Market volatility will persist for some time
The first quarter of 2025 has only recently finished, but for many it feels as if we have already lived through a whole year. And while investors had already begun to rotate out of mega-cap and other US-based stocks, President Trump’s tariff announcements on 2 April accelerated the process. The main US stock indices have already recently flirted with bear market territory, and analysts are weighing up US stagflation and recession likelihoods. What is certain is that we are in for a period of uncertainty and that market volatility will persist for some time.
As the global negotiations that need to take place with the US get underway, our analysts have highlighted that there are alternative regions and segments in equity markets that provide investors with a good opportunity to diversify into non-US assets. While Europe is not immune to tariffs, valuations, fiscal stimulus, and sectoral growth potential make the European market attractive to diversify into relative to the US. In Europe, our focus is on Germany, a market poised to benefit from a potential fiscal spending boost. Furthermore, we find an array of high-quality companies that should be able to weather the current storm in Switzerland.
Germany: Tailwinds from stimulus plans
Germany’s new chancellor, Friedrich Merz, ushered in a new era of fiscal stimulus as he took office in March. Since then, he has successfully negotiated the creation of a EUR 500 billion infrastructure fund, as well as gained permission to increase the country’s investment in its own defence capabilities. As a result, our outlook remains positive for aerospace and defence companies. German domestic stocks, particularly those within the MDAX Index (which consists of mid-cap stocks) also look attractive. Furthermore, our Next Generation Analysts highlight that Germany’s growing focus on fiscal spending provides support to the Buildings & Infrastructure theme, on which they have a constructive view.
Switzerland: Resilient and stable economy
Switzerland is famed for its economic stability, as well as for its capacity for innovation. The country has been named the most innovative country in the world for the 14th consecutive year in September 2024. Following lacklustre performance in 2024, the rotation into defensive sectors, coupled with the sell-off in information technology stocks, has reinforced Swiss equities’ price momentum. Despite our current neutral rating on Swiss equities overall, our analysts acknowledge that Swiss large-caps do provide defensive stability, which is certainly an appealing quality in the current environment. Nevertheless, their focus remains on the quality mid-cap segment. Switzerland’s deep-rooted culture of innovation fosters a dynamic environment for high quality businesses to thrive, resulting in sustainable results. Historically, Swiss mid-caps have consistently outperformed both global equities and their large-cap domestic peers.
Subsectors with resilience
As tariff negotiations are embarked upon and governments grapple with how best to tackle these, it seems clear that just as the US is putting itself first, so must Europe. The use of fiscal policy might well be a better way to weather the trade wars. As Europe gets to work tackling its ageing infrastructure, small- and mid-cap stocks should benefit. They have less global exposure than large caps and should therefore suffer less from broken global supply chains and currency fluctuations.
1. Infrastructure
With infrastructure spending expected to receive a big boost (in Germany at least), companies involved in the until now underutilised construction industry should benefit. Added to that, these companies tend to buy source materials and produce their goods locally, rendering them more immune to global trade issues. Our analysts believe that mid-cap industrials and materials companies, as well as European utility companies, ought to benefit most from investments forthcoming in transportation, energy grids, and housing. We focus on companies with a mix of cyclical and structural growth potential, pricing power, and resilient earnings and cash flow.
2. Financials
European financials reached new highs early in 2025, but have fallen back since higher US tariffs stepped in. We still expect resilient earnings-per-share consensus trends. However, in a recession scenario, loan losses might tick up, the rate curve could flatten, and non-interest revenues might be affected by lower market values and activity. However, we would expect European banking stocks to still perform better versus US banks given their cheaper valuations. They should also have more resilient credit portfolios given that they have fewer unsecured loans and the leeway to continue buy-backs. Insurance and reinsurance companies should also be the least impacted by tariffs.
3. Consumer defensives
European wine and spirit producers will likely be adversely affected by tariffs. However, companies producing foodstuffs for grocery stores, especially those sourcing and producing in their own countries, should benefit.
Conclusion: Investors should diversify their portfolios
We currently believe that the best strategy is to diversify portfolios, reducing exposure to US equities and redeploying cash in Europe. Investors should choose stocks selectively or assign the task to an experienced fund manager who can actively manage positions and respond quickly to market moves.