IC No. 40 - U-turn

The term «turn of time» was declared the expression of the year 2022. We are now coining the term «U-turn» as a possible expression of the year 2025.

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Political U-turn

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Although the Investment Commentary No. 40 – U-turn coincides closely with the general election in Germany, the results are neither surprising nor really relevant for us as investors. For example, the companies represented in the DAX, Germany's leading index, generate 80% of their sales outside Germany.^[1] Above all, we hope that the economic and social situation in Germany and therefore also in Europe will stabilise and that we will be able to report more positive developments and good news again. Given the difficult political majority situation, we are talking about a U-turn with the handbrake on.

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In this respect, Donald J. Trump's second presidency can be described as a radical reversal of the previous policy under Joe Biden. A U-turn with spinning tyres and a lot of smoke. Political issues aside, we see the measures as positive for the economy. For instance, a budget plan has just been passed in the USA that provides for USD 4,500 billion in tax cuts.^[2]

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Regional U-turn on the stock markets

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A turnaround can also be observed in market performance since the beginning of the year. After many years of drought, Europe is finally outperforming the US stock market. A peace agreement between Ukraine and Russia, as cited by us as a real possibility in IC No. 39 - Outlook of the Outlooks, would further favour the positive sentiment on the European equity markets. The Swiss equity market also had its best start to the year in 25 years (+12.3%) after a difficult few years. The Asian tiger, in the form of the Hang Seng Index, also made a brilliant start to the year (+18.9%). In contrast, the American stock market in the form of the S&P 500 has lagged behind so far (+1.4%).

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Regional U-turn

Market performance 2024 & 2025 YTD

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One of the reasons for the relative outperformance of European equities is the valuation difference that has long prevailed in the market between the relatively expensive US market (P/E ratio 27x) and the significantly more favourably valued European markets (P/E ratio 16x). The large US technology stocks are also coming under greater pressure and are increasingly weighing on the overall index.

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Sector U-turn

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There has also been a significant sector rotation since the beginning of the year. While the IT sector was one of the best performing sectors last year with +33.1%, we have seen a clear reversal since the beginning of the year. Year to date, the materials sector has been at the top of the ranking with +6.8% and the IT sector is at the bottom.

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Sector U-turn

Ranking by return, 2024 & 2025 YTD

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Explanatory factors for the positive performance of various companies in the materials sector include rising prices for gas, raw materials and precious metals as well as further potential supply shortages due to trade wars. In addition, a certain correction in the IT sector was overdue.

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We view the developments described above at regional and sector level as a healthy recalibration of extreme imbalances. As investors, we welcome such a development, which strengthens market stability in the long term.

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‍AI U-turn?

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One reason for the relative outperformance of the Hang Seng Index was the appreciation of the Chinese technology sector due to DeepSeek's results announced on 27th January 2025. Whether DeepSeek will actually change the rules of the game has not yet been finalised. But the possibility alone fuelled the Chinese stock market. The disappointing performance of Tencent and Alibaba turned into a veritable rally. Last but not least, Jack Ma's return to the public eye also led to a positive response on the capital markets. In the USA, on the other hand, the announcement of DeepSeek triggered a stock market earthquake in the technology sector. The market value of Nvidia alone fell by over 600 billion US dollars. Will DeepSeek now change the dynamics in the industry?

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The significant difference between DeepSeek and OpenAI lies in the architecture of the model. While OpenAI has trained a large «generalist brain», the latest DeepSeek model «R1» is based on a collection of many «specialist brains». This means that a query is forwarded to the appropriate «brain» depending on the subject area, which means that the entire model does not have to work simultaneously.^[3] The design, known as the Mixture-of-Experts (MoE) approach, impresses with high efficiency gains and reduced hardware requirements. According to DeepSeek,^[4] the total cost for the two-month training of the model with 2048 H800 Nvidia chips was around 5.7 million US dollars. At an estimated cost of USD 2 per GPU hour^[5], this would be around 5% of what OpenAI required. However, the real innovation is that DeepSeek has managed to implement and train a highly complex model that utilises the MoE architecture.

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The impact could be far-reaching and affect the investments and efficiencies of US technology corporations such as Microsoft and Meta. Decreasing capital expenditure may enable a higher return on invested capital and at the same time jeopardise the high demand for computing power and chips. On the other hand, DeepSeek's optimised architecture also enables a simplified and broader application of AI. There are indications that, in reality, more efficient AI models will lead to greater integration into everyday life and thus further increase the demand for computing power in the long term.^[6] As DeepSeek originates from China, a geopolitical component also comes into play. It now enables Chinese companies to establish their own AI ecosystems in China and integrate them into their products. This opens up new potential for the Chinese technology sector. Despite the recent recovery, the Hang Seng Tech Index remains favourable with a valuation of less than 17 times expected earnings. The valuation of the US technology index Nasdaq 100 is 36 times the expected earnings.

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Defence budgets U-turn

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After decades of peace dividends in Europe, the issue of armaments and the military has moved further centre stage since the outbreak of war between Ukraine and Russia. At the beginning of the year, Trump called on NATO members to increase their defence spending to 5% of GDP. The will to implement this is reflected in numerous new government contracts for defence companies across Europe and their share price performance. For example, the share price of the most important defence company in Germany, Rheinmetall, has risen by 97% over the last six months. Here, too, we see a positive recalibration. Europe's defence spending is far too low compared to the enormous military spending of the USA, Russia and China.

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Nestlé’s U-turn

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We also see the trend reversal at Nestlé following the publication of the 2024 annual figures as positive. Since Laurent Freixe took over as CEO in September 2024, he has been pursuing a clear strategy: a stronger focus on established brands such as Nescafé or Maggi and greater investment in advertising to win back market share. In addition, savings of 2.5 billion Swiss francs are to be realised by the end of 2027. Nestlé made its first exclamation mark with the publication of its business figures for 2024 on 13th February. Sales totalled 91.4 billion Swiss francs, profit was 10.9 billion and organic growth was 2.2%.^[7] The Group's outlook for 2025 with improved organic sales growth is positive. The share price has risen +10.5% since the publication of the results up to the editorial deadline.

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U-turn on the markets?

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Berkshire Hathaway

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The investment conglomerate Berkshire Hathaway, owned by well-known investor Warren Buffett, presented its business figures^[8] at the weekend and reported a jump in profits of +27% for 2024 compared to 2023. The company's cash and cash equivalents reached a record USD 334.2 billion, more than double the USD 163.3 billion at the end of 2023. Warren Buffet's letter to shareholders reflects a cautious stance in the face of high market valuations and his willingness to wait for better investment opportunities. He emphasised that Berkshire will always prioritise owning companies over cash. «Paper money can lose its value if fiscal stupidity prevails», he wrote. Accordingly, we are increasingly discussing with our clients the question «what does Warren Buffett know?» and, related to this, the question of whether higher cash ratios might be tactically advisable.

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Conclusion of the U-turns

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The key question is whether the aforementioned reversals will solidify into longer-term trends or whether we have only seen a temporary breakout from the long-term developments of the past. We believe that a certain balance and an equalisation of extreme developments from the past are healthy for the markets. Extreme positioning will be reduced and new balances created.

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Dr. Patrick Cettier

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^[1] Goldman Sachs Research

^[2] NBC News

^[3] NZZ,01.02.2025: How does DeepSeek manage to overthrow OpenAI?

^[4] DeepSeek.com

^[5] GPU = Graphics processing unit

^[6] See Jevons-Paradoxon

^[7] Nestlé Annual Report 2024

^[8] Berkshire Hathaway Annual Report 2024

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