Word from the Strategist – Mar. 25

Doubt is worse than certainty

The calm before the storm did not last long. Not even the better-than-expected earnings season results were enough to boost North American stock markets, which felt the impact of corrections in technology stocks. Nvidia's results, despite being above expectations, did not bring the previous excitement, and the S&P 500 ended the month down 1.5%.

From a macroeconomic perspective, data continues to show robustness. The job market shows no signs of deterioration, as evidenced by the payroll report that came in above expectations for the month. GDP also remains strong, and we expect growth of 2.4% for the year. Consequently, inflation remains persistent, and in January we had a negative surprise, with CPI coming in at 0.5%, totaling 3% over 12 months. This combination of factors is making life more complicated for the Federal Reserve, and we are already seeing the market pricing in between one and two rate cuts for this year, albeit only in the second half.

At the same time, the new government's policies regarding immigration and tariffs continue to bring even more uncertainties to the scenario, and the VIX index, which measures market volatility, reached its highest level of the year, above the 20-point mark.

The cost of doubt

More uncertainties, more volatility

February kept the pattern of uncertainty from the beginning of the year, with investors postponing some decision-making while assessing the real impacts of the new Trump administration's policies, whether through the imposition of tariffs, tax cuts, or the process of economic deregulation.

Once again, discussions about tariffs were back to the radar, with the start of 25% charges on Canada and Mexico, but now also including the European Union. We saw Trump moving closer to Russia and advancing talks to end the War in Ukraine. Regarding relations with China, positions seem more controversial. While restrictions on technology sharing continue, as do tariff burdens, Trump has waved positively for more Chinese investments in American territory. This position helped improve optimism about China, which had already been drawing attention since the DeepSeek factor at the beginning of last month.

In the macroeconomic field, the consensus points to still high interest rates in the first half of the year, as inflation above target, a heated job market, and strong economic growth could limit the Fed's actions regarding monetary policy easing. However, it's worth noting that the recent drop in confidence shows some discomfort with the uncertainties surrounding the new government, which, if consolidated, could affect future consumption and investment decisions.

Asset Allocation Mar.2025

Volatility demands a defensive portfolio, but opportunities might arise in alternatives

In times of high volatility and emerging uncertainties, it's crucial to adopt a more defensive approach to our portfolio while remaining open to potential opportunities.

Diversification remains mandatory. We maintain optimism in the fixed income class, as high interest rates imply higher yields. However, credit risk is also present, and we should remember that higher yields benefit investors but burden borrowers. Increased attention to issuers is important, alongside a balanced mix of maturities. Despite resilient macroeconomic indicators suggesting higher interest rates for the year, the decelerating effect of tariffs on the economy cannot be disregarded. For this reason, we maintain our preference for maturities in the middle of the curve, with bonds around 5 to 10 years.

Regarding equities, betting on American stock markets has become increasingly challenging. Expected earnings have been revised downward as companies warn of accommodative demand and persistently high costs due to inflation. Furthermore, recently imposed tariffs could bring additional pressure on margins, especially for growth companies. Nevertheless, we still see opportunities in sectors likely to benefit from the new administration's policies, such as industrials, financials, and healthcare. Here, we prefer well-established names due to their market presence and stable results.

Looking for opportunities elsewhere, gold could continue to perform well due to its defensive characteristics. Apart from that, the real estate sector is still under pressure from higher interest rates and higher home prices. That said, multifamily segment could be benefited.

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