In March 2025, politicians in Germany agreed on a comprehensive financial package that provides for significant investment in infrastructure as well as a reform of the debt brake to increase defense spending. A central element of this package is the establishment of a special fund of 500 billion euros to enable additional investment over a period of twelve years. The funds are to flow primarily into the modernization and expansion of transport routes, the promotion of sustainable energy projects, digitalization and education and healthcare facilities. At the same time, a reform of the debt brake was agreed, which makes it possible to exempt defense spending that exceeds 1% of gross domestic product (GDP) from the debt rule. This allows additional funds to be made available for the Bundeswehr without burdening other budget areas. These measures mark a significant change of course in German financial and defense policy and should help to strengthen Germany's economic resilience and ability to act in terms of security policy in the coming years. The trade conflict between the USA, Europe, Mexico and China escalated further with a series of tariff increases and countermeasures. US President Donald Trump announced that he would impose tariffs of 25% on all imported cars from April 2 in order to strengthen the US automotive industry and reduce trade deficits. In response, the European Union plans to impose retaliatory tariffs on US products such as whiskey, motorcycles and boats from April. These countermeasures are aimed at protecting European interests and maintaining a balance in transatlantic trade. Other countries such as Mexico and Canada have also announced countermeasures. The uncertainty in the tariff conflict is immense, which is reflected in record-high levels of consumer confidence. However, this disgruntlement has not yet been reflected in the real economy.
The United States' erratic trade policy caused market participants to fear growth and contributed significantly to the continued underperformance of US equities in March. In the future, trade tariffs could lead to an increase in prices in various sectors in the US, which is likely to have a significant negative impact on consumption. On the other hand, they are already causing considerable planning uncertainty and could lead to fewer investments by companies. Although US equities have become somewhat less expensive as a result of the fall in share prices, they are not cheap. Against the economic backdrop, we believe they still have the potential for a setback. There is no doubt that the US tariffs will also affect the European economy and have a corresponding impact on share prices. Nevertheless, we view the European politicians' spring awakening as positive in the medium term. In the light of reasonable valuations, the planned infrastructure program should have a supportive effect on both the European and Swiss equity markets.
The European bond markets have also reacted to the announcement of the infrastructure program. The yield level for 10-year German government bonds has risen and as the ECB - like the SNB - lowered its key interest rate in March, the yield curve has steepened. As German government bonds serve as a benchmark for other EU countries, refinancing costs for countries such as France and Italy have also risen. For EU countries with higher debt levels, this could make plans for higher defense spending more difficult, as without savings in other areas, this would lead to even higher debt and thus higher risk premiums. The euro has appreciated against the Swiss franc as a result of higher interest rates, while the US dollar has weakened. Gold and silver performed very positively (not only) last month. However, in view of the prevailing political situation, we consider this to be appropriate and assume that there is still further potential for price increases in both precious metals, but also in other commodities.
In March, the many risks became more pronounced and also took center stage on the financial markets. The ongoing trade war risks stagflation in the US economy. According to a Bank of America survey, fund managers have reduced their exposure to US equities at a record pace. Given the current situation and the persistently high valuations, we have also reduced our exposure to US equities since the beginning of the year in favor of equities from developed countries excluding the USA. This is in line with our philosophy of sound diversification, as the share of US equities in the global market is extremely high at over 70%, as is the concentration within the US equity market. There were also good opportunities in the second half of March for new issues of Swiss bonds. We took advantage of these and increased the proportion of Swiss bonds at the expense of foreign government bonds. We continue to hold on to our hedges and assume that our precious metal allocation will deliver attractive returns in the foreseeable future.