A 6 milloin dollar (USD) banana and an ultra-loose economic policy  

What to look out for in 2025

During the past two weeks, we have had the opportunity to meet the management of over 40 European listed companies from various sectors, as well as a handful of equity analysts, economists, and strategists. We had the pleasure of attending the Danske Bank Winter Seminar in Copenhagen, followed by the Berenberg European Conference in London. We would like to share some, at least in our view, interesting observations from these meetings and discussions.

First of all, it is quite obvious that we are in a period of exceptional circumstances from an investor’s perspective. Trump has just won a sweeping victory in the US and is about to deregulate and expand the US economy, Bitcoin has surpassed USD 100,000, the German and French governments are about to be dissolved, and a banana taped to the wall was sold for USD 6.2 million, after which the buyer (a crypto enthusiast) ate it. The Mag 7 companies are today worth more than all listed companies in Europe combined (yes, all of them!), and if they grow by 20% over the next three years, and current valuation multiples prevail, these seven companies will be worth more than the entire US economy (GDP). Nvidia alone is significantly more valuable than any single country’s listed equity market in Europe, including the UK. As one strategist phrased it, “We are entering a brave new world”.

European companies

European companies are clearly worried about any potential tariffs imposed by Trump. There is concern about the lack of growth in Europe and the current political turmoil in both France and Germany. At the same time, hopes are high that a new government in Germany could solve some of the current issues, one of which is the debt brake that is hindering a much-needed expansive German economic policy in these times of very sluggish growth and a weak economic outlook. Another hugely positive trigger for European companies would be an acceptable and sustainable resolution to the war in Ukraine. Valuation levels are currently very low in Europe as many investors want to stay clear of the geopolitical uncertainty and non-existent growth. Were these obstacles to be removed, there would most likely be large inflows into European equities, and the relative winners are likely to be the small caps. Also, the ECB is determined to cut rates during 2025 as inflation is now “tamed.” A dovish ECB could also be supportive of European equities but not so much for the Euro.

The US

US debt levels are rising rapidly, and the stage is set for an ultra-loose economic policy for the next few years with the upcoming administration. US debt has risen from 10 trillion after the financial crisis in 2008 to a whopping 36 trillion today and is expected to grow another 10 trillion in the coming decade. This policy has generated massive investments and growth, which has ultimately resulted in a growing economy and booming stock market. Venture capital investments were approximately 80% larger in the US compared to Europe during 2023. The valuation premium for US equities is currently at very high levels versus European equities. The fact that Trump’s policy includes cutting taxes, stricter border control, and imposing tariffs seems to have a quite positive effect on equities in the short term. The risk is, however, that these policies will have a negative impact on economic growth in the long run and can in some cases be inflationary. The worst-case scenario is that we have a situation of a slowing economy and rising inflation after a few years of Trump. We will just have to wait and see

All in all, a very interesting set of meetings and a great way to get some perspective on what to look out for during 2025. In the meantime, we will stick to our investment philosophy of investing in quality companies with sustainable growth prospects.

Marcus & Kenneth
Fondita Portfolio Managers