Portfolio Management Report December 2024: USA — continued political and economic focus

December

2024

USA — continued political and economic focus

The equity markets are in a demanding but at the same time promising phase. Geopolitical tensions, economic policy decisions and seasonal patterns are currently shaping market activity. The election of Donald Trump as US president had a lasting impact on developments, while macroeconomic indicators and geopolitical uncertainties kept the mood changeable. Despite these challenges, the remaining weeks of the year offer potential for index level stability and should enable a positive end to the year and also a positive overall result. However, investors should not overestimate short-term movements such as the “Trump Trade.” This report analyses key market events, current trends and future challenges for investors.

Equity markets: euphoria in the USA and restraint in the rest of the world

Following Trump's election victory, the US markets in particular continued their impressive upward movement and ended an already above-average stock year at a new high at the end of the month. Cyclical consumption and financial stocks topped the list of winners. This development was largely driven by expectations of tax breaks and deregulation measures. In contrast, there was a predominantly cautious trend in Europe and also in emerging markets. “America First” thus found its way not only politically but also on capital markets. The differentiated picture meant that selected markets such as France or China were even down on a monthly basis in a positive environment. Uncertainties about potential trade conflicts and signs of an economic slowdown weighed on sentiment in emerging markets and Europe. The mixed framework conditions can also be quantified using economic data.

Macroeconomic developments: Focus on the USA

The US economy showed remarkable resilience despite political uncertainties. In the third quarter, GDP rose by 2.8% on an annualized basis, while retail sales and corporate earnings exceeded expectations. However, these positive signals reinforced concerns about a possible rise in inflation. The inflation rate rose to 2.6% in October, after six months of declining figures. At the same time, core inflation (excluding energy and food) remained at 3.3%. Overall, this means that although the disinflation trend is intact, it is not linear. The Fed's communication faces the challenge of alleviating the market's concern about a renewed surge in inflation. Disinflation, however, also means that prices continue to rise, just more slowly. Consumers are suffering immensely and this often misunderstood phenomenon is also an explanation why Harris was unable to win the election despite robust labor and stock markets. Trump's election program, however, includes some possible price drivers. Economists warn that a combination of tax cuts, high tariffs, a further increase in government debt and stricter immigration policies could further drive inflation in the medium term. In Europe, the macroeconomic environment remains challenging. Germany, the largest economy in the EU, is struggling with stagnating corporate investments and a weak consumer climate. Although the Ifo Business Climate Index showed a slight improvement in November, it fell short of expectations. The structural weakness in Europe could be further aggravated by geopolitical and political uncertainties.

Bond markets: divergences and inflation risks

The interest rate markets clearly reflected the uncertainties of November. In the USA, yields on ten-year government bonds rose temporarily to around 4.5% following the US election, driven by rising inflation expectations and fiscal policy uncertainties. In the back of its mind, the market has the 5% mark, which most recently caused major turbulence in many asset classes in autumn 2023. The appointment of Scott Bessent as designated US Secretary of Treasury partially calmed the markets. Bessent, an experienced hedge fund manager, was received positively as he understands the importance of capital markets and communication with investors. This was followed by a calming of the rise in yields, so that we are back at the level (around 4.25%) at the beginning of the month. This consideration of decimal places may be of little use for outsiders. However, in times of enormous refinancing needs, the market reflects this very closely, with even more attention being paid to the dynamics of a sudden change in yield than the absolute level.

The situation in Europe remained fragile. In its Financial Stability Report, the ECB warned of increasing risks due to high government debt and possible market distortions. This is compounded by the fact that Germany and France are currently struggling with massive domestic problems, each of which also has an impact on fiscal policy.

Gold: Fluctuations in the “safe haven”

The price of gold was volatile in November, reflecting the tension between debt expansion by the new US administration and the resulting interest rate policy. While gold remains in demand as a hedge against inflation and political uncertainties, the latest development (around 3% weaker on a monthly basis) suggests that investors are increasingly investing in riskier asset classes again. At the same time, recent signs of a slight de-escalation in the Middle East meant that “the safe haven” was less heavily targeted. However, it remains to be seen to what extent the agreed ceasefire will last, as a different foreign policy of the USA is expected from January 20, 2025, the power structure of Hezbollah will have to rearrange itself and Israel's prime minister is also under severe domestic pressure.

Currencies: The US dollar remains strong

In November, the US dollar showed sustained strength against many currencies, including the euro, which was temporarily below $1.04. The irony here is that it contrasts with Trump's desire for a weaker domestic currency to stimulate his own economy. In his opinion, a less strong US dollar could help make imports from other regions to the USA more expensive, but make exports there cheaper. However, the market is currently not doing him any favors. China, after all the world's second-largest economy, is crippling its economic dynamism due to falling real estate prices. In Europe, on the other hand, the two heavyweights have been suspended domestically. In France, the question is to what extent the Prime Minister is able to implement his financial policy and budget planning. In Germany, on the other hand, economic policy has come to a complete standstill in view of the new elections. In such an environment, Trump is now hitting the nerve of many investors with his full-bodied announcements to cut taxes and exempt consumers and industry from regulations. The US economy is already running at full speed and even more growth momentum, promising further US dollar strength, as foreign investors are virtually attracted to this market and invest there (if only to anticipate possible tariff barriers).

Strategic Considerations for Investors

Geopolitical tensions, particularly as a result of the war in Ukraine, remain a significant risk. Escalations and unclear geopolitical attitudes could weigh on markets in the short term, particularly in commodity-dependent sectors. Trump's unpredictable leadership style and his potential conflict with the Fed could put an additional burden on market stability.

In this environment, diversification is crucial. A broadly diversified portfolio across sectors and regions helps to minimize risks and seize opportunities. Flexibility and continuous monitoring of capital markets remain essential to respond to changes and maximize potential returns. With our disciplined strategy and structured approach, we can successfully take advantage of the current market situation without exposing ourselves to unnecessary risks.

In the portfolio of Hansen & Heinrich Universal Fund(current equity ratio 92%) We kept our investment level stable and were thus able to achieve very pleasing results on a monthly basis, particularly with our highly weighted positions in US equities based on fund assets. In the price rally, we used the increased price levels to realize profits and reduce position sizes, as our medium-term price expectations were achieved faster than expected. These include shares from Deere, Intuit, Procter & Gamble, Salesforce or Walmart. On the other hand, we bought shares from AstraZeneca, Johnson & Johnson or Siemens, for example. Deere & Company, a leading supplier of agricultural machinery and construction equipment with roots dating back to 1837, recently published impressive business results. Despite a challenging economic environment, the company was able to strengthen its market position and achieve solid profits. Strong demand for modern agricultural machinery and increasing automation in the agricultural sector had a particularly positive effect on business development. Deere has made significant investments in research and development in recent quarters to drive innovative technologies such as autonomous tractors and connected systems. These innovations address farmers' increasing need to increase efficiency while reducing operating costs. In the construction sector, Deere is also benefiting from continued high demand for infrastructure projects. The focus on sustainable and energy-efficient machines strengthens competitiveness in an increasingly environmentally conscious market. Future prospects remain promising as Deere seeks strategic partnerships and expansion into emerging markets to further expand its global presence. Deere remains in the portfolio as a reliable dividend payer (35 years in a row), although we have recently reduced our position somewhat following the sharp increase, as agriculture remains a highly cyclical business despite all megatrends.

In H&H Endowment Fund (current equity ratio 38%) We were able to successfully implement our proven strategy even in the current market environment. Changes in the portfolio were limited to selective adjustments in order to continue to ensure an optimal balance between stability and return. In the bond sector, we have targeted new issues from renowned issuers such as Kerry Group, L'Oréal, Medtronic and Meta Platforms. These replace maturing bonds from the low interest rate phase and strengthen the fund's stabilizing interest rate component. With this measure, we are securing a solid base of regular income over the long term and making efficient use of the current interest rate environment, particularly against the backdrop of falling returns. In connection with the expiration date on the futures exchange, we were offered shares from first-class companies such as AbbVie, Air Liquide, Danaher and Thermo Fisher. These positions result from strategic stillholding transactions, where we were able to collect attractive premiums in advance. Following the expiry of the options, we as shareholders are now benefiting from both share price increases and dividend payments — a double added value for our investors.

Overall, regular interest income, standstill premiums and dividends form the basis for our annual payout and smooth fund price development.

Procter & Gamble (P&G) is a particularly reliable part of our equity portfolio. The company is a global market leader in the consumer staple goods sector and has impressed with stability and growth for decades. With brands such as Pampers, Ariel, Gillette and Oral-B, P&G is represented in over 180 countries and achieved net sales of 84 billion US dollars in fiscal year 2024. P&G's continuous dividend policy is particularly impressive: The company has been paying dividends since 1890, and these have been increased annually for 68 years. Over the last five years, the dividend has risen by 6.5% on average. This defensive strength of the company makes it an ideal investment in our fund, even in challenging market phases. While demand is weakening in some markets, such as China, P&G remains robust thanks to its global presence, operational efficiency and brand diversity and thus meets our strict selection criteria.

Am 06.12.2024 Will we Another payout of EUR 3.00 per share Do what one Distribution yield of just under 3% corresponds. This dependability In the payout amount — regardless of geopolitical crises, volatile markets or low real interest rates — is a Trademarks of the H&H Endowment Fund. In doing so, we always ensure compliance strict sustainability criteria, which form the basis of our investment philosophy.

In WowiAssets (current equity ratio 15%) We used cash inflows to significantly strengthen the segments away from European corporate bonds. In the Eurozone, we currently see very low premiums for corporate bonds, investments such as Pfandbriefe or government bonds that can deliver a comparable return with a better credit rating. When it comes to issuing new corporate bonds, we are currently taking a much more selective approach, i.e. just a few months ago, because, on the one hand, yields have fallen significantly and, traditionally, issuance activity is declining sharply at the end of the year. In addition, we have further strengthened the convertible bonds, equities and equity bonds segment. Especially at the beginning of November, we were able to take advantage of short-term increases in volatility in individual stocks to secure attractive coupons in the equity bond segment. For the new issues, we signed a bond from VW Financial Services AG, which matures in 2027. The company is currently rated A3 by Moody's.

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