Alpinum Investment Management Q1 2025 Investment Letter

Trump 2.0: Make America Grow Again

The fourth quarter of 2024 highlighted a complex global economic environment shaped by geopolitical developments, monetary shifts and fiscal policies. US equity markets reached record highs, supported by disinflationary trends and robust growth, though cooling consumer spending and labour market headwinds tempered enthusiasm. Central banks played a pivotal role, with Federal Reserve rate cuts and European Central Bank easing measures aimed at sustaining growth and aligning inflation with targets.

Chart 1: No recession (so far), markets at all-time-high

Donald Trump’s November presidential victory drove significant market responses, including a surge in smalland mid-cap US equities amid expectations of deregulation and expansionary fiscal measures. However, heightened tariff policies escalated stagflation risks globally, particularly for trade-reliant regions like China and Europe. China’s economic struggles persisted as the property sector downturn and limited fiscal measures constrained growth below 5%. While policymakers emphasised domestic consumption and innovation, external pressures from tariffs weighed on prospects. Commodities experienced heightened volatility due to geopolitical tensions and demand fluctuations, while the US dollar’s strength pressured emerging market assets.

United States

The US economy demonstrated resilience in Q4 2024, despite facing mixed signals across growth, inflation and labour markets. Real GDP grew 2.8% quarter-over-quarter, driven by strong consumer spending and AI investments, though weaker business and government spending revealed vulnerabilities. The housing market showed signs of stabilisation, benefitting from lower interest rates, but household consumption displayed moderation. Labour market conditions softened, with unemployment easing to 4.2% from its mid-year peak of 4.3%. Layoffs remained low, but slower hiring and weak job openings raised labour market concerns. However, November’s 227,000 job gains highlighted resilience. Inflation trends were nuanced, with core PCE edging higher at 0.3% m/m in October but holding steady at 2.2% y/y, reinforcing the broader disinflationary trend. Service-sector inflation persisted, complicating the Federal Reserve’s outlook. The Fed cut rates twice in Q4, reducing the target range to 4.50%-4.75%, citing softening economic conditions and inflationary pressures.

Chart 2: S&P 500 earnings yield vs. 10-year US Treasury yield

Equity markets posted strong gains, led by largecap tech stocks and small-cap equities, with the S&P 500 (SP500, SPX) on track for a 25%+ annual increase. However, stretched valuations, with forward P/E ratios exceeding historical averages, heightened correction risks amid softening earnings growth estimates. Treasury markets experienced volatility, with 10-year yields peaking at 4.5% before stabilising at 4.3%, reflecting shifting policy expectations. The quarter also marked a pivotal political shift, as Donald Trump’s electoral victory and“America First” policies stirred market uncertainty. Tariff threats and potential policy changes added complexity to an already cautious economic landscape, balancing optimism for a soft landing against looming risks.

Europe

Europe’s economic and financial landscape in Q4 2024 was marked by subdued growth, evolving monetary policy, and intensified geopolitical challenges. Eurozone GDP expanded by 0.4% quarter-over-quarter in Q3, driven by domestic demand recovery amid persistent manufacturing sector weaknesses. Consumer confidence remained fragile, constrained by stagnant real wages and enduring economic uncertainties. Inflation trends were mixed. Headline HICP rose to 2.3% year-over-year in November, surpassing October’s 2.0%, mainly due to energy base effects. Core inflation held steady at 2.7%, underpinned by elevated service sector costs. The European Central Bank (ECB) responded with a third consecutive 25 bps rate cut in October, reducing the deposit facility rate to 3.25%. ECB President Lagarde emphasised confidence in the disinflation trajectory, citing subdued global demand and softening service-sector sentiment as mitigating inflationary pressures. European sovereign bond markets reflected heightened volatility. Benchmark 10-year Bund yields declined to 2.03%, while peripheral bond yields outperformed as political uncertainty grew following the collapse of Germany’s government.

Chart 3: Eurozone GDP resilient despite weak manufacturing

Geopolitical factors added to the complexity. Donald Trump’s re-election as US president heightened trade policy concerns, threatening Europe’s export-driven economies. Domestic political instability in Germany further weighed on investor sentiment. Equities underperformed, with cyclicals pressured by earnings downgrades in the automotive and consumer sectors, while defensive sectors and sovereign bonds attracted risk-averse investors. The growth outlook remains precarious. While monetary easing and resilient service-sector activity provide some support, geopolitical tensions and Europe’s reliance on global trade present significant risks.

China and emerging markets

China’s economic recovery remained tepid, as GDP growth slowed to 4.6% year-over-year in Q3, reflecting persistent headwinds from property sector weakness, subdued domestic demand and deflationary risks. Stimulus measures from the People’s Bank of China(PBoC), including recordlow lending rates and anticipated reserve requirement ratio cuts, have yet to catalyse a robust turnaround. Consumer inflation moderated to 0.3% in November, underscoring rising deflationary pressures, while industrial output and retail sales showed modest gains. The urban unemployment rate declined to 5%, its lowest in four months, signalling a marginally improving labour market. Manufacturing activity provided a glimmer of optimism as the Caixin PMI rose to 51.5 in November, the fastest pace of expansion since June, driven by export growth and increased output. However, services activity softened slightly, with the Services PMI declining to 51.5, indicating uneven sectoral growth. Despite incremental improvements, business confidence remains cautious amid lingering trade tensions and global demand uncertainties.

Chart 4: China’s monetary support continues to strengthen

Equity markets in China and broader Asia underperformed due to ongoing geopolitical frictions, a strong US dollar and tepid domestic sentiment. The Shanghai Composite edged lower, while government bonds found favour as investors sought safety in the face of deflation risks and sluggish economic activity. Property sector measures, including credit expansion for developers, fell short of market expectations, further weighing on equities. Geopolitical volatility, such as South Korea’s political instability, added to market uncertainties. Sustained growth in Asia hinges on more aggressive fiscal and monetary policy interventions to stimulate confidence, bolster demand and mitigate external risks.

Investment conclusions

The current economic outlook reflects a late-cycle environment with moderate growth, resilient private consumption, and normalized capital costs. Inflation is stabilising around 2.5-3.0%, although structural pressures, including de-globalisation and energy transition, alongside geopolitical tensions, present ongoing challenges. Equity valuations remain elevated, with more attractive opportunities outside the US, while credit markets appear constructive amid an ongoing interest rate cutting cycle. Although recession risks persist due to tighter financial conditions, resilient corporate margins, strong US housing and robust largecap tech sectors support a cautiously optimistic view. This fragile yet adaptable economic environment emphasises the importance of strategic diversification, disciplined risk management and selective investment opportunities to navigate periods of heightened volatility.

Chart 5: “Credit” outperformed “rates”, led by bank loans

Bonds: Fixed income offers selective opportunities amid global monetary policy shifts. While credit tightening persists, elevated default rates remain manageable. Favor short-duration high-yield and loans, with duration providing effective diversification. Anticipate steepening yield curves.

Equities: Equities present fair valuations supported by lower rate expectations and moderate economic growth. Maintain a positive bias with a blended style approach, noting limited upside in large-cap US equities.

The tactical stance favours a balanced approach, with a limited bias toward value and cyclicals due to resilient economic growth. Neutrality in duration is maintained, with a neutral position on IG bonds and USTs, and an overweight on short-term HY and loans, alongside selective exposure to below-IG-rated bonds and hybrids.