Portfolio Manager Update

To the latest Market Commentary

Ethna-DEFENSIV

Key points at a glance

• Trump elected: Almost no change for US yields.
• US rate cuts: clear signals for further rate cuts.
• Focus on France: Developments set the agenda. German elections? Of little importance for the markets.
• Stable portfolio duration at 5.3.

29 November 2024 – Donald Trump is once again President of the United States. After a brief spike upward, US Treasury yields closed almost exactly at their starting level from the beginning of the month. The market seems to have settled on a clear assessment: Trump’s plans – from higher tariffs to deportations – are considered inflationary. At the same time, the announced tax cuts are raising expectations of a growing budget deficit and thus an increasing supply of government bonds. The result? Many believe that higher yields are inevitable. We disagree: Trump’s planned austerity and efficiency measures are likely to significantly reduce government spending. The announced tax cuts could also reduce the pressure on US companies to raise prices to boost profits. However, the timing and specifics of the planned measures remain unclear. It is therefore premature to draw hasty conclusions about the impact of individual measures. For example, will tariffs be used primarily as a bargaining chip? Or are they aimed specifically at increasing government revenues?

We also see clear signs of further interest rate cuts in the US. Given the balance between supply and demand in the labour market and recent productivity gains, wage increases are unlikely to generate inflationary pressure. The ongoing upward trend in house prices is also expected to moderate in the coming months. The Fed believes that, despite further rate cuts, the federal funds rate is likely to remain restrictive for a few more quarters. This plays into the hands of the Trump administration, as it can more easily implement policies with lower central bank rates and may even see them as a prerequisite. Pressure on the central bank? Certainly. Lowering yields is also on the agenda of the Trump administration.

In Europe, yields have fallen across the board, including French government bond yields. However, their decline has been significantly less than yields on other European government bonds. The new French government is currently trying to push through a budget for 2025. However, it is becoming increasingly clear that the planned austerity measures will be reversed. In a worst-case scenario, the parliament could topple the new government with a vote of no confidence and fail to pass a budget for 2025. France’s creditworthiness, as measured by its rating, will decline in any case. Instead, we prefer Spanish government bonds as Spain’s economic growth can even keep pace with that of the US and further rating upgrades are expected. The upcoming elections in Germany have had no impact on German government bond prices so far. The formation of a new grand coalition is by far the most likely outcome, with which investors are familiar and do not expect any surprises.

These developments have resulted in a significantly positive monthly performance (share class T) of over 1%. Aas a result, the need for adjustments is currently low. The portfolio duration remained unchanged at 5.3 at the end of the month, with 3.6 in euro-denominated bonds and 1.7 through a 15% position in Treasury futures.

Ethna-AKTIV

Key points at a glance

• Equity markets, particularly in the US, recorded above-average gains following the tailwind of the election of Donald Trump. Interest rates in the US remain unchanged after a brief rise, while rates in Europe fell during the month.
• The Ethna-AKTIV gained 0.65% in November and continues to trade close to its all-time-high.
• In anticipation of falling interest rates, the portfolio’s modified duration was increased from 4.5 to 5.2 and to 9.9 via interest rate derivatives.
• Equity exposure was raised to 40.8%. In a first step, the core portfolio, which is exclusively invested in US large caps, was increased to 32.7%. In a second step, equity futures were increased by 3% to 8.2%.
• The portfolio has a foreign currency exposure of 1.5%. The hedge implemented in October remains in place.

29 November 2024 – With the tailwind of positive equity markets, the Ethna-AKTIV posted a respectable 8.01% year-to-date performance at the end of November.

The main event last month was the US election. It was remarkable that the market was actually right about the reflation trade. The President-elect will be able to govern with the support of the entire Congress. This is a clear mandate and very positive for the economy and Wall Street, although the Republican propaganda of a ‘landslide victory’ is not accurate – it is the third closest result in over 100 years. Many of the new US administration’s plans are likely to be implemented. The planned tax cuts will not take effect until 2026 at the earliest. However, in combination with the optimistic outlook provided by the recent earnings season, we continue to see a positive picture. Profits are expected to continue to rise, especially for US companies. For this reason, the equity allocation was increased during the month to a total of 40.8% through purchases and a 5% increase in the futures position.

There have been no major changes to the bond portfolio. The mix of 47% corporate bonds and 14% government bonds remains almost unchanged. Only the average maturity has been extended by around half a year through reinvestments. The average rating remains at A to A+, reflecting the quality of the portfolio. Interest rate sensitivity, which had already increased significantly before the election, remains unchanged. Admittedly, we were a little early in betting on falling rates, but we are still convinced that long-term US interest rates will not rise any further. By increasing our modified duration from 5.2 to 9.9 via US interest rate futures, we are clearly reflecting this conviction in our positioning. We do not believe that Trump’s policies, which have been described as highly inflationary, will be so price-driving. Tariffs are merely a means to an end in the negotiations and will be reduced or eliminated once his objectives are achieved. The immigration policy may push up wages, but it will ease the housing market. Overall, no clear effect is discernible here. The rise in inflation expectations and thus also the rapid rise in US 10-year interest rates since mid-September should not only stabilise but also decline again. The fact that the new administration is giving high priority to fiscal consolidation and thus to the sensible management of US debt is a supporting argument for our interest rate positioning.

French government bonds, now trading at the level of Greek bonds, once again highlight the political difficulties in Europe. We are currently monitoring the market and analysing potential opportunities for the portfolio.

As with US interest rates, we believe that the reaction of the US dollar over the past two months has been exaggerated. Our currency exposure remains fully hedged.

We recognise that some of the objectives of the new US administration are highly competitive. Therefore, it continues to be both exiting and highly important to monitor the gradual implementation and to flexibly adjust the portfolio if necessary.

Ethna-DYNAMISCH

Key points at a glance

• The election of Donald Trump boosted the US stock market. The rest of the world struggled.
• We sold SAP and added Commerzbank to the portfolio.
• With a net equity exposure of 76%, we end the year on a constructive note.

29 November 2024 – The 'Trump Put': President-elect Donald Trump measures his success in office by two key indicators: positive economic development and new record highs in equity prices. US markets reacted promptly to the dominant theme of November and celebrated the election outcome with new all-time highs. With a Republican majority in both the Senate and the House of Representatives, Trump has extensive control to implement liberal economic ambitions such as tax cuts and deregulation.

However, concerns about US import tariffs caused other markets to lag. In the Ethna-DYNAMISCH, we reviewed the portfolio ahead of the election for this risk factor (as well as other election-related aspects). Many of the companies in our portfolio with significant US business produce mainly locally for the US market and are likely to be only marginally affected by potential tariffs. While we expect tariffs to be a bargaining chip, we believe that they will ultimately only be implemented in a watered-down form. We have therefore refrained from taking precipitous action and have not made any adjustments to individual holdings in this regard. However, we remain vigilant and will continue to monitor the situation closely.

From a bottom-up perspective, we parted company with SAP in November. Since the inception of the Ethna-DYNAMISCH 15 years ago, the German software company has repeatedly been part of the portfolio – continuously since mid-2017. The stock has always met our high quality standards, but the valuation has now reached a level that makes the stock much more susceptible to setbacks. We have therefore consistently taken profits and looked for new opportunities elsewhere. We found what we were looking for in Commerzbank, which we added to our portfolio as a new position towards the end of the month. We consider the rumoured takeover by UniCredit to be relatively likely, although patience is required. The attractive valuation of the stock and the increasing consolidation in the European banking sector should also limit downside risks.

Overall, our assessment of the equity markets remains constructive, with a net equity exposure of 76%. Economic growth is adequate, company fundamentals remain robust and valuations across the board are in order. At the same time, sentiment and positioning continue to be moderate despite strong price developments. All in all, this is a situation that should not be underestimated and that has the potential to drive the current momentum forward.

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