Portfolio Manager Update

To the latest Market Commentary

Ethna-DEFENSIV

Key points at a glance

• US bonds stable: Inflation and debt fears over new US policy offset by lower actual inflation figures.
• European market stable: German bonds barely moved, ECB cuts key rate to 2.75% to support the economy.
• Portfolio largely unchanged: duration remains at 5.4, positioning at the short end of the curve in Europe, expecting US yields to fall.

31 January 2025 – In January, bond markets moved in a cautious environment, mainly due to uncertainty about the future policies of the new US president. The market consensus seems to be that the deportation of millions of illegal immigrants and the introduction of tariffs on key trading partners will increase inflationary pressures in the US. Investors are also concerned about the sustainability of the US debt in the face of spiralling government spending (a budget deficit of almost 2 trillion US-Dollar). There are concerns about the market's ability to absorb an influx of new debt to finance the deficit, especially as the government seeks to extend the maturity of its debt. These considerations have put upward pressure on the US yield curve. At the same time, relatively benign consumer price index data mid-month dampened inflation fears and stabilised the market somewhat. At the end of the month, the US Federal Reserve left the key interest rate unchanged in the current range of 4.25% to 4.50%, as expected. The Fed remains data-dependent and will react to incoming data. If inflation develops as expected, interest rate cuts will follow.

In Europe, the bond market was very stable during the month, with the yield on 10-year German government bonds moving sideways in a very narrow range between 2.5% and 2.6%. Towards the end of the month, the ECB cut its key interest rate by 25 basis points to 2.75%, as expected, in an attempt to stimulate the stagnating eurozone economy. ECB President Christine Lagarde stressed that the decision was based on an updated assessment of the inflation outlook and the strength of monetary policy transmission. She also noted that services inflation had not fallen as much as other components, but that all indicators pointed to a slowdown in wage growth this year, which should contribute to a decline in services inflation. Inflation data for the largest European countries were below or in line with expectations: France 1.8% and Germany 2.6%.

Corporate bond markets have remained stable in both the US and Europe, reflecting investor confidence despite potential risks such as a significantly higher long-term yield curve and trade policy uncertainties. In Europe, investment-grade issuers with strong financial positions should be better able to withstand economic challenges and tariff pressures, while benefiting from the ECB's rate cuts.

We made no significant adjustments to the portfolio during the month. Duration remains at 5.4, with 3.8 coming from the underlying bond portfolio and 1.8 from a 15% Treasury futures overlay. Monthly performance was 0.35% (T-class), largely reflecting the sideways movement of markets and the constant coupon income over the period. In Europe, we are mainly positioned at the short end of the curve, reflecting our concerns about the ECB's exit from government bond purchases. In the absence of such a large buyer, we do not expect yields at the long end of the curve to fall significantly in the foreseeable future. As far as the US is concerned, we still do not share the market's fears about inflation and expect yields on long-dated US Treasuries to fall as market participants realise that the new policy will not have a significant inflationary impact.  

Ethna-AKTIV

Key points at a glance

• The Ethna-AKTIV (T) gained 1.88% in January
• The bond ratio remains at 56.5%. The average rating is A to A+.
• A 25% LONG position in the US 20Y bond future increases the modified duration from 5.9 to 10.7.
• The net equity exposure remains unchanged and only rose to 43.3% through performance. The weighting of technology and communication stocks was further reduced and is now under-represented.
• The portfolio’s currency exposure is currently 5.1% (2.7% CHF and 2.4% USD).

31 January 2025 – Trump, Trump, Trump. Almost the entire month was dominated by coverage of the political and economic agenda and the first official acts of the new US President. The coverage of his policies almost overshadowed the current macro environment. The 'Let's make America great again' rhetoric may give the impression that the country has yet to regain its economic strength, but it obscures the fact that the US is currently doing much better economically than the rest of the world. An 'America first' policy is aimed solely at consolidating and extending this status. A number of measures have already been announced. It remains to be seen what, how and in what form these will be implemented in the future. It can be said that the first days of his policy are likely to be a good blueprint for what can be expected in the coming years. In any case, it has led to a bit more volatility.

But it wasn't just the new US president that kept financial markets on their toes. The earnings season has been strong so far. Over the course of the month, technology stocks with a focus on artificial intelligence were confronted with a Chinese competitor, DeepSeek, which is as powerful as Western models but operates on a much cheaper infrastructure. At least for a day, this sent shockwaves through the financial community as the investment plans and business models of all providers were heavily scrutinised. It was a wake-up call for an industry that was already very demanding in terms of valuations, even under optimistic assumptions. We benefited from the fact that we had already reduced the portfolio weight of this sector in advance.

The World Economic Forum in Davos was dominated by pessimistic forecasts for the European economy. This is in contrast to European equity indices, which are currently outperforming even US indices. In our view, this can be explained well by the existing valuation gap and, above all, by hopes of structural change. Finally, Germany is facing a landmark election. We fear that this hope will once again be disappointed. As a result, we are not changing the regional and US bias of our equity portfolio. The central banks' actions did not come as a surprise.

The portfolio mix of Ethna-AKTIV was basically unchanged. The bond allocation was reduced to 56.5% by selling 3% of short-term government bonds. As a result, the modified duration of the invested bonds rose only slightly to 5.9 years. We maintained the long position in the US 20-year bond future, as we still believe that US long-term interest rates are too high. This brings the modified duration to 10.7.

The net equity exposure was kept constant at 43.3% by buying 1% S&P futures and selling individual stocks. The underweight in technology in general and semiconductors in particular and the overweight in financials paid off during the month. The full hedge of the US dollar exposure was also maintained.

Ethna-DYNAMISCH

Key points at a glance

• The start of 2025 has been very good for both markets and the Fund.
• Donald Trump has provided some recent market impetus, but many of the effects of his policies are now priced in.
• There are still many attractive opportunities lurking across the breadth of equity markets and this continues to make us optimistic.

31 January 2025 – The first few days of the new year have been anything but dull. From Donald Trump's inauguration to the World Economic Forum in Davos and the start of the Q4 corporate earnings season, January was packed with market events. Although there was some increased volatility in certain sub-segments, the overall capital market environment remained supportive. Both equities and bonds benefited from the favourable trend and started the year on a positive note.

Donald Trump in particular seemed to be in his element. Without wishing to make any political judgement at this point, it is clear that the new US President is continuing to act with the same energy and speed that characterised his first term in office. At the same time, he is demonstrating the experience and sophistication that have marked the second terms of many US presidents. Looking at the markets in this context, it seems that the unpredictability of this unpredictability has quickly become calculable. This is especially true of the constant threats of tariffs, which in most cases should end in a deal. These are usually deals that are still acceptable to the trading partner, but which put the US in a better position than before.

Many of these manoeuvres should now be priced into markets. In previous presidential election campaigns, it has often been observed that the winning or losing stocks initially moved in line with the election forecasts and the subsequent election result. Subsequently, stocks continued to react to personnel decisions that became public and action plans that took shape. However, these effects have worn off in time for the inauguration, and other, less political topics are coming to the fore. A repetition of this pattern already seems to be emerging.

What has also become apparent recently is a normalisation of the distorted risk-return ratio in the markets. NVIDIA's DeepSeek moment in the last week of January certainly left its mark. More than a few market participants were painfully reminded that investing is always a combination of growth and valuation. This principle, which characterises our approach in Ethna-DYNAMISCH, has borne fruit with a successful start to the year. There was no significant need for adjustment in January, either in terms of equity allocation or stock selection. We only increased the exposure of long-dated US Treasuries from around 5% to around 7.5% when the yield on 30-year US Treasuries briefly approached 5% in the middle of the month.

One stock purchase from December should not go unmentioned, as it did not fit into the more detailed annual review in the last commentary. The beauty of US medical technology company Becton, Dickinson and Company (BD) is that it perfectly encapsulates all of the above. Healthcare stocks are often out of favour with investors ahead of US elections, as the sector represents a significant cost pool that many new presidents would like to reduce (so far in vain). At the same time, the sector is of fundamental importance and benefits demographically from structural growth. The timing – one month after the election – was therefore a good opportunity to increase exposure to the sector. Potential risks had already been priced in. On the other hand, in addition to the structural growth opportunities, BD also has a whole range of idiosyncratic arguments, which we recently explained in more detail in the #Aktienexpress on LinkedIn. We consider the risk-return ratio to be so attractive that BD has earned a place in the top 3 positions.

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