Stocks are currently grappling with a mix of positives and negatives.
On the positive side:
1. The global manufacturing cycle is improving.
2. A ceasefire in Ukraine might be moving closer.
3. US bond yields have come down, easing financial conditions.
On the other hand:
1. Trump continues to threaten tariffs against the European Union and other trading partners.
2. Job cuts by the Doge department may lead to a slowdown in the US economy.
3. The Japanese 10-year bond yield is trending higher, which could trigger a repatriation of capital from abroad by Japanese investors.
Overall, the current environment is characterised by an exceptionally high level of uncertainty – the highest in at least 30 years according to some measures. www.policyuncertainty.com
In this environment, my focus is on what stocks are cheap and what does an investor get paid to own these stocks.
European banks remain attractively valued. Within the portfolio, ING and Nordea trade at 9 times their estimated 2025 earnings. That means investors are paid 11% a year to own these stocks.
Brazilian bank Itaรบ, another portfolio holding, is valued at 7 times its earnings. This is well below its historical average of 9.5 times. Should Brazil’s macroeconomic environment stabilise, Itaรบ’s valuation could revert towards the historical average.
Investment group Eurazeo, a recent addition to the portfolio, trades at a significant discount to the value of the portfolio of companies it owns. This discount exceeds typical levels. A more robust European economy could narrow the valuation gap.
The Industrials and Chemicals companies Aalberts, Arkema and Akzo Nobel are in the portfolio because each case, roughly a 7% free cash flow yield is being produced for shareholders. That is in a cyclically weak year. If the global manufacturing cycle improves, these stocks will produce more cash flow.
The most problematic part of the portfolio over the past 6-9 months has been real estate. These positions are showing a loss. Contrary to my expectation, 10-year interest rates have not decreased in the last 9 months. Instead they have remained stable or, in the case of the UK, increased.
Iโm not ready to give up on all real estate quite yet. 6-7% dividend yields are available from some of the real estate positions in the portfolio. The real estate stocks in the portfolio also trade at 20-40% discounts to the value of the underlying properties.
On balance, 2025 has started positively. Going forward, much depends on Trumpโs approach to Ukraine, tariffs and deficit reduction. If the war continues, if EU tariffs are implemented, or if the US deficit is reduced too quickly, stocks will probably suffer. But if the war ends, if a negotiated solution is found to avoid the tariffs, or if the US private sector can pick up the slack created by government redundancies, stocks will probably do well.
Several outcomes are possible in the current high-uncertainty environment but I believe that in the long run, focusing on attractively valued companies will lead to returns above those of the MSCI World index.
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@triangulacapital +5.9%
SWDA.L +2.8%
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ASR Nederland was replaced by Eurazeo. Merlin Properties was sold and new positions were opened in Grainger and Evolution.
