Q1 2026 Market Outlook – Quarterly Investment Review

The guerrilla wins if he does not lose. The conventional army loses if it does not win. – Henry Kissinger

Stock markets’ strong performance in 2025 continued into the first two months of this year, despite an increasingly disturbing geopolitical backdrop. This Q1 2026 market outlook examines how quickly sentiment shifted as geopolitical tensions escalated and began to materially impact global markets.

On January 3rd, US special forces captured President Maduro of Venezuela and brought him to face trial in New York on charges of narco-terrorism. As the quarter progressed, President Trump sought to annex Greenland, an autonomous territory of Denmark, and rhetorically suggested that the US could annex Canada, while also announcing his intention to ‘take Cuba’. While these developments contributed to a growing sense of instability, they were ultimately overshadowed by the US/Israeli attack on Iran on the last day of February.

Iran’s response was decisive. By effectively closing the Straits of Hormuz—through which around 20% of the world’s energy supply transits—the country triggered the largest global energy disruption since the Second World War. Oil prices surged by 68% in March alone, reshaping expectations for growth and inflation alike.

This sudden escalation exposed fractures within the NATO alliance and raised broader questions about the role of the United States as a stabilising global force. Markets, which had largely ignored geopolitical noise at the start of the year, rapidly repriced. By the end of the quarter, the MSCI World Index had declined by 3.4%, while US 10-year Treasury bonds were marginally lower.

A fragile and highly binary environment

The current situation remains fluid, uncertain and increasingly binary. Despite overwhelming conventional military superiority, the US has struggled to secure safe passage through the Straits of Hormuz. The threat posed by low-cost, asymmetric tactics—drones, naval mines and fast-moving explosive vessels—has proven highly effective.

Oil tankers, by nature slow and vulnerable, are particularly exposed. Even naval forces have had to retreat at times to avoid concentrated drone attacks. While limited shipments continue under Iranian oversight, the broader disruption remains unresolved.

The economic implications are significant. The longer the situation persists, the greater the strain on global supply chains. Inflationary pressures are already emerging as delays, shortages and logistical bottlenecks feed through to prices. Compounding this, damage to regional energy infrastructure may take years to repair, suggesting that the effects of this shock could extend well beyond the immediate crisis.

Beyond oil: a systemic supply shock

While oil dominates headlines, the real impact is more complex and far-reaching. Refined products such as diesel, jet fuel and naphtha are essential inputs across multiple industries. The disruption therefore affects not just energy markets, but the broader functioning of the global economy.

The region hosts 68 oil refineries, strategically located to benefit from low-cost energy. These facilities produce a wide range of materials that underpin industrial activity—from transportation fuels to petrochemicals used in plastics.

Energy remains deeply embedded in modern economic systems. Oil and gas are not only central to transport, but also to electricity generation, fertiliser production and manufacturing processes.

For instance, Taiwan relies on liquefied natural gas (LNG) for roughly 40% of its electricity generation, with a significant portion sourced from Qatar. LNG is difficult to store at scale. Any disruption risks forcing rationing, particularly for industrial users. This would have immediate consequences for semiconductor production—an essential component of the global technology ecosystem and AI supply chain.

The Middle East also supplies a substantial share of the world’s helium, critical for both semiconductor manufacturing and aerospace applications. In addition, it is a key source of sulphuric acid, required for processing metals such as copper, nickel and uranium—materials central to electrification and the energy transition.

Another critical vulnerability lies in agriculture. Approximately one-third of global fertiliser shipments pass through the Straits of Hormuz. The timing of the disruption—coinciding with the spring planting season in the Northern Hemisphere—raises the likelihood of food price inflation in the months ahead.

Macroeconomic transmission channels

The economic impact of higher energy prices is well understood, but no less significant. First, rising costs reduce consumers’ disposable income, leaving less available for discretionary spending. Second, heightened uncertainty leads households and businesses to delay major purchases.

Third, concerns about employment prospects tend to increase precautionary savings, further dampening demand. Finally, if inflation accelerates, central banks may be forced to tighten monetary policy, increasing borrowing costs and slowing economic activity.

What makes the current situation particularly challenging is the lack of short-term alternatives. Energy systems are not easily adaptable. Vehicles, industrial processes and heating systems cannot quickly shift away from fossil fuels, reinforcing the persistence of the shock.

Historically, oil price spikes of this magnitude have often preceded economic slowdowns or recessions. While today’s global economy is less energy-intensive than in the 1970s, the scale and breadth of the current disruption remain concerning.

Financial markets: vulnerabilities beneath the surface

This shock comes at a time when several areas of the financial system already appear stretched. Technology companies—particularly hyperscalers—are investing heavily in infrastructure, with capital expenditure expected to reach $600 billion this year, largely driven by AI development.

At the same time, parts of the private credit market are showing signs of strain. These segments, often less transparent, may be particularly sensitive to tightening financial conditions. In parallel, an estimated $3.8 trillion of private equity assets remain unsold, awaiting favourable exit conditions.

Higher energy prices and increased volatility could place additional pressure on this ecosystem, raising the risk of forced adjustments or delayed liquidity events.

Another important consideration is the role of energy-exporting nations in global capital flows. Historically, Gulf states have recycled oil revenues into international financial markets, notably US government bonds and equities. Any disruption to these flows—whether due to reduced production or increased domestic spending needs—could remove a key source of liquidity.

This comes at a time when public finances in many developed economies are already under strain. US government debt has reached $36 trillion and continues to rise rapidly. In the UK, welfare expenditure now exceeds income tax revenues. These constraints limit policymakers’ ability to respond aggressively to future shocks.

A path to de-escalation?

Despite the severity of the situation, there are reasons to believe that a resolution remains possible. Both the United States and Iran face strong incentives to avoid a prolonged conflict.

In the US, the upcoming mid-term elections represent a significant political constraint. A deterioration in economic conditions could weaken the administration’s position, particularly given the narrow balance of power in Congress.

Iran, meanwhile, is grappling with acute economic stress. Hyperinflation and currency collapse have created conditions that historically increase the risk of domestic instability. These pressures may encourage a negotiated outcome.

Should a resolution be reached and the Straits of Hormuz reopen, energy markets could stabilise relatively quickly. Oil prices, currently elevated, could fall materially, alleviating pressure on both inflation and growth.

Recovery scenario and structural drivers

In such a scenario, the broader economic backdrop could reassert itself. Fiscal stimulus in major economies—including the United States, Germany and Japan—remains supportive. At the same time, China continues to benefit from strong export dynamics.

Longer-term structural trends also remain intact. The expansion of data centres to support artificial intelligence, alongside the need to modernise electricity grids, is driving sustained demand for commodities and infrastructure investment.

Recent events may even reinforce these trends. The disruption has highlighted the strategic importance of secure and diversified supply chains, particularly for critical materials. As a result, governments and companies may increase investment in resilience, including stockpiling and domestic production capacity.

Conclusion: navigating uncertainty

Markets have entered a phase where outcomes are increasingly dependent on geopolitical developments. The range of potential scenarios remains wide, from prolonged disruption and economic slowdown to a relatively rapid normalisation.

The longer the current impasse persists, the greater the risk of compounding effects across supply chains, inflation and financial markets. However, political and economic incentives on both sides suggest that de-escalation is a realistic possibility.

In parallel, policymakers—particularly central banks—may respond to deteriorating conditions with supportive measures, especially in politically sensitive periods.

For investors, this environment calls for caution and discipline. Diversification, resilience and a focus on underlying fundamentals remain essential. While uncertainty is likely to persist in the near term, periods of dislocation can also create opportunities for those positioned to navigate them effectively.

Written by James Macpherson

Click HERE to download the full Q1 2026 market oulook.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q4 2025

We’re seeing substantial asset inflation away from the dollar as people are looking for ways to effectively de-dollarise, or de-risk their portfolios vis-a-vis US sovereign risk.
Ken Griffin

‘‘The multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette because we are subject to complete changes in the rules’’ Bill Gates in 1998

‘‘I’m willing to go bankrupt rather than lose this race’’
Larry Page, co-founder of Google

2025 was a gangbuster year for financial markets. Most equity markets delivered double digit gains, and most bond markets also generated positive returns. Apart from oil and the grains market, commodity markets were strong, and precious metals enjoyed spectacular returns. For once the US market was not the best performer. After a decade and a half of dominating equity returns the US produced one of the weaker performances, and if the currency is taken into consideration that result was even further behind, as the US dollar fell approximately 10% during the year. Elsewhere strong results were widespread across European, Asia and the Emerging Markets. The MSCI World Index was up 19.5% in US dollars or 16.9% measured in Local Currencies, and the S&P500 was up 16.4%.

Given the political background in 2025 this result might seem surprising. President Trump initiated a trade war by imposing tariffs which bludgeoned the world trade system. In Europe, the UK and France endured rolling political difficulties centred on both countries inability to contain their debt problems. The Ukraine war continues, while the Gaza war has reached an uneasy truce. What accounted for the market’s rise was good earnings growth in the US, while in Europe it was due more to a rerating. Underpinning all markets was an exceptionally supportive liquidity environment. Fiscal policies in all the major economies were benign – the US, China, Japan and most EU countries ran deficits of about 5% of GDP; low interest rates prevailed across the world; the US dollar weakened, which was particularly helpful for those Emerging Markets whose currencies were pegged to the dollar; and oil prices declined by close to 20% in US dollars and even more in other currencies, which has the effect of a giant tax cut for the world’s consumers. 2025 thus represented a rare occasion when the global economy, even though it wasn’t in recession, was stimulated by every lever at Governments’ disposal. This stimulus looks set to continue into 2026 as Trump’s One Big Beautiful Bill kicks in during January, as well as a promise of more deregulation. Germany’s giant fiscal boost will also get underway, and OPEC have increased their production to keep energy prices subdued. Given the midterm elections in the US in November President Trump will do everything he can to juice the economy in the run up to that.

Such stimulus could trigger inflation, and the biggest danger to stock markets would be a selloff in the bond markets, particularly the long end, on fears that the incontinent profligacy of government spending is unsustainable. While bond markets were stable in 2025, they have been poor investments in the last decade due to mounting concerns about Western debt profiles. According to Gavekal, since July 2020 the real return on a constant 10-year duration US Treasury bond has been minus 33%, and minus 37% for a German bund. Many Western countries debt to GDP ratios have risen above 100% and have annual deficits of 5–7% The interest cost on Government debt, for example, now exceed £110bn in the UK and $1 trillion in the US. As these debts spiral ever higher bond investors are being presented with the equivalent of investing in a share that yields 4% while it is annually increasing its share count by 7%. It was a striking feature of 2025 to see the complete failure of governments’ attempts to rein in these deficits. Trump campaigned a year ago on a promise to slash government spending, but Elon Musk’s DOGE effort collapsed in three months. The UK and France failed to remove even minor items of welfare spending from their budgets. It appears to be impossible to control the excesses in the public sector in these countries. In this context the change of Federal Reserve Chairmanship when Jerome Powell retires in May may be one of the most significant in history. The new Chairman will be chosen by President Trump on the basis that they will be expected to set rates significantly below current levels. Coming at a time when inflation is above target, deficits are at record levels, and global confidence in US policy is fragile, investors will have to grapple with how markets react to this new regime at the Fed. Meanwhile Governments will continue to overspend. The likelihood is that this spending will only be controlled when there is a failed bond auction which will force them to economise.

The US equity market’s superior returns have overwhelmingly stemmed from the extraordinary performance of its technology sector and particularly the largest companies, commonly referred to as the Mag 7. Since November 2022 when ChatGPT was released the US stock market has added $30 trillion in market capitalisation as the profits promised by AI (Artificial Intelligence) have come to obsess investors. As a result, the largest stock, Nvidia, has a larger weighting in the MSCI World Index than the entire Japanese market. In order not to fall behind in the AI race the leading companies are spending gigantic sums. Forecasts estimate that they will spend $566 billion in 2026, following $441 billion in 2025. Projections for the next several years suggest it will continue at these levels. Unlike the internet boom which rewarded successful operators for minimal capital investment, the AI build out is capital intensive and the returns uncertain. The datacentres that are at the heart of AI are subject to rapid obsolescence, with their useful economic life estimated at less than eight years. The relentless innovation in the sector could mean that whatever is cutting edge today is overtaken in the next few years leading to costly updates and overhauls, making it even more challenging to earn a satisfactory return on today’s investment. When money is allocated so fast in what remains a speculative industry the risks become much higher. There is little doubt that AI will be a transformational technology, but as with the railways and the internet much of the early capital invested may come to grief. The concern is that because the Mag 7 have been so entwined with the rise in the market if they fail to execute a satisfactory return on their enormous investments this failure will undermine the market. Their health has become the health of the entire market. Equally concerning is if this investment does justify itself then where will this profit come from? The most likely source is that it will derive from companies shedding labour. This uncertainty on how AI will be deployed into the economy means that firms have already reduced hiring, particularly of graduates. PwC have reduced graduate hirings by 35-40% for example. As firms work out how to use it, this jobs freeze may morph into firings. Historically when technology has made people redundant, they have found new jobs, but the speed of change this time may be quicker making the transition harder. Eventually the impact will be on the older generation who have less transferrable skills and the effect of this could be cataclysmic. This is likely to become an increasing political problem.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q3 2025

“In times of rapid change experience can be your worst enemy.”
John Paul Getty

“Sooner or later every generation is shocked by the behaviour of interest rates.”
S. Homer and R. Sylla, A History of Interest Rates (1977)

“Government is basically unfixable.”
Elon Musk

Equity and bond markets advanced during the third quarter recovering from the turmoil following the introduction of tariffs in April. The MSCI World was up 7.3%, and the
US 10-year bond rose by 1.3%. In the currency market the dollar continued to weaken and is now down 9.9% for the year. Reflecting this move Gold has risen by 47% year to date.

Bonds have been a poor investment over the last decade. The ten-year rolling return from US Treasuries to January 2025 was minus 1.3%, the worst performance on record. This resulted from a combination of the exceptionally low interest rates that prevailed during the 2010s, and the return of inflation five years ago. Every month over the last four years inflation has been above the Federal Reserve’s 2% target. Alongside this poor performance Government debt has been ballooning. US National Debt exceeds $37 trillion, equivalent to about $279,000 per household (based on 132.6m households). For comparison the median net worth per household is about $192,700 (the mean is about $627,900). President Trump’s One Big Beautiful Bill which passed into law in early July exacerbates the problem. It is estimated that the Bill will increase the US fiscal deficit by a further US$3 trillion over the next decade. This from a President that campaigned in last year’s election to improve the fiscal position. Elon Musk’s attempts to rein in Government spending through the DOGE project have fizzled out, and the Administration has returned to running a budget well beyond its income. President Trump’s attacks on the Federal Reserve Chairman, Jerome Powell, and threats to take away the Central Bank’s independence have undermined faith in US bonds even more. In Europe the situation is even worse. Both the UK and France have appalling debt profiles which continue to deteriorate. These problems derive from the seemingly inescapable weight of entitlement spending and interest costs, aggravated by generous healthcare provision in the face of deteriorating demographics. The UK now spends twice as much on debt interest as education. France last managed to balance its budget in 1974. Nor are these chronic problems the result of low tax collection. Most European populations are over-taxed, and it will be difficult to squeeze more out of over-burdened taxpayers. The top 1% of UK income taxpayers already pay for 28.5% of the income tax paid. In terms of controlling spending both the UK and French Governments have failed in their attempts to reduce their expenditure, being forced to reverse even small reductions in social benefits. The continuing risk for government bonds in all these spendthrift countries is that when their governments cannot tax, they start to print money to pay the difference, thereby debasing their currency and eroding the value of their bonds. In effect it is default by another name.

Such precarious governmental finances would seem to be an unfavourable backdrop for equity markets, but they have shrugged off concerns. Since President Trump’s tariff announcement in April this year the S&P500 has added $35 trillion of value, equivalent to half the GDP of the US. Much of this increase is related to the technology sector. Since the release of ChatGPT in November 2022 markets have become obsessed by the view that AI (Artificial Intelligence) will lead to a surge of productivity and profitability. The largest companies are investing gargantuan sums to try and secure this, and it has led to an extraordinary increase in the market capitalisations of the beneficiaries. Nvidia’s market cap, for example, has risen from $308 billion to $4.4 trillion in three years. Besides being the centre of AI, America also benefits from much more competitive energy prices, courtesy of the fracking revolution, which has helped both businesses and consumers. Unlike the US Government the S&P companies have much healthier balance sheets and with the economy expanding steadily these companies are extremely profitable. They are generating excess cashflow and a lot of that is returned to shareholders through share buybacks. Together with flows from retail investors $7-8 billion dollars of liquidity flows into the US market every day. In most bull markets cashflow is absorbed by IPOs, as entrepreneurs take advantage of a strong stock market to list their companies. But this has not happened this time. Half the market consists of index tracking funds which cannot buy new issues because they are not yet part of an index. The rest of the market is very short term focused (the so-called pod shops), or too price sensitive to pay the high multiples that the current market is enjoying. So, the IPO market is moribund, and the flows that would have been diverted to new issues have remained bottled up in the existing index. As a result, the S&P resembles a cash machine which recycles much of the cash it produces back into the market. This is a perfect recipe for a bubble, but it will take higher interest rates or weak earnings to break this dynamic.

Globally markets are in a classic inflationary boom. Fiscal and monetary conditions in all major economies are loose. The US has abandoned DOGE and embarked on an aggressive stimulus package, further fuelled by the Federal Reserve starting to cut interest rates. In Europe nearly all countries are expanding their fiscal deficits, with a particularly significant boost in Germany, accompanied by the ECB also cutting rates. Japan is discussing its own fiscal easing whilst keeping its interest rates well below inflation. China has a budget deficit of 10% this year, while its interest rates are at record lows. These loose financial conditions are reinforced by low energy prices. A further boost is the falling dollar, which is highly stimulative for Emerging Markets. Markets reflect this. The financial, industrial and commodities sectors are outperforming, and Emerging Markets are outperforming Developed Markets. The fall in the dollar is encouraging investors into other parts of the world. The euro, for example, has gained 13.3% against the dollar this year. President Trump’s rhetoric, particularly on withdrawing the US defence umbrellas from Europe, and tariff actions may necessitate a deeper unity between European countries, creating a less nationalist and more pan-European approach. This could result in significant cross-border consolidation in sectors such as defence, financials and telecoms to create European champions which invest locally and compete globally. National interests make this hard to achieve but there have been tentative moves in this direction, and a precedent from the 1970’s that proves this can be accomplished is Airbus, which was formed as a strategic response to Boeing. For Emerging Markets, the weaker dollar is crucial due to it leading to lower import costs and rate cuts which improve growth. Investors have been and are underweight, so this year’s strong performance is partly adjusting that, as investors reweight to this neglected area. Furthermore, Emerging Markets have followed far more orthodox policies than elsewhere so the foundations for strong economic growth and stock market performance are in place.

Entering the final quarter of 2025 there is a sense that markets are complacent. The strong performance of gold reflects this, particularly as a haven against a blow up in European sovereign bonds. After such a strong market there are pockets of overvaluation, and any disappointment on growth or AI would leave markets vulnerable, particularly in the US. However, while bonds enjoy more yield than previously, the returns remain unattractive, and cash is being slow roasted by Central Banks fixing interest rates at negative real yields. This background is forcing investors into stock markets where there remains a strong earnings story. While these conditions endure markets are likely to continue to rise.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q2 2025

We’re running roughly a 7% fiscal gap and probably a 3% gap is what’s sustainable. The further you drift from that, the closer you get to the point where it becomes uncontrollable. It’s a job I don’t want, but it’s a job that needs to be done.

Warren Buffett on DOGE & the US deficit in his final Berkshire meeting

The US no longer represents a rock such as anchored the West for so many decades, but more like sand, shifting underfoot.

Max Hastings

Quarterly Investment Review – Q2 2025

The second quarter of 2025 started in dramatic fashion with the announcement by President Trump of his tariff proposals, described by him as Liberation Day. This precipitated the largest three-day decline in the S&P since the 1987 crash, leading to the temporary easing and suspension of the tariffs till July 8th while further negotiations take place. The quarter ended equally dramatically with the US engaging in the first official military action against Iran since 1979, when the Shah was deposed. The scale of the tariffs was shocking with countries facing double, treble or more of what they had expected, and the announcement was delivered with unusually undiplomatic aggression. At the end of May Elon Musk, who had led the cost cutting DOGE initiative, departed having fallen far short of the original targets set in the post-election euphoria. However, despite all these upheavals, by the end of the quarter most stock markets had advanced, and bond yields were barely changed. The only significant impact was on the dollar which fell by 10.7%, recording the worst first six months start to the year since 1973. Gold rose by 6%, and bitcoin by 30%. So, despite the chaotic political and military news flow financial markets enjoyed a good quarter.

The final level of US tariffs is still unknown, but on current indications the likelihood is that they will settle around 14-15%, a far higher amount than has prevailed for decades, but lower than threatened in early April. At one point Trump imposed a 145% rate on China. For comparison the effective tariff rate was 2.4% last year. It hasn’t been clear whether the primary purpose of these tariffs is to raise revenue or encourage industries to reshore, but their inflationary potential and the uncertainty that they cause for many industries has caused considerable alarm for businesses. Politically though they have worked for Trump. They exhibit a clear preference for labour over capital, making them popular in the swing states which secured his election victory last November, and given the electoral importance of these states these policies are likely to be durable. Yet with China Trump appears to have overplayed his hand. China depends on little from the US beyond semi-conductors, and even here the technological gap is closing, whereas the US imports hundreds of products from China, many of them of critical importance, hence the enormous trade deficit. Even the US defence industry depends on Chinese-processed rare earths to keep going. With so many American businesses dependent on Chinese supply chains the US was forced to back down from its initial position. By contrast, China is well prepared for this trade war having been adjusting to American aggression on trade policy since 2017. Given how intertwined the two economies have become after thirty years of integration, a face-saving resolution is in both sides interest.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q1 2025

The EU was formed in order to screw the United States

President Donald Trump 26 February 2025

Quarterly Investment Review – Q1 2025

The first quarter saw the inauguration of President Trump and almost immediately this led to a series of dramatic changes in the political climate. Final detail on many policies hasn’t always been clear but among the more significant policies that have been indicated has been the proposal to raise tariffs on various goods, a decline in the importance of the climate change narrative, the abandonment of Ukraine and corresponding greater accommodation of Russia, a fracturing of the NATO alliance, and the suggestion that Canada, Greenland and Panama come under US control. These pivots in American policy signal the end of the post 1945 Settlement and led directly to Germany’s government voting through a €1 trillion bill to increase spending on defence and infrastructure, casting aside their fiscal and military restraints, a major reversal. An equal impact on markets was the announcement in January by a Chinese firm called Deepseek that its semiconductor chips could perform as well as some of those of the American giants at a fraction of the cost, thereby challenging American leadership in AI, which has become the most important trend in the stock market in the last few years and was the embodiment of US exceptionalism. These events generated a mass of noise and commentary. Yet at the end of the quarter most markets were affected much less than might be thought. The S&P fell 4.6%, The MSCI World index fell 2.7%, the US 10- year bond market rose 5.5%, and the US dollar fell 4%. Gold rose 19%.

The levels of debt and deficits in the Western world mean that Governments have started to face significant issues as global bond markets question the sustainability of this vast debt load being supported by flimsy growth. Nonetheless it is impossible to predict what level of debt creates extreme stress. Japan has shown that fiscal stress is not guaranteed even where the government debt has been ballooning for decades. The most important market is the US, where Government expenditure is running at a rate of 6% above receipts. Worryingly this is during a period when the economy is reasonably strong, which begs the question of what would happen if a recession arrived. The US needs to refinance $7.6 trillion of maturing debt in 2025, in addition to issuing new bonds to meet any budget deficit, and as interest rates rise the interest bill rises commensurately. US interest payments are now the second highest item in the US Government budget (greater than the defence budget), and the stock of Government debt is increasing by $1 trillion every 100 days. Elon Musk is attempting to make inroads on Federal spending, but even the Trump Administration has said that its target by 2028 is to lower the fiscal deficit from 6% to 3%. Deficit spending is entrenched, and this at a time when both tariffs and reshoring of industry will keep upward pressure on inflation and interest rates. One solution to reduce the debt is to raise taxes. US taxes are low relative to National Income which is one reason that stock market profits have been so high. However, Trump looks unlikely to take this path having been elected on a low tax agenda. Europe’s debt problems are even more acute because the tax burden is already high. Europe’s expansion of the welfare state has crowded out other priorities which has led to the confrontation with Trump who has insisted that they bear more of their defence expenditure. With no appetite for austerity most European Governments are having to confront tough choices. These decisions are all the harder given that despite the spending binge of the last decade few of the citizenry in western nations feel satisfied.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q4 2024

We don’t have inflation because the people are living too well. We have inflation because the government is living too well.

Ronald Reagan

All Government spending is taxation

Elon Musk

We all know what we need to do as politicians, we just don’t know how to get elected after we have done it.

Jean Claude Juncker

Quarterly Investment Review – Q4 2024

2024 saw the financial trends of 2023 extended. Equity markets produced strong returns, led by the US indices, with most of these returns generated by the giant technology companies. Performance was particularly strong after the victory of President Trump in the US Presidential election in early November. Most other markets in Europe and the Emerging world were more subdued. The US bond market suffered an unprecedented fourth year of decline. The US dollar remained strong against most of its international rivals, and gold had a strong return. Most remarkable was bitcoin which rose 120% during 2024.

The last quarter was dominated by the US election and Trump’s comprehensive victory. Unusually for a Republican candidate, he won the popular vote, as well as making a clean sweep of Congress, giving him a strong mandate to implement his policy platform. The result was a vote for less Government, and markets celebrated the promise of deregulation and lower taxes. The expected boost to growth is supportive of equities. So far markets have been unconcerned by the less market-friendly protectionist threats of the incoming Administration, such as the promise to curb immigration and impose draconian tariffs on foreign goods, both of which could increase prices. It is hard to say the extent to which these measures will be implemented. Judging by his first term Trump is more fluid in his policy making than other Presidents, and he will start this Administration with a different set of circumstances to his previous one.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q3 2024

Markets rose during the third quarter as most Central Banks started to ease policy by cutting interest rates, causing the yield on the US 10-year bond to fall from 4.40% to 3.78%. Stock markets moved up in tandem with the rate cuts, but this masked significant gyrations in early August. The combination of falling US interest rates and rising Japanese rates caused the yen to rise dramatically, and the Japanese market crashed 22% in three days. The VIX index, which measures volatility, reached its third highest ever reading. Most of these moves occurred within a few hours on the 5th and 6th August in thin trading, and the recovery was equally abrupt. By the end of the month the Japanese index had recovered everything when measured in dollars. However, the size of the moves indicates the potential vulnerability of markets even with relatively minor disruptions.

The rise in Japanese interest rates marks the end of the last source of free money in global markets. Since 2008 global Central Banks have kept interest rates close to zero and provided plentiful liquidity. The inflationary burst in 2022/23 brought this to an end and led most banks to raise interest rates and rein in liquidity, except in Japan. Japan was more reluctant to normalise its policy because it has spent the last thirty years escaping from a debt and deflationary bust caused by one of the largest property and stock market bubbles in history that peaked in 1989. It cut interest rates to zero in 1997, and from 2013 adopted an aggressive printing policy. As a result, Japanese money was pressured into seeking returns elsewhere, and Japanese liquidity has flooded world markets. These flows have supported asset prices but may start to retreat. Meanwhile the summer saw other developments. There were increasing signs that the US economy was less strong than previously thought with a record revision of US jobs numbers, and China’s economy has continued to disappoint. There were also signs that the dominance of the massive technology companies may be starting to wane. These three areas have been the major supports to the bull market in the last decade, so if they are deteriorating it will have significant implications for investors.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Quarterly Investment Review – Q2 2024

“Americans prefer strong and wrong to weak and right.” Warren Buffett

The second quarter was an unsettled one. The bond market rose modestly. In April the technology sector fell sharply before rallying strongly over the rest of the quarter. Most of the rest of the market did the exact opposite. In a year full of elections, the Indian result surprised with Prime Minister Modi experiencing a setback. In the European parliamentary elections, the parties with more nationalist tendencies did well, and in France this triggered a further election to take place in early July. As we enter the third quarter the US Presidential elections in November will start to dominate headlines in what looks a close race between two ageing and uninspiring candidates. Political uncertainty looks set to continue.

Election years tend to witness heavy spending because democratically elected Governments choose fiscal misbehaviour over unpopularity every time. There has been a relentless deterioration in western Government finances. US Federal spending increased 22% year over year to May and is up 55% since 2019 while the population has grown only 2%. The Federal debt has risen from 30% of GDP to 120% since the late 1970’s. As interest rates rise the government is being hurt as much as anyone. US Government debt now stands at $34.7 trillion and is increasing at a rate of $1 trillion every 100 days. If it had to pay 4.5% (the current two-year rate) on all of that, then that implies $1.56 trillion of interest payments annually. This sum is equivalent to the GDP of countries like Australia or South Korea. US economic growth has been exceptional over the last five years, adding approximately $6 trillion of GDP, but how much of this growth is due to fiscal spending?

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Gavekal macro view – Three scenarios for a new era of high interest rates

Three scenarios for a new era of high interest rates

After a year that surprised most investors by the strong performances of both the bond and equity markets the meeting considered the outlook for 2024. What will determine the progress of markets from here will be what happens to inflation. Last year was extraordinary in witnessing an almost painless return to low inflation. Despite monetary stimulus tripling, a huge fiscal stimulus, and a sharp rise in interest rates, by the end of the year markets were celebrating a goldilocks scenario. The expected recession never materialised, employment has remained strong, and with inflation falling markets are pricing an expectation of six interest rate cuts in the US in 2024. If markets are correct, and the US economy can get away with extraordinary fiscal profligacy without generating significant inflation, then this is immensely bullish. If what appeared to be reckless stimulus has no inflationary consequences that would suggest that assets should be rerated to much higher levels. However, if markets are wrong to be dismissing inflation, then the downside could be considerable. The argument of Gavekal is that markets have been too sanguine, and investors should be much more cautious of asset prices which are now assuming a return to a long-term inflation rate of 2%. This is especially true of bonds.

Broadly, there are three likely scenarios for the next year or so. The first is the ‘immaculate disinflation’ that markets are currently celebrating. The second is that the economy slips into recession. The third, which is Gavekal’s favoured view, is that inflation will be more persistent, and long-term interest rates stay at a structurally higher level than the last two decades. Instead of the trading range of US and European bonds having a ceiling of 2%, the range is more likely to be 3.5% to 5%, and the risk is that this trading range turns out to be too low. This would be similar to the period that existed before the Financial Crisis of 2008, and prevailed through much of the 1990’s. The reasons to be concerned that inflation may not behave as well as hoped is that many of the structural forces that created the disinflation environment of the last forty years are running out of steam or going into reverse. These include deglobalisation, the ageing of western populations, the shifting balance of power globally, and the ongoing use of fiscal and monetary policy; even in a growing economy the US fiscal deficit is enormous. Therefore, it seems premature to declare victory over inflation. Moreover the 2% inflation target is now seen as a floor not a ceiling. Tighter labour markets and higher energy prices are also putting upward pressure on prices. Even if inflation does settle at 2% the market should price a real rate above that, and this real rate is likely to be above what has been experienced for the last couple of decades. The dismal economic recovery post 2008, described by Larry Summers as the secular stagnation, meant that the world was awash with excess savings, and this excess liquidity kept interest rates low. Following this long period of lacklustre economic activity, the world needs an investment cycle, and this will be capital intensive. Areas such as transport, housing and infrastructure are obvious examples. The energy transition is another. In Emerging Markets ex-China, a boom similar to that experienced by China may be starting to take place. In India forests of high-rise housing developments are springing up, with all the transport and energy demands that accompany them. Indonesia is showing similar strong growth. The combination of this capital investment will soak up savings and thus raise the demand for capital and keep pressure on interest rates to stay higher.

The conclusion is that the risk for investors is that the benign scenario that has been priced into the market in the last two months fails to materialise. Markets have taken such a strong view that inflation has been conquered that if inflation figures surprise negatively, that will be a nasty shock. The bond market would fall, and long duration assets decline in line with it. The better opportunities appear to be in the cyclical areas of the market, particularly those areas exposed to energy transition and infrastructure. In currencies the US dollar appears expensive, and with its ability to protect against inflation, Anatole is recommending an allocation to gold for the first time in more than twenty years. Currencies that look attractive include the yen which is exceptionally cheap, and the Norwegian krona and Swedish krona. Finally, investors should not lose sight of the possibility that some things may improve in 2024. Geopolitical concerns have cast a dark shadow over the last few years, but there could be better news over the coming months. If the pro-China candidate wins in Taiwan that would remove the risk of a confrontation with China. The Ukraine situation may also move towards some sort of settlement, probably one which recognises the current areas of occupation. Greater clarity in these areas would improve sentiment, and in the case of Ukraine allow for plans for rebuilding the infrastructure destroyed by the war. That alone would be a substantial economic boost to all the companies that are involved.

Quarterly Investment Review – Q4 2023

“The Middle East region is quieter today than it has been for two decades.” James Sullivan, US National Secretary Adviser, 29.9.2023

“The Western World faces the greatest number and most complex array of threats since the end of the Cold War.” General Petraeus, 21.10.23

“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett

2023 was a year in which investors were continually wrong footed. Surging inflation and sharply rising interest rates meant that the banking crisis in March caught them unawares, as bond prices plunged. The reassertion of higher rates as economic growth continued to be strong, despite interest rates reaching a twenty year high, caught them off guard again. In equity markets performance was dominated by a handful of immensely powerful US technology companies benefiting from an explosion of interest in Artificial Intelligence. Apart from these companies, the stock market’s performance was muted. By year end the performance of US 10-year bonds was flat ex the coupon payment, registering a third consecutive disappointing year. The S&P 500 was up 24.2%, though much of this rise was accounted for by the mega tech companies’ stellar performance. The equal weighted S&P index was up 11%.

After a forty-year bull market bonds have been struggling. When interest rates reached all-time lows, the temptation for any type of borrower to take on debt led to an orgy of debt issuance. Yet despite higher borrowing costs debt has continued to accumulate. In 2023 the US Government issued its second largest amount ever. Incredibly this borrowing occurred during a year of reasonable growth, which begs the question of what borrowing would reach if the economy fell into recession and required government support. The annual rate of US Government borrowing is now running at approximately $2 trillion, piling on top of a total of about $33 trillion. The annual interest bill is now close to $1 trillion per year and rising. The $2 trillion of new debt, together with $7.6 trillion that matures in 2024 that will need to be rolled over, is now incurring an interest rate of over 4%, compared to the current average of 2.78%. The market seems to be floundering as it digests these giant flows. The further complication is that large-scale buyers such as the wealthy Middle East oil nations and China have become less willing to buy American debt, leaving the market rate being set by more price sensitive investors such as fund managers.

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Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group