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T&V Letter | Q4 2024

Insight

Javier Milei, the President of Argentina, is continuing his radical reform course and has announced that he intends to fundamentally change the country's tax system. In an interview with Forbes Argentina, Milei explained that he plans to abolish 90% of taxes - not the revenue, but the number of taxes - and reduce the system to a maximum of six taxes. This measure is part of a comprehensive strategy that includes deregulation, privatization and labour market reforms. Since taking office in December 2023, Milei has already made drastic cuts, including the dismissal of tens of thousands of civil servants, the closure of ministries and a 31% reduction in government spending.

 

The country's economy is showing mixed signals. While inflation has fallen significantly from 25.5% in December 2023 to 2.4% in November 2024, the unemployment rate rose to 6.9% in the third quarter. However, economic activity recorded growth of 3.9% in the same period, and forecasts suggest that Argentina could achieve a balanced budget in 2024 for the first time in 15 years.

 

Milei's radical reforms have attracted international attention, particularly from Elon Musk and Vivek Ramaswamy, who are aiming for a similar streamlining of the state with the DOGE initiative in the USA. Musk has publicly praised Milei's approach as "impressive" and sees his tax and government reforms as a blueprint for the USA. Whether this course can also be implemented in the United States remains to be seen in the coming months.


 

Dear reader

 

While Europe and Switzerland are struggling, the US market is once again dominating: the S&P 500 posted an impressive performance of 23.3%. We already noted this in last year's end-of-year letter: The year 2023 in one word: "The Magnificent Seven"


It was precisely these "Magnificent Seven" tech companies that shaped the US markets in 2024 and contributed significantly to performance. Their dominance is impressive, but comes with risks. The seven companies - Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms and Tesla - now account for around 34% of the S&P 500. Just ten years ago, in 2014, their combined share of the S&P 500 was less than 10%.


The Dominance of the 'Magnificent Seven': A look at the leading tech giants shaping the markets.
Figure 1 : The dominance of the " Magnificent Seven"

Apple alone now has a higher market value than the entire stock market of Germany, the UK or Canada. If Apple were a market in its own right, it would be the fifth largest stock market in the world, after the US, China, India and Japan. In 2025, Apple could be the first company to reach a market capitalization of USD 4 trillion - more than the GDP of all countries except the USA, China, Germany and Japan. Nvidia has also established itself as a heavyweight and was briefly the most valuable company in the world this year.


Although the "Magnificent Seven" have driven market returns, their dominance also carries risks. A significant decline in the "Magnificent Seven" could weigh heavily on the S&P 500 as a whole. With around USD 11 trillion invested in US index funds at the end of 2024 (around 20% of the total US equity market of USD 55 trillion), a sharp sell-off in the "Magnificent Seven" could trigger a domino effect. In recent years, however, the best investment strategy has been to focus exclusively on the "Magnificent Seven".

 

Europe struggles with economic weakness

The STOXX Europe 600 (the largest 600 European companies) rose by a meagre 6% in 2024. The strong underperformance compared to the US can be explained on the one hand by the lack of tech and AI companies in the STOXX Europe 600. On the other hand, the severely weakening economic situation in Europe, coupled with the dominance of traditional, weaker-performing sectors, had an additional negative impact.

 

Switzerland is also struggling with a lack of momentum

The Swiss stock market, as measured by the Swiss Market Index (SMI), achieved a return of 4.2% in 2024. Six of the twenty SMI stocks even posted a negative return. Even if dividend income is taken into account, one in four SMI stocks closed 2024 in the red. This is a poor result for a blue chip index. Large tech and AI companies are also nowhere to be found here. The strong Swiss franc (as usual) and the predominantly defensive sector weighting, which was hardly able to develop any momentum in a growth-oriented environment, also weighed on the index. The heavyweight Nestlé weighed on the Swiss stock market again in 2024: with a price loss of 23%, it was the third year in a row with a negative return. The share price had already fallen by 7.7% in 2023, while a loss of 11.9% was recorded in 2022.


Active vs. passive: strategies for stability

As long as the "Magnificent Seven" drive almost the entire return, active fund managers have little chance of beating the market. Few active fund managers have these seven companies with a weighting of 34% in their portfolio, as the S&P 500 automatically represents. As nobody knows how long the dominance of these seven stocks will last, a combination of active and passive strategies seems to make sense to us. Even if active approaches could lag behind the overall market in the short to medium term, diversification remains the key to a stable and successful long-term investment strategy - a principle that T&V consistently implements.

 

Outlook 2025

In the long term, share prices generally move in line with corporate earnings growth. However, the exceptional success of the US market in 2023 and 2024 is also due to the fact that investors were willing to pay higher prices for every dollar of profit - a sign of their growing optimism. This confidence reflects, among other things, the enthusiasm for artificial intelligence and pro-business policies following the Trump re-election.

Whether the positive market sentiment continues will largely depend on whether earnings growth continues and how economic momentum develops. We are keeping a close eye on developments!


As always, we thank you for the trust you have placed in us!


 



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