FPM-Comment Reducing the Noise Martin Wirth: 4/2025 dated October 9th 2025
The political environment should not dominate the investment strategy
- The new German government has not yet addressed the problems
- Today's politicians apparently do not understand how growth and prosperity are created
- The situation in the US appears even more dire
- The EU has also contributed little to growth in recent decades
- But: a correct assessment of valuations is crucial for good returns
- In absolute terms, many German stocks remain worth buying
As a warning: if you don't want to spoil your mood, please only start reading this report from the last third onwards.
The new German government has not yet addressed the problems
After the new federal government took office, there were hopes that the reform backlog in Germany could be broken and that politicians would once again focus their efforts on the productive majority of the population. Just a few months later, however, these hopes have been dashed. Our political elite continues to view only nurses and, of course, public sector employees as high achievers among the workforce. The rest are expected to stop complaining and pay for the rising social welfare costs of benefit recipients, including compensation for increased inflation rates and civil servants' incomes, without providing any evidence of increased productivity. At best, reforms will come sometime in the next few years, and the rest will be taken care of by the state, i.e., the taxpayer. Only the bureaucracy continues to grow, while industry continues to decline, with losses compared to the highs of a few years ago now often reaching double digits. The former enemy number one, the automotive industry, has drawn its conclusions and is now investing in countries where it is welcome, from the US to Mexico, Spain, and Hungary. The fact that VW will cut 50,000 jobs in Germany over the next few years was largely met with a shrug. This will also affect suppliers, the surrounding economy, and their families, negatively impacting the lives of up to 300,000 people. And the fact that, apart from VW, large corporations are now regularly prompted or forced to make waves of redundancies in the four to five-digit range does not seem to bother anyone in politics or the media close to it. People would rather spend weeks worrying about the election of a constitutional judge. Every now and then, elections are held, and the SPD in particular is surprised that its core voters seem to have shifted to the right, only to then continue the disastrous course of recent years with renewed vigor – for the past few months with the support of the CDU/CSU. Measures considered to promote growth, such as faster depreciation or lower energy costs, are financed by higher government debt or, in the social democrats' dreams, by tax increases.
Today's politicians apparently do not understand how growth and prosperity are created
It seems that left-wing politicians in Germany and Europe in particular still do not understand where prosperity comes from. Hint: it does not come from increasing regulations, bureaucracy, and redistribution, from stimulus measures, or from desperately searching for ways to hinder and prevent ideas. Rather, it comes from letting people who are willing to risk their existence when in doubt do what they want, supporting them, and making things possible and easier for them. The exact opposite has been happening in Europe for decades. Only projects that have been approved in advance by politicians are supported and promoted. The automotive industry is a prime example of where this leads: VW, a company with strong government influence, has, to great applause from politicians and the media, focused entirely on battery-powered e-mobility and geared its factories solely to the production of battery-powered electric cars, while BMW has been heavily criticized for wanting to maintain its flexibility and designing its factories so that cars with all types of engines can be built. This lack of flexibility is now costing VW subsidiary Porsche more than €1 billion for the new Macan alone to develop a combustion engine, not to mention the lost sales and profits, as production will not start for several years. The significance of this misjudgement for the rest of the VW Group can be imagined, even if there are no clear figures on the costs of capacity underutilization or plant closures. BMW's strategy is called openness to technology, something that is considered misguided by the government and most of the media, apparently against the backdrop that politicians and journalists already know exactly what the future holds. The latter, in addition to their own political preferences, largely report on things that have already happened and are therefore always right. This is not limited to journalists: in hindsight, we always know exactly what happened, but not everyone writes about it.
When you look at the projects in which the government, represented by former economy minister Habeck, who studied all kinds of subjects except economics, wanted to invest, it can send a chill down your spine (or perhaps inspire admiration for their willingness to deliberately run the country into the ground): Intel in Saxony-Anhalt, a semiconductor manufacturer that has now largely fallen behind, Wolfspeed in Saarland, now insolvent, and Northvolt, also insolvent. This comes close to sabotage. The full glory of government -run economic activity becomes clear when you look at the success story of Deutsche Bahn, whose decline is still attributed by left-wing circles to the IPO that was cancelled about 15 years ago. This is simply ridiculous, if it weren't so sad. Meanwhile, infrastructure in Germany and Europe is rotting away, while China is equipping the global South with roads, bridges, and airports, having apparently run out of things to do at home. Not to mention artificial intelligence, a successful semiconductor industry, or the targeted and fully supported development of technologies such as nuclear power. That doesn't mean that this will always result in a breakthrough. But at least it's more likely than the umpteenth restructuring of Karstadt leading to success.
Rather equality for all than prosperity for most
This, too, seems to bother no one outside of occasional Sunday speeches. Especially in the left-wing camp, the motto seems to be: better everyone poor than differently wealthy, and if we cannot help people achieve prosperity thanks to our policies, then better everyone be poor.
On the distribution debate: 1% growth in Germany corresponds to an additional national income of €40 billion. 10% growth p.a., i.e. 1% (mathematically just under 1%) over 10 years, would mean €400 billion more that could be distributed. That is more than if you were to take €1 billion from each German billionaire. And that would be every year, which would quickly mean that most of them would no longer be billionaires. So supporting growth would be more helpful for everyone than politicians trying to cover up their own failures with this discussion. And making things 1% more efficient every year thanks to growing knowledge and capital stock does not seem to me to be an unattainable goal. After many years of lamenting “growth fetishism,” especially in green circles, we can now see what happens when there is no growth for several years in a row.
The statement that all tax loopholes must finally be closed is also driven solely by the vague hope that this will miraculously close the holes in the budget, while also achieving the desired aspects of redistribution. I would be grateful to my fellow citizens who claim this if they could explain the loopholes to me. I cannot discover any. Anyone who considers capital gains tax to be a loophole has not understood the tax system, which also takes 50% of income in this area. In my experience, this ignorance even extends to relevant positions at public television stations. Tax evasion is estimated at €100 billion, giving the impression that putting a stop to it would solve all problems. First, I don't believe this figure, and second, even if it were that high, it would be another sign of the blatant failure of government agencies.
The situation in the US appears even more dire
On to the next unpleasant topic: developments in the US
Leaving aside the government's actions, which are in breach of democratic procedures and the separation of powers, what is happening here in terms of economic policy is, in our view, not necessarily, but with a certain degree of probability, a very bad idea economically. In addition to the self-enrichment orgies of the circles around the president, the most striking feature of Trump's policies is US trade policy. To say something positive for once: given the geopolitical situation, it is understandable that the US no longer wants to be dependent on China and countries that are (or could be) close to China for core products and therefore wants to have its raw materials industries, shipyards, rare earth production, pharmaceutical production, etc. under its own control. That would also suit the EU well.
Take rare earths, for example: the world's dependence on China, which has a virtual monopoly on the production of most rare earths, has the potential to lead to disaster. The time required to build up the capacities that no longer exist is estimated at 15 to 20 years in some cases. Even though rare earths can be replaced by other products and processes in various applications, this situation is an unprecedented strategic problem, analogous to the EU's defense capabilities, which were practically non-existent until two years ago. But as we all know, politicians have placed importance on other things, such as colouring roads to make cyclists happy. And the extraction, processing and treatment of rare earths is harmful to the environment, which is something we do not want here. In addition, China supplies cheaper products, which also convinced the industry. Let's see how long that lasts.
Unfortunately, the US is overshooting the target. Extensive car production really is not strategic, and the US has sufficient capacity of its own, to name just one example that seems to be of particular concern to the administration. In the long term, this policy has the potential to emulate the path taken by China 500 years ago, when what was then by far the world's largest economy became an impoverished developing country thanks to centuries of isolationism. Trump wants foreigners to finance the US, which they are supposed to have cheated for some hallucinatory reason (instead of, as is actually the case, enabling the US to consume well beyond its means by financing a massive current account deficit). Skilled foreign workers are to pay $100,000 in visa fees, while skilled workers from companies from friendly nations are suddenly arrested on construction sites. According to Trump's logic, Americans will then have to work hard instead of being able to choose from among the smartest of the eight billion people on Earth, as they have done up to now. If there is no change of course, the result is likely to be that, as always with isolationism, inefficient structures will remain in place and this will permanently reduce prosperity. Let's see how long this mindset persists. And 500 years is certainly a long time.
The EU has also contributed little to growth in recent decades
From a European perspective, it would be better to remain silent here too: we are wasting our resources on rampant bureaucracy and welfare states that punish rather than reward performance, as described above. The dismantling of the welfare state in Germany means that it is believed that the redistribution of €1.3 trillion is sufficient to finance a reasonably decent life, often without any corresponding return. The most popular solution among many politicians is to once again raise taxes significantly in a country with high taxes and levies such as Germany, whose economy has not grown for more than half a decade despite population growth due to misguided tax and economic policies – instead of focusing on growth; see above. However, since the leader of the Green Party in the Bundestag, as recently demonstrated on German television, has no idea about the size of the federal budget or the level of social spending, but knows full well that any cuts would be devastating, it is hardly surprising and we should not delude ourselves into thinking that her like-minded colleagues have much more factual knowledge.
Instead, we hear nonsensical discussions about roofers who can no longer work at the age of 65. There are approximately 60,000 roofers in Germany, most of whom take up other jobs well before their 60th birthday. Even if there are other stressful professions, the myth that Germans can no longer work when they reach retirement age is easily refuted by taking a look at cruises or sightseeing trips to cities. 70% of citizens who take advantage of early retirement, known as “retirement at 63”, have worked in professions that are not particularly stressful. And that means they weren’t roofers.
And because it is important in terms of perception: there is occasionally good news too. For example, the share of European GDP spent on energy purchases has fallen back to the level of 2015-2020, even though the share of gas coming to Europe as liquified natural gas has doubled to almost 40%. Thus, the price increases that everyone is talking about are primarily due to political decisions, such as CO2 taxation, grid fees, and infrastructure costs for renewable energies. In any case, energy prices should no longer be cited as the main reason for a deterioration in the economic environment.
But: a correct assessment of valuations is crucial for good returns
The coming months will show whether the government is prepared to implement significant reforms. Anything is possible, and as equity investors, we tend to be optimistic. Ultimately, it is possible to earn money from equity investments even if the environment is not perfect, provided the valuation is right. Let us now consider what this means for investing, with the aim of striking a more positive note.
The above is not pleasant, but it should be mentioned now that the narrative has spread: the debt brake has been smoothed out, and now everything will be great. That is only part of the truth. The crucial question is whether the good and bad aspects are priced into stock prices. And since both the structural problems and the effects of the debt brake adjustment are quite obvious, it is hardly surprising that this is reflected in the prices to a significant extent, in the form of an increased risk premium or a growth premium, depending on the case. Companies that will benefit directly from growing government activity have achieved impressive performance in some cases. This is in contrast to the broader market. This is evident in the valuation discounts compared to the US, but also in relation to the valuations achieved for comparable assets in the private equity markets. Depending on the calculation, the discounts to these two comparable markets are at record levels. This does not mean that things cannot get worse. However, there is a valuation buffer for this scenario, or a price opportunity if things in the political environment develop better than one might think.
Indices don't tell the whole story: one-third of DAX and MDAX stocks are in the red in 2025
Contrary to what the indices suggest, it's not all sunshine and roses on the markets. Alongside the big winners such as financial services providers, the defense industry, and large technology companies, there are a number of stocks that have suffered significant price losses.
As we have repeatedly emphasized here, the quality of a company alone is not a reason to buy. We are certainly in a position to determine whether a company is above or below average in terms of quality. However, this is only one aspect of evaluating an investment. Ultimately, you are buying the stock, and what you pay and what you get in return is crucial. And quality is only one aspect.
Formerly expensive quality stocks are now affordable again...
Why am I emphasizing this? 2025 turned out to be a year in which even companies with well above-average quality had a tough time. A weak economy, competition from China, tariff discussions, excessive inventories at various stages of the value chain, the effects of rising inflation, and, above all, the impact of interest rate hikes, which are now considered to be sustainable, have all left their mark. As a result, disappointments led to substantial double-digit percentage losses in share prices.
...while defense and banking stocks benefited from the environment...
On the other hand, at least two formerly pariah industries benefited from the changed environment: banks and the defense industry, both of which saw significant increases in profits. As a result, portfolios had to be restructured on a massive scale. When the growth rates and margins of formerly indispensable quality stocks, which had previously recorded steady but not particularly high growth, proved disappointing even within a manageable range due to weak growth, some of them suffered massive price losses.
...and valuations across all sectors have leveled off
Many of these companies, some of which we have avoided for more than a decade due to their valuations, are now trading at reasonable, and in some cases low, valuation levels. However, we have learned (hopefully correctly) that capital flows only change in the longer term. Capital is withdrawn from underperforming strategies and invested in those that have been successful recently. The reasons for the better performance are not examined in detail, which is sometimes a pity, but sometimes perhaps better for the issuer.
In absolute terms, many German stocks remain worth buying
In summary, we see the environment as follows: We do not expect much from the economy, especially as long as global economic policy remains on a path that hinders growth. Not everything is rosy in China either, given the huge misinvestments in infrastructure, real estate, and, in recent years, industrial capacity. We accept interest rates as a given, now that the structure has largely returned to normal. In this respect, the significant distributional effects of recent years have largely been reflected in share prices and priced in, both positively and negatively. In short: banks up, real estate down. With the exception of companies that are expected to achieve significant growth in the coming years, primarily in defense and, to some extent, technology, most stocks are still not too expensive, and in many cases are even undervalued. Based on the assumptions made, this also applies to banks. Equally important, this is increasingly true for quality companies, especially those that have recently disappointed their quality- and safety-focused investors for one reason or another. If these disappointments are temporary, the outlook will be positive again.
Sincerely yours,
Martin Wirth
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FPM-Comment Reducing the Noise Martin Wirth: 3/2025 dated July 9th 2025
Politics continues to dominate the financial markets
- US politics continues to dominate the financial markets in the second quarter
- Consensus in Europe on improving defense capabilities...
- ...but the willingness to reform is less pronounced
- The stock market is guided by facts and not by hopes
- Valuation differences between the market segments have narrowed
- The clarification of tariff issues provides the lagging sectors with a potential to catch up
US politics continues to dominate the financial markets in the second quarter
The second quarter of 2025 started with a bang from Washington called Liberation Day, which, according to its wise leader, was apparently intended to free the beleaguered USA from decades of servitude. Full of anticipation, stock markets around the world initially plunged, only to recover to their previous highs when it gradually became clear that not everything is as hotly eaten as it is cooked. The geopolitical strategy, which had caused widespread political chaos in the first quarter, particularly in Europe, initially took a back seat until the disputes between Israel and Iran, which, however, ended as quickly as they began in terms of the hot phase of the conflict. Most recently, a significant tax cut was passed in the US, which is likely to drive the already escalating deficit to even more alarming heights, because unlike the US president, the capital markets do not believe that the budget gaps can be closed even remotely with the comparatively low tariff revenues. Thanks to the double deficit in the national budget and current account, the USA is dependent on international capital to maintain its apparently modest prosperity. The fact that international investors have a different opinion than the US government regarding the meaningfulness and sustainability of these measures can be seen from the performance of the US dollar. The US government's idea that international suppliers to the USA could simply forgo 10, 25 or 50% of the proceeds at the expense of their own margins for the grace of being able to sell their products there is hard to beat in terms of absurdity. The USA also has at least one advantage over Europe in terms of budgetary policy: the tax burden in Europe is already at a level that inhibits performance and does not appear to be rationally expandable (unless you are active in left-wing political parties). So before the USA slides into national bankruptcy, it has a whole range of other options to counteract this, even if this will be accompanied by disruptions.
All in all, the lasting effects of the US government's chaotic behavior are still unclear. Uncertainty remains high worldwide with regard to tariffs, geopolitical conditions and general economic development. This can also be seen in the operating performance of many companies, particularly those that are sensitive to the economy. At least the attitude towards Russia seems to have moved somewhat closer to the European view, which is anything but trivial in these times.
Consensus in Europe on improving defense capabilities...
Many things have changed in Germany and Europe, some for the better, but not always at the speed that was hoped for. The main fact is that there is a consensus that the defense capability of European states must be restored now that the USA is no longer seen as fully reliable and at the same time Russia (and China) have become adversaries, at least politically speaking, who are also working massively on their armaments.
As far as the economic outlook is concerned, not much has happened apart from the use of the budgetary leeway created by the change in the German debt brake. In other European countries, people are watching Germany with bated breath and are doing little or can only do a little, as debt is already far too high in most countries.
...but the willingness to reform is less pronounced
What is actually much more important than the question of a debt-financed surge in demand is the reduction of bureaucracy and the reform of the social systems. These reforms are still in the embryonic stage at best. It is obvious that this will take a long time, even at best. After all, laws need to be changed and then procedures need to be adapted to a considerable extent. However, it is still unclear to what extent this will be supported by politicians. The view of the SPD party conference is deeply depressing: the majority of delegates are obviously of the opinion that the SPD's situation is so bad because there is too little welfare state, too little bureaucracy, too little social security, whereas the issue of controlling immigration seems to have been resolved. One of the leaders, the Vice-Chancellor, almost fails the election after daring to question the SPD's recipe for failure in recent years. At least we can now get an idea of who went off the rails in the chancellor election in May. This is not just an anecdote: for reforms you need the parliaments and the parties, visions of individual members of government are not enough. And in this respect, the implementation of the necessary reforms remains unclear. They even want to take four years to implement a pension reform that is clearly necessary due to demographic factors. At least that has been clarified.
The stock market is guided by facts and not by hopes
Accordingly, despite significant price gains, our interpretation of the stock market was dominated by skepticism regarding the ability to reform beyond the increased possibility of new debt. Companies that were and are valued low were able to make significant gains if they show a solid operating performance even in the current environment or will visibly benefit directly from the infrastructure or defense projects that have been initiated. Examples include banks and insurance companies, but also telecommunications companies and a large number of industrial companies.
In contrast, quality companies with above-average valuations underperformed significantly, after reaching very high valuations in some cases in recent years, driven in part by the low interest rates at the time. Companies that could benefit from an economic upturn, but which were not yet visible due to the conditions described above, also suffered. In this respect, it can be said that the promised reform measures and the resulting positive aspects for the economy as a whole are still a long way off. In contrast, the tariff discussion, the foreseeable government investments and the generally still weak economy are currently the reality, and the stock market is not prepared to give more credit.
Valuation differences between the market segments have narrowed
Overall, the equity market is more balanced across the board than it has been for many years. Compared to the USA, European equities are still valued lower, like for like, as far as one can tell. Some of the former favorites of recent years, which have lost considerable ground due to what is probably only a temporary weakness, remain interesting, especially in the mid and small cap segment. None of the companies have included a still possible and not unlikely economic recovery in their valuation. However, the weakness of the US dollar, which will have different effects on companies, has probably not been fully taken into account either. This may explain some of the weakness in share prices, but there is still some time before company forecasts are adjusted, and only then will company estimates be more reliable than they are today. Most companies that need to make adjustments in this respect will probably communicate this with their half-year figures. This could then be a purifying element for share prices and allow investors to look to the future again.
What is important, but remains to be seen, is the impact of the disruptions caused by the US government. We can imagine that this will be more important for the next one to two years than the willingness of the Europeans for reforms: no clear-headed investor makes decisions for the next few decades that could become obsolete tomorrow due to a presidential whim. In this respect, the wait-and-see strategy makes sense.
As a result, many things are simply not happening. Action remains focused on the short term, which of course will not improve growth potential. It doesn't have to be the really big decisions such as whether to build another car factory in the USA or a steel mill that won't start production until after 2030 anyway. There are also small things, such as taking an extremely short-term approach to ordering chemicals when you don't know whether they will be subject to tariffs or not, or whether, to be on the safe side, you should order domestically but pay a higher price if tariffs are not introduced. Or how to structure the supply chains, depending on whether an alternative delivery location will result in a lower tariff burden.
The clarification of tariff issues provides the lagging sectors with a potential to catch up
In this respect, we are still in a period of uncertainty, with corresponding effects on the valuation of the companies particularly affected by this. This phase will not be permanent, and even a less-than-perfect decision on US tariffs is better than no decision at all, as it provides a basis for calculation that can be used to make effective decisions in the longer term. So if everything normalizes, even if higher tariffs are introduced than in the past (which will eventually be paid for by importers, i.e. ultimately by American voters), then there will be planning certainty, and this alone should be enough to make the market segments that are currently still neglected look better again by normalizing demand.
As you can see: There is always something going on and you should always be able to adapt to a new situation. Despite the significant price gains in the first half of the year, the overall outlook remains quite solid.
Sincerely yours,
Martin Wirth
FPM-Comment Reducing the Noise Martin Wirth: 2/2025 dated March 18th 2025
Turning point 2.0 - this time with consequences
- Dramatic events in the USA, unfortunately in the wrong direction
- Tariffs, growth concerns and stock market prices are by no means the biggest problem
- What can be relevant for the capital markets? Everything!
- The age of seeing things through rose-colored glasses is over
- New priorities: Growth and resilience instead of sustainability at all costs
- The potential of a united EU is vastly underestimated in the public debate
- Upside after massive underperformance against the USA over a long period of time
What is currently taking place in plain sight has the potential for major shifts in the world, including on the financial markets. Interest income is likely to remain weak to negative in real terms, the US dollar is deliberately under pressure from the US government and the fundamental liberal order in the US is at risk. On the other hand, there is unprecedented pressure and a willingness in the EU and Germany to realign political and economic objectives. Germany probably has the greatest potential. This is due to the comparatively low national debt and the most unrestrained bureaucracy to date, the reduction of which should bring corresponding relief after 20 years of nothing being geared towards growth and everything being geared towards redistribution and regulation. The potential for the shares of German companies then lies not only in a higher earning power, but even more in the reduction of the high risk premiums at many companies and the expansion of the valuation across the board, even if not so much at the top. The special fund only plays one role in this, but the aspects of bureaucracy reduction and economic growth are decisive if implemented correctly. The latter can also arise from the fact that the state does not primarily see its task as preventing everything that is possible but, as it should be in a free society, allowing people to do what makes sense.
First disclaimer for the following text: I do not see myself as part of the left-green woke bubble. I have not seen the end of democracy in Germany, just because the CDU once held the chancellorship. Just in case anyone is wondering what bias is behind the following.
Dramatic events in the USA, unfortunately in the wrong direction
To start with the important second disclaimer: If the whole thing we are currently experiencing is not the result of an ingenious US plan to wake up the West from its lethargy, especially the EU, in order to strengthen it for the fight against the autocracies of the world, then what we are currently experiencing is a fundamental turning point that may only be temporary, but may also be lasting and will change everything that has been walled up for eternity. The EU stands for many things that are a thorn in the side of the new US administration. Given the threats being made against Canada, Denmark, Panama, in the customs dispute, but also within the US against dissenters, it is naïve to assume a larger plan beyond what is visible and becoming more visible every day. In a nutshell: Under this administration, the USA is no longer part of the Western community of values, at best on the way to becoming an autocracy, at worst on the road to fascism. As far as corruption is concerned, what is happening right now is worthy of a banana republic at best. Or a copy of present-day Russia. For an impression, 30 minutes is well invested in Murphy: Six Weeks In, This White House Is On Its Way To Being The Most Corrupt In U.S. History , if you are attached to the view/hope that the new administration is perhaps a little heavy-handed, but on the whole taking sensible action against a pervasive waste of money.
What is particularly depressing, apart from the fact that the American people have largely failed to revolt against the breaking of rules that were considered to be the rule of law, is the fact that the American people have largely failed to revolt against the breaking of rules that were considered to be the rule of law. In this respect, perhaps the Land of the Free, Home of the Brave was mistaken after all. It is easy to wave rainbow flags at demonstrations “Against the Right” when that is the mainstream. How quickly everything can fall: The week before last we received mail from a proxy voting service that always made sure that women had to have a place on boards of directors, otherwise they should vote against the administration. Now it looks like this: Shareholders are ultimately being advised to stop voicing their support for diversity and inclusion at shareholder meetings because the new US administration doesn't like it. This has never been a major concern for us in our investments, but the fact that those who have just carried this like a monstrance in front of them are now immediately caving in is unbelievable.
In view of this opportunism, and this is just one example of many, we should not assume that things will quickly swing back to their original position. Nor should we assume that this is all Donald Trump's fault: apparently he is just the figurehead of people who can implement their agenda with him, after all his style was enough to get him elected president once before. Which means that nothing has to be over after four years. And internal tensions in the USA could continue to rise.
Tariffs, growth concerns and stock market prices are by no means the biggest problem
You can take the position, and the stock markets are doing so, if you look superficially at the fact that the tariffs are the problem and that things might not turn out so badly. The US is a gigantic domestic market, so a good portion of the price increases from tariffs are likely to be diluted, and otherwise things will even out, for example, because BMW sells more SUVs (production in the US) than sedans (production in the EU and Mexico). But the problem goes much deeper and is much more comprehensive.
Ironclad principles of the free world are under attack here: The rule of law, the separation of powers, checks and balances. Tariffs are just one aspect: introduced one day, abolished the next, all without consulting parliament, trading partners or companies and without giving the whole thing any kind of lead time and meaningful (if that can be said in this context) structure. Dissolve federal agencies without reorganizing their missions, without listening to those affected, and in the process dismantle icons of the rule of law such as the FDA, SEC, FBI, CIA or the Internal Revenue Service. No longer paying for subscriptions to the best-known newspapers such as the NY Times or Washington Post in US government agencies, instead paying for some obscure press products. It's not about this being economically relevant, it's about suppressing opinions that don't suit you. And Trump's well-known lies, which are more likely to serve as a test of the loyalty of those around him and his supporters: If everyone knows this is a lie and yet it is not denied, then that is a sign of a reliable supporter. And anyone who says Gulf of Mexico instead of Gulf of America is kicked out of the press conference. This is on the subject of free speech, which should no longer exist in Europe.
Two other issues are catastrophic (without going into detail here):
Ethically and morally established values are being destroyed
Even the temporary withdrawal of support for Ukraine for the defense of civilian targets through missile defense is high treason against a country that has just received support and wants to live the same values as the USA has for 250 years, especially after the USA was involved in “liberating” Ukraine from its nuclear weapons. You can read whatever you want into the relationship with Putin, but the true face of the new US administration can be seen here. The main thing is that the president can be the peacemaker, regardless of the conditions.
And secondly: Migration means stress for every society. The large flows that are currently taking place in plain sight have two causes: Wars started or supported by Russia/the USSR, from Afghanistan to Syria and Eritrea to various African states. And drug use in the USA, Europe and other rich countries, which have turned the countries of origin of the drugs and refugees into failed states in Central and South America. No normal person there wanted this, and the blame does not lie with these states. The way Trump describes the people who see no other option but to flee their homes because of the failure of the US and other rich states is the intellectual equivalent of the failure to defend civilian targets in Ukraine. As a German, you can certainly see parallels here with Julius Streicher's agitation against the Jews. And from today's perspective, the storming of the Capitol after the 2020 election defeat was not accepted looks less like an event that has gone off the rails and more like the storming of the Feldherrnhalle in Munich on 9 November 1923, with the subsequent release of convicted criminals as soon as Trump was able to. Does it all sound too dramatic? For the last few years, I've always thought it wasn't all that bad. Now it's probably time to consider the worst-case scenario as a possibility.
You shouldn't fool yourself here: The situation has changed dramatically. And if you think that nothing is eaten as hot as it is cooked: this is not the US government's plan.
What can be relevant for the capital markets? Everything!
And from here we try to assess the impact on the capital markets.
The most important asset of a country from an investor's point of view is the rule of law and reliability. This has been severely affected in the USA. We don't know what will happen if the mood sinks before the mid-term elections: Will every American then receive a $50,000 transfer from the Federal Reserve? What rules apply to non-American investors? Allegedly, there were discussions in Mar-a-Lago about extending the maturity of outstanding US government bonds, with stable coupons or even eliminating them, as it is known that current interest rates have risen and the national debt (for which Trump is not solely to blame) is getting out of hand, which would be nothing more than a default in economic terms. Tech entrepreneurs who do business globally grovel, the major shareholder of the supposedly most valuable car manufacturer insults the main Mexican customer of his satellite company, whereupon the latter cancels orders worth USD 7 billion. Never mind, he gets a deal with the government and a competitor (verizon) is kicked out after years of preparation. How secure are American defense systems if Ukraine is betrayed in the middle of a war? How are American brand values being affected when they recently stood for completely different values? All this against the backdrop that the US was until recently seen as the last bastion in the event of an emergency and investors were therefore prepared to pay high valuations for the US dollar and US equities, combined with an economy with low savings and growing foreign debt. The US has NOT been ripped off by the rest of the world, rather it has had goods and services written off to its suppliers for a trillion US dollars a year, indirectly in the form of a massive increase in government debt abroad, repaid by rising inflation figures. So: deterioration in the rule of law, political stability both internally and externally, chaotic economic policy, grinding institutions of statehood: it is not clear to me in any form why you still have to pay a valuation premium for something like this. Except that there is a theoretical possibility that this spook will soon come to an end.
And now for the counter-trade.
The rule of law is becoming an even scarcer commodity in the world
First of all, a brief digression: Switzerland has a democracy that is a few centuries older than that of the USA, a government that represents almost all groups of the population, across various parties and levels of government. With around 1 per thousand of the world's population, it is not too significant in mathematical terms, and yet it has a currency that is overvalued by 50% according to purchasing power parity and which stands for solidity throughout the world. This is the premium for stability and security that can be achieved in a free system in which one is forced to reconcile different wishes and ideas. And these regions have become rarer in the world, which can also be seen in the price of gold as a last resort for friends of security.
In view of the USA's impending drift, we can consider where we can find something similar, albeit not to perfection. And there is not much more left of relevant regions than the EU. Which was still on an irreversible descent. What is the upside?
First and foremost: political leadership is required, which should not be as difficult as in recent years. The deficits are clear, the shock caused by the events of recent years and months is huge, and there is a high level of unity in the political center. The Merkel years in Germany were characterized by the fact that everything looked great, money was not an issue thanks to low interest rates, the bureaucracy got on with the job and made everything more and more complex without really hurting anyone. The US took care of defense, and (almost) everyone could bask in their moral actions, in which defense was superfluous, but diversity and inclusion played a major role as long as it didn't cost anything.
To paraphrase Wolfgang Schäuble: “Isch over”.
Germany and the EU are starting to move, and they have the reserves to do so
In a nutshell and in relation to Germany, similar things often apply in the EU:
First of all, both Germany and the EU are designed for consensus; people are forced to agree. And only the permanent suppression of the will of the voters can lead to conditions like those now prevailing in the USA. Germany and the EU were heading in this direction; perhaps the warning shot will be fired in time before the extremists spread here too.
Defense, external security, is the core of the state's tasks. This can now be seen again in the shares of defense companies, after years of pretending that Germany only had a Bundeswehr. What is now possible, and perhaps also in other policy areas, can be seen in the Greens and to some extent the SPD: In their youth, they still protested against the rearmament with US missiles and conjured up the end of the world, but in a short space of time this was a 180-degree turnaround (even if R. Habeck was certainly one of the first to point out the problems in Ukraine, to the annoyance of the SPD and to some extent the CDU). When existence is at stake, you can change your mind. And that is not a criticism, but a positive perspective. The Greens are quite Keynesian: “When the facts change, I change my mind - what do you do, sir?”
Save in time, then you will have in need: The two “special funds” under discussion or the exemption of defense from the debt brake in Germany would correspond, spent over ten years, to approx. 2-3% of GDP per year gross, including the returns to the state less. If this is flanked by countermeasures such as the abolition of a public holiday or the freezing of social benefits, even less. So it is not the drama that it is now seen as.
Germany has a capital outflow of more than €100 billion a year. The current account surplus is more than €250 billion. This means that the country is not mathematically dependent on external financing and can easily raise the money for these measures itself.
The same applies to the EU, which also has a considerable current account surplus even without Germany, which to some extent contradicts the statement about a lack of competitiveness.
From a historical perspective, the stock market is still fairly valued to low, apart from a few exceptions which, however, push up the index valuation.
The euro is undervalued, whereas we have doubts as to whether bonds are a good idea given that interest rates for German government bonds are still below 3%. But interest rate savers are used to suffering, with nominal interest rates close to zero over the last 10 years, but also a good night's sleep (as long as you haven't been dreaming of real interest rates).
The age of seeing things through rose-colored glasses is over
If you want to describe the EU, its states and their actions as well as the rationale behind them in a positive light, then it looks like this: The involvement of most social forces and the different trends in the individual states have so far (we will see how it continues) prevented a rift like in the USA. Wars and demonstrations of power were seen as pubescent forms of behavior. The EU was preoccupied with making the world a better place: socially, environmentally and resource-friendly, non-discriminatory, worldwide, and with a great deal of trust, an endless meticulousness was created in the bureaucracy, which ultimately overshot the mark and led to the weak growth of recent years.
Here too: Turning point (at least light) with no alternative. There are other priorities now. And if the high level of performance and willingness to perform is steered in other directions, this probably has a potential that is underestimated today. What supports companies instead of hindering them, what saves costs and generates revenue. With a defense sector that is innovative and not evil for the first time in decades (this is how the tech industry in the US came about), with infrastructure investment radiating throughout the economy, with higher interest rates and a structurally more profitable financial industry. And if all of this is no longer designed to hinder growth, but to promote efficient growth, we can expect to see a corresponding impact on all areas of the economy.
None of this is guaranteed, but the conditions have not been this good for a long time. The USA has always had such a large domestic market that the companies that were able to establish themselves there had a huge, often unassailable advantage. This was not necessarily due to better technology, it was often the sheer financial power with which technologies could be bought and incorporated in Europe if necessary. A serious European single market could create a level playing field here. There is also the question of what potential could arise from a possible brain drain from the USA. Think not only of the thousands of scientists on leave in state institutions, but also in the knowledge industries, now that the focus in the USA seems to be on reviving the steel and shipbuilding industries. And then, at the end of the day, there are of course talented people from all over the world who perhaps don't like to be insulted. As I said, it's all up to Germany and the EU to simply roll out the red carpet here too.
New priorities: Growth and resilience instead of sustainability at all costs
Why should we be optimistic about the EU's willingness to change? With the “Green Deal”, the EU wanted to develop a narrative and set a goal behind which the peoples of the EU could unite: The whole world can benefit, rich countries, which include most EU states, can afford it more at the beginning and thus build up skills that should be in demand everywhere and ultimately, as Chancellor Scholz hoped, achieve growth rates like in the 1950s. This has not worked out for various reasons: Too bureaucratic, too little openness to technology, too slow, moreover functioning technologies shut down without having a comparable replacement, in short: too much wanted, too badly done, too much prosperity lost.
It looks as if this gigantic waste of resources in Europe will not continue. We are now seeing more flexibility, more realistic assumptions and more openness, and at the same time the technical possibilities for achieving the objectives of the Green Deal have developed further. However, the really big common task now is defense capability and economic competitiveness. For example, it now seems to be happening very quickly that European car manufacturers will be given a more sensible framework in terms of CO2 compliance instead of paying penalties for things they were not responsible for, or even better: making compensatory payments to companies that do not pay taxes, only look at workers' rights and supply chain regulations with binoculars and have also been subsidized by the state, preferably from taxes paid by long-established companies.
And there are heaps of examples of this kind, from subsidized house renovations that have an energy payback of 50 years, renewable power generation plants that are built wildly in the landscape without making any positive contribution to the power supply, etc.. If energy, which has had a destructive effect over the last 15-20 years, is now only neutral or even moving in the right direction, then there is a lot of room for improvement. The pressure from the left-wing and right-wing populist parties is starting to have an effect, even if not on everyone involved. But the fear that further elections in Europe will result in things like those in the USA should make even the most stubborn ideologues think twice. Let us be surprised.
The potential of a united EU is vastly underestimated in the public debate
Finally: When you hear the discussion that the small EU no longer has much to say between the major powers, you can only scratch your head in the face of this dwarfism. One of the three major powers (excluding India) has the economic power of Italy, which is nice, but nothing to be in awe of. Without going into the multitude of relevant data points because it is too obvious: a little more self-confidence, knowledge of the facts and a willingness to put things right can work wonders.
Upside after massive underperformance against the USA over a long period of time
If a share (and ultimately an economy) achieves better than expected and priced-in growth rates, not only do profits rise, but valuations also increase. It works the same way in the opposite direction. There are signs that the EU will be able to overcome its weak growth, while the opposite is true for the US. At the very least, however, it will be difficult to exceed the high relative expectations. If these trends materialize, the valuation discrepancies, which are still at a record high, will no longer be justified. These differences also apply to companies with comparable assets in the same regions but with different headquarters. Economically, this makes little sense, but if you invest your money by region via ETF asset allocation: You can't go into that much detail. And if you look at the other asset classes: It's more like the Ugly Contest. Inflation is no longer low, in contrast to historical interest rates, currencies that are overvalued in terms of purchasing power parity (except for the yen) and government debt that should cause worry lines to appear on the foreheads of many countries. There is not much left to invest capital in with any confidence. In Germany, apart from the defense stocks and individual exceptions, especially among the large stocks, many shares are still cheap in historical terms. Now the turnaround 2.0 is upon us. To bring Lord Keynes back into play: “When the facts change, I change my mind - what do you do, sir?”
Sincerely yours,
Martin Wirth
Experience in German equities: Since 1990
Responsibilities: Fund management, equity analysis and corporate management
Funds: FPM Funds Stockpicker Germany All Cap mutual fund
Institutional special mandate for a single family office
Awards: Numerous awards for the funds managed by him, also multiple personal awards from Sauren Fonds-Research AG, Citywire and others
Career:
- Portfolio manager at Credit Suisse (Deutschland) AG
- Equity analyst at Bank Julius Bär (Deutschland) AG
- Equity analyst at Credit Suisse First Boston
Graduate in business administration from the University of Cologne (Dipl.-Kaufmann)
Experience in German equities: Since 1997
Responsibilities: Fund management, equity analysis and corporate management
Funds: FPM Funds Stockpicker Germany Small/Mid Cap & FPM Funds Ladon mutual funds
Career:
- 15 years at DWS Investment GmbH – managing the DWS German Small/Mid Cap fund, as a member of the European small/mid cap team of DWS and the DWS macroeconomics team and responsible for risk scenarios
Graduate in business administration from the University of Leipzig (Dipl.-Kaufmann)