) was the first of the world’s major central banks to lower its policy interest rate. Now it may become the first to arrive at the end of the rate-cutting cycle. In the wake of its recent policy rate cut to 0.25%, the SNB is forecasting relatively stable inflation in the middle of the 0%–2% target range for Switzerland until the end of 2027. Since the SNB at the moment is arguably the only central bank that is actually ahead of the proverbial curve and not trailing behind developments (unlike many other

central banks), it is in a comfortable situation at present. Negative interest rates are likely an improbable tail risk.

China stimulating consumption

The government of China announced an economic growth target of “around +5%” again for this year at the National People’s Congress in early March. However, at a time when yet another punitive tariff hike lurks just around the next corner, the attainability of that target now seems even less certain than it already was in the face of the struggling housing market, China’s demographic challenges, and the upheavals in the country’s employment market expected to occur as a result of advancements in artificial intelligence. The leadership in Beijing views boosting domestic consumption as a way to counter the downside risks, and it recently released a 30-point plan aimed at doing just that. However, although measures like an old-for-new trade-in program for electronic devices are popular among the public, they merely bring future consumption forward to the present and do little to change the structural weakness of consumption in China.

Uncertainty… | …in a whole new stratosphere US Economic Policy Uncertainty Index (trade)

Sources: Bloomberg, Kaiser Partner Privatbank

The government of China announced an economic growth target of “around +5%” again for this year at the National People’s Congress in early March.

Asset Allocation Monitor

Asset Allocation

Notes from the Investment Committee

Cash Equities

Fixed Income

Global

Sovereign bonds Switzerland

Corporate bonds

Europe

Microfinance UK

Inflation-linked bonds

High-yield bonds

Emerging-market bonds

Insurance-linked bonds

Convertible bonds

USA

Japan

Emerging markets

Alternative Assets

Gold

Duration Hedge funds

Currencies

US dollar

Structured products

Private equity

Swiss franc Private credit

Euro

British pound

Equities: Mean reversion

• The US equity market continued to plummet at first during the month of March. In particular, the winners from last year – the Magnificent Seven – rank among the losers thus far in 2025. The big technology stocks by now have given back all of the gains they accrued during the share-price rally in the fourth quarter of 2024. This has also weighed heavily on the S&P 500 due to the Big Tech stocks’ dominant position in the blue-chip index. But in the wake of a 10% index drawdown, a familiar reflex took hold in mid-March as investors followed the motto “buy the dip.” That method, after all, has been extremely successful in recent years. For the moment, though, the recent rebound is nothing more than a typical overdue technical reaction in the midst of a very oversold market condition. The sustainability of the rebound looks set to get tested in the weeks ahead. As long as anxiety about more and more punitive tariffs dominates headlines and hopes of deregulation and tax cuts are not revived, a mere stabilization of the US equity market at its current level and rangebound meandering in the weeks ahead must be rated as the most positive conceivable scenario.

• Europe and China are the clear regional winners year-to-date. However, the recent frontrunners like European defense and Chinese internet stocks particularly have become heavily overbought in the meantime. In the wake of investors having withdrawn

Infrastructure

Real estate Scorecard

Macro

Monetary/fiscal policy

Corporate earnings

Valuation 03/2025

Trend

Investor sentiment 03/2025

capital from the USA in recent weeks to chase the better performance in other markets, the highfliers of late are now neither cheap buying opportunities nor undiscovered (and underinvested) hidden gems. At the same time, the big US technology stocks have since become a bit more attractively priced again, particularly when one factors in their continued higher growth potential. All things considered, in the near term there’s a lot suggesting that the stock-market pendulum will soon swing back in the direction of the USA and a mean reversion will occur. Although the period of American exceptionalism may indeed be over, if the rest of the world sustainably outperforms the USA in the future, that would not be a linear process and would only be possible if the fundamentals also evolve accordingly. With regard to the fundamentals, imagination about higher corporate earnings in Europe in the future is running high right now, but there’s no proof yet that it will actually come true.

All things considered, in the near term there’s a lot suggesting that the stock-market pendulum will soon swing back in the direction of the USA and a mean reversion will occur.

The US bond market in recent weeks has been whipsawed by two forces.

Fixed income: Historical turning point –also for German Bunds?

• The US bond market in recent weeks has been whipsawed by two forces. On one hand, the tariff spiral set in motion by President Trump threatens to drive up inflation (in the near term). Economic actors’ inflation expectations have already risen lately. On the other hand, the haphazard and uncoordinated (at least to outside observers) brandishing of the tariff cudgel and the uncertainty provoked by that heightens the risk of a self-inflicted recession in the worst case. As a result of this set of circumstances, the yield on 10-year US Treasury notes has been hovering lately in the middle of the last half-year’s trading range. At a current yield level of around 4.4%, investors still have a good opportunity at the moment to hedge against the mounting downside risks to economic activity.

• Things went diametrically differently for German government bonds in March for a change. The revision of Germany’s debt brake mechanism is nothing other than a long overdue act of fiscal liberation for the country. For the bond market, the widened borrowing leeway for Europe’s largest national economy at the same time means a substantial increase in the supply of debt securities. It can only be absorbed by the market at higher interest rates, and this explains the recent huge surge in the yield on 10-year German Bunds to intermittently almost 3%. This also affected Swiss Confederation bonds, which saw their 10-year yield climb to almost 1% at its peak. Germany’s “whatever it takes” is a game changer for Swiss bonds as well. The yield lows at around 0.2% at the end of last year may have marked a long-term nadir.

• Credit spreads on lower-rated bonds have widened in recent weeks in the face of the increased uncertainty on the part of market participants, but they are still at relatively tight levels from a historical standpoint and do not compensate for the likewise increased risks to economic activity. We continue to advise investors to stay defensive in this bond segment and to not let themselves be seduced by the optically high yields to maturity.

Alternative assets: Crypto upside fantasizing has fizzled out for the time being

• Bitcoin in recent weeks has not lastingly recovered from its swoon in February. The price of the world’s preeminent cryptocurrency has stayed below USD 90,000. Even the fulfillment of Donald Trump’s election campaign promise – i.e. the announcement of the establishment of a strategic digital currency reserve – only sufficed for a brief rearing up of crypto prices in weekend trading before they quickly headed downward again. New impelling forces are needed to lift and entrench Bitcoin back in six-figure territory. Whoever bought at peak prices at the turning of the year now has to be patient for the time being. But HODLing really is an inherent part of

an investor’s life anyway for true crypto fans. Those who do not rank among crypto enthusiasts but nonetheless would like to participate in this young asset class now have alternatives to the volatile buyand-hold approach these days. Crypto hedge funds, for example, offer return opportunities that do not depend on rising crypto prices and are not correlated with the performance of other asset classes. The price of gold, meanwhile, continued to climb higher in March. The precious metal by now has even broken through the psychologically important USD 3,000-per-ounce mark. Whoever lacks the imagination to envision the upside potential of the ongoing rally would do well to look back at the bull market from 1999 through 2011, when the price of gold rocketed by more than 600%.

Currencies: Euro trend reversal?

• EUR/USD: The EUR/USD exchange rate dynamically and convincingly completed its expected trend reversal in March. The massive increase in the yield on German (and European) government bonds significantly decreased the prior market-interest-rate disadvantage versus the USA while projected growth differentials also shifted in favor of the euro at the same time. A consolidation phase in the near future would not be unusual before another burst of upward impetus potentially kicks in.

• GBP/USD: The weaker dollar desired by US President Donald Trump has taken shape since the start of this year also against the British pound. From the perspective of the fundamentals, sterling’s (under) valuation gives the currency ample long-term leeway to appreciate further against the US dollar. The stagflationish UK economic data, which per se make a case for a weaker pound, are not the main driver of the currency pair at the moment. Here, too, US politics and policies are the dominant factor.

• EUR/CHF: The euro also shot upward against the Swiss franc at the start of March. Looked at from a somewhat wider angle, one can see that a rounded and potentially sustainable bottom has formed on the EUR/CHF chart over the last half-year. An overly strong franc may no longer be the Swiss National Bank’s biggest problem in the near future. Its policy-rate cut to 0.25% in March thus probably marks the endpoint of Switzerland’s rate-cutting cycle. However, a genuine slump in the franc does not loom right away. It would take an actual pickup in economic growth in the Eurozone and an end to tariff uncertainty for that to happen.

On top of the world one minute, down in the dumps the next – a rollercoaster ride of emotions is part of the everyday life of a stock-market player. Mass investor psychology also produces recurring patterns and signals. The US investor sentiment pendulum has recently swung downward once again because the 47th US president’s unorthodox and erratic way of working is fraying investor’s nerves in a manner seldom before witnessed. The bears among investors have outnumbered the bulls three to one for weeks. Such persistent pessimism is exceptionally rare and was last seen in a similar form at the nadir of the Great Financial Crisis bear market. It was an uncommonly profitable buy signal at that time. Since the valuation of US stocks these days is still lofty, it’s very unlikely that a new lengthy stockprice upturn is now imminent again this time. However, the bear overhang has already caused stock prices to stabilize. When all investors have sold, the stock market regularly heads back upward, at least in the short term.

Chart in the Spotlight

The honeymoon is over | Trump is giving investors cause for concern Percentage of optimists (bulls) and pessimists (bears) among US individual private investors

Sources: Bloomberg, Kaiser Partner Privatbank

Theme in Focus

Water: Elixir of life and strategic natural resource

In an age of accelerated climate change and increasing environmental stress, water is becoming an ever scarcer strategic natural resource. Water, however, is not just an elixir of life, but is also associated with natural catastrophes and geopolitical conflicts. As the granddaddy of sustainability, the water theme offers huge potential for investors. Investments in innovative water enterprises generate not just a financial return and diversification, but also a societal dividend.

Environmental stress and social responsibility

We have an apparent superabundance of water in our corner of the world, but globally, (potable) water is a rare commodity that is becoming ever scarcer.

We have an apparent superabundance of water in our corner of the world, but globally, (potable) water is a rare commodity that is becoming ever scarcer. Increasing environmental pollution caused by industrial waste, chemicals, and plastics is putting a strain on water resources around the world. At the same time, climate change is causing extreme weather events like droughts, floods, and severe storms that disrupt the natural hydrological balance and further strain an already tight water supply. Agricultural, industrial, and urban overuse of water resources additionally worsens the problem and endangers entire ecosystems. These ecological challenges have far-reaching social implications. In many developing countries, millions of people lack access to clean drinking water, which causes health risks like cholera and typhus and results in high child mortality. Women and girls particularly suffer because they often are the ones responsible for fetching water and thus miss out on educational and career opportunities. Entire communities literally have “water up to their neck.” According to the World Health Organization (WHO), investments in clean water could prevent up to 1.6 million deaths each year. Committed governmental and corporate involvement

and investment in water matters is both economically and ethically imperative.

Water scarcity: On the thirst of artificial intelligence…

The resource water is playing an ever more important role also in the technology sector. The rapid rise of artificial intelligence (AI) and cloud technologies is particularly driving up water consumption because high-performance data centers consume enormous amounts of energy and accordingly have to be efficiently cooled. Although part of the water used to cool them can be recycled, a lot of it gets lost to evaporation. Moreover, water abstraction for data centers is often regionally concentrated, which creates additional challenges in arid areas like the US state of Arizona or parts of Spain. So, pressure is mounting on technology companies to develop more sustainable methods. Closed recirculating cooling systems, rainwater utilization, and lowevaporation technologies are considered promising solutions for quenching AI’s thirst for water without further straining global water resources. In addition, site selection is playing an ever bigger role in protecting water reserves. Meanwhile, investors and the public are demanding transparency, compelling companies to disclose their water consumption and to present strategies to reduce it.

…and potable water from the ocean

Over 97% of the water on Earth is not drinkable fresh water, but is salty and unpotable. Desalination of sea water is thus widely considered one of the most promising approaches to sustainably alleviating the stress on global water resources. Advancements in areas like reverse osmosis and innovative membrane technologies enable ever more efficient treatment of salt water. The high energy demand of desalination plants had long been a drawback, but renewable energy and heat recovery lower their consumption these days by up to 40%. Examples like Israel and Singapore demonstrate how quasi-autarkic water circuits can be created through a combination of desalination, sustainable water management, and recycling. This can relieve traditional

sources of fresh water and ease regional shortages. Rigorous research and investments in expanding these technologies in an environmentally sound way are needed to enable solutions of this kind to catch on worldwide and make water infrastructure more resilient.

Water as a growth factor…

Water is a driver of economic advancement. From the food-and-beverage and textile sectors to semiconductor manufacturing and AI-supported data centers, virtually every industry depends on a secure water supply. The dwindling availability of “blue gold” directly impacts the production capacity of entire branches of industry and can permanently slow economic growth in the regions affected. If sources of water run dry, production and economic growth stall. The OECD warns that the worsening water crisis could reduce global economic output by 8% by the year 2050. Some developing countries could even see a 15% drop in economic output. Outdated water infrastructure today already causes economic costs totaling USD 470 billion annually.

…and risk factor

Water, however, is not just a growth factor, but also a risk factor. The World Bank calculates that the damage wreaked by urban flooding causes costs amounting to USD 120 billion per annum. While builders have to ask themselves whether they want to continue building in areas threatened by water risks, insurance companies are increasingly weighing whether they still want to insure those risks in the future. For other businesses as well, water is increasingly becoming a strategic issue necessitating proactive management. Regulatory requirements are mounting, as are the penalties that loom for noncompliance. Moreover, if companies disregard sustainability in their water management practices, they also risk harming their reputation and losing the trust of investors, customers, and the public.

Water – and the scarcity thereof – is also increasingly the cause of geopolitical conflicts. One example of this is the Grand Ethiopian Renaissance Dam, the construction of which is further straining the already fragile relations between Ethiopia, Egypt, and Sudan because the falling water level of the Nile River threatens the livelihoods of countless people. In Iran, in turn, persistent droughts exacerbated by decades of mismanagement are pushing people to take to the streets in mass protest while water scarcity is depopulating entire regions and fueling social strife. Even in the USA, overutilization of the Colorado River is increasingly becoming a stress test because drastic water conservation measures are inevitable and agriculture and urban water supply networks are both reaching their limits. Diplomatic skill and foresightful policy strategies are called for to avert escalations and safeguard long-term stability. Only

Where

A force of nature | Water is the greatest natural risk factor Cause of economic losses inflicted by climate-related catastrophes, 1970–2021

Granddaddy of sustainability

Water can be unpredictable and immensely powerful. But humanity also has been harnessing the power of water for decades. As the granddaddy of sustainable power generation, water is compellingly convincing as a steady, dependable, and flexibly deployable source of energy that doesn’t run dry even during “dark doldrums” (periods of little or no sunlight and no wind). Hydroelectric power contributes to energy supply security and is an invaluable backbone of the energy transition. The subject of water also features prominently in the United Nations’ Sustainable Development Goals (SDGs), weaving through them like a blue ribbon due to its social, economic, and environmental relevance. Water also is explicitly mentioned in sustainability goal number 6 (clean water and sanitation), which unfortunately is a still a long way from being achieved. Although access to clean drinking water and sanitation is a basic human right, 2.2 billion people around the world were still denied this fundament of health and well-being in 2022.

Water can be unpredictable and immensely powerful. But humanity also has been harnessing the power of water for decades.

the water on Earth is fresh water… | …and 70% of it is locked in ice

is Earth’s water located?

Sources: USGS, Kaiser Partner Privatbank

Sources: World Meteorological Organization, Kaiser Partner Privatbank Drought 6%

34%

Extreme Temperature 2%

Flood 57%

Landslide 1%

Investing with depth

Water is an established theme also with regard to sustainability investing. The first “water mutual funds” were launched around 25 years ago. They invest predominantly in companies connected with water supply utility operation, water technology, and environmental services. The utility and industrial sectors usually make up more than 80% of a typical “water portfolio,” which

thus combines both defensive and offensive qualities and promises a good risk/reward tradeoff at least on paper. However, due to the high sectoral concentration, the supposedly good risk-adjusted return comes only at the cost of having to put up with an elevated tracking error relative to the world equity market (e.g. MSCI All-Country World Index), and that’s if the performance promise is even kept at all.

Although active management of a thematic fund makes a lot of sense in theory because it enables one to react to subtrends and to over- or underweight fundamentally strong or weak companies, in real-world practice the majority of water fund managers do not succeed in beating the relatively simple passive water indices. Investors therefore must think about whether they have the ability to identify the best managers or should favor the more promising and cheaper alternative presented by a water ETF. There’s also a third option, though it only comes into question for active investors, and that is to discerningly pick individual water-related stocks instead of investing in a mutual fund or ETF. That way you avoid product fees, but bear the risk of active management yourself. Whatever variant an investor chooses in the end, in an era of richly valued US technology stocks, a “water portfolio” not only creates a diversifying counterbalance, but may even contribute to easing an investor’s conscience.

Sources: MSCI, S&P Global, Kaiser Partner Privatbank

Similar performance… | ...but with a clear conscience

von wasserorientierten Indizes gegenüber dem Weltaktienindex Sources: Bloomberg, Kaiser Partner Privatbank

The Back Page Asset Classes

This document constitutes neither a financial analysis nor an advertisement. It is intended solely for informational purposes. None of the information contained herein constitutes a solicitation or recommendation by Kaiser Partner Privatbank AG to purchase or sell a financial instrument or to take any other actions regarding any financial instruments. Furthermore, the information contained herein does not constitute investment advice. Any references in this document to past performance are no guarantee of a positive future performance. Kaiser Partner Privatbank AG assumes no liability for the completeness, correctness or currentness of the information contained herein or for any losses or damages arising from any actions taken on the basis of the information in this document. All contents of this document are protected by intellectual property law, particularly by copyright law. The reprinting or reproduction of all or any parts of this document in any way or form for public or commercial purposes is expressly prohibited unless prior written consent has been explicitly granted by Kaiser Partner Privatbank AG.

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