Muzinich Weekly Market Comment: Follow my lead

March 10, 2025

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In our latest roundup of the key developments in financial markets and economies, we compare the management styles of the Chinese, German and US administrations.

The miserable end to February has continued into early March, with nowhere to hide for government bonds. Yields rose across the board; Europe was the epicentre of the suffering, with the 10-year Bund yield rising 30 basis points (bps).

The pain fed through into corporate credit markets, with returns turning negative for the month. European investment-grade credit returns are negative year-to-date. High yield, which has a lower correlation to government bonds and higher coupons, was better protected from rising yields. Somewhat paradoxically, Asia high yield has emerged as a relative safe haven, posting positive total returns this month that have helped make it the best-performing credit sub-asset class in 2025.

The consensus bullish view on the US dollar continues to be challenged, as it depreciated against global currencies. European and commodity-linked currencies outperformed significantly - with the Polish zloty up 5%, the euro up 4%, and the Chilean peso and South African rand each up 3% against the greenback. In contrast, digital currencies remain weighed down by a perceived lack of follow through on campaign promises by the US administration.

In commodity markets, energy prices continued to decline, reflecting weaker demand due to tariffs and increasing supply concerns from declining geopolitical risk. Metals have emerged as clear winners. Precious metals benefited from a flight to safety, increased sovereign foreign reserve allocations, and the slump in digital assets. Industrial metal prices have been supported by supply imbalances, signs of a bottoming in the Chinese property market, the prospect of a material rise in European infrastructure spending, and expectations surrounding US tariffs.

By order of the management

“Management kills companies, not accountants” is a phrase often heard on the Muzinich investment floor. It highlights the critical role of management reviews in the investment process. The same rationale can be extended to countries and their administrations.

The Chinese government shares similarities with a privately owned company. It operates as a one-party system, is highly centralized and technocratic, and prioritizes long-term goals over short-term performance.

This structure can result in slow responses to challenges, stubborn decision making, and a tendency to double down on ineffective policies. However, it also has a key advantage: flexibility. A crucial factor to assess is the level of pragmatism shown by leadership, highlighting its ability to adapt and navigate evolving challenges.

Under the Xi Jinping administration, we have seen evidence of pragmatism in recent years, most notably in the reversal of China’s draconian COVID-19 policies. Now, signs of policy flexibility are emerging in response to the threat of global trade wars.

Last week, Premier Li Qiang presented the annual government work report at the opening of China’s top legislature, the National People’s Congress (NPC). The government set its 2025 economic growth target at approximately 5% and raised the fiscal deficit target to around 4% of GDP, the highest level in over three decades.^[1]

However, the biggest surprise was the strategic shift towards boosting domestic demand. Li pledged that economic policies will now focus on improving people’s lives and driving consumption, signalling a departure from the past emphasis on infrastructure and exports.

Perhaps the government has recognized the reality of any trade war: the economy with the most powerful consumer base holds the advantage. Strengthening domestic demand is seen as low-hanging fruit given China’s relatively low level of private consumption, which accounts for 39% of GDP, compared to 55% in Japan and Germany and 63% in Brazil.^[2] Meanwhile, household savings have more than doubled since 2018 to reach 151 trillion yuan (US$20.7 trillion) at the end of 2024,^[3] despite repeated deposit rate cuts by banks.

Whatever it takes

The recent German election resembled a friendly takeover, with the centre-right Christian Democratic Union (CDU)-Christian Social Union (CSU) alliance replacing the centre-left Social Democratic Party (SPD), while keeping at bay a hostile acquisition attempt by the far-right Alternative for Germany party.

The SPD has been in office since 1998, a period largely defined by fiscal austerity. However, Chancellor-in-waiting Friedrich Merz has signalled a major shift in economic policy, promising Germany will do “whatever it takes” to strengthen national defence, including amending the constitution to exempt defence and security spending from fiscal limits.^[4]

And, in a joint initiative, Merz’s CDU-led bloc and friendly rival SPD proposed an ambitious €500 billion infrastructure fund to be deployed over the next decade.^[5] The fund will seek to accelerate investment in key national priorities rather than waiting out the months-long coalition formation process. [Separately, the European Union announced a plan that could mobilize as much as €800 billion in additional national spending, including €150 billion of loans to member states for defence purposes].^[6]

The increase in government spending is expected to boost Germany’s economy by approximately 0.8% in 2025 and 0.9% in 2026, with an additional potential 0.5% uplift from positive sentiment and second-order effects.^[7] However, these plans will lead to a substantial rise in net German debt issuance, which JP Morgan estimates at €44 billion in 2025 and €91 billion in 2026.^[8]

General Partners

If the Chinese government can be compared to a privately-owned business, perhaps the Trump administration can be likened to a private equity (PE) firm.

Just as PE firms typically look to enhance efficiency by cutting costs, Trump established the Department of Government Efficiency, led by Elon Musk, to drive similar efforts. In terms of increasing profitability, the administration views tariffs as an effective way to boost revenue. Much like a PE firm, which often initiates strategic changes, the new government favours deregulation policies, a 180-degree departure from the approach of the Biden administration. And, just as PE firm will typically look to exit an investment after 3–7 years, Trump’s tenure is limited to just 4 years.

The latest update on the administration’s tariff rollout strategy is a one-month delay to tariffs on goods from Mexico and Canada that meet United States-Mexico-Canada Agreement (USMCA) requirements.^[9] This delay should exempt about half of the goods impacted by the new 25% tariffs.

Under the USMCA, which was renegotiated during Trump's first term, the exemption largely relates to rules of origin requirements, addressing concerns over potential re-imports from third countries. However, since this is a delay rather than a permanent exemption, and with reciprocal tariffs expected to be announced in April, uncertainty surrounding tariffs and trade wars remains.

Who do you trust?

This brings us to a critical question: which management approach is the most effective – at least in the eyes of investors? Stock markets can serve as a useful proxy, reflecting the overall health and well-being of the economy and sentiment towards management.

Month-to-date, the Hang Seng is up 5.6%, the DAX is up 2%, and the S&P 500 is down 4.5%. Year-to-date, the Hang Seng has gained 20.7%, the DAX 15.5%, while the S&P 500 is down 3.3%.

 

Past performance is not a reliable indicator of current or future results.

References

[1] Bloomberg, ‘China boosts official budget deficit to highest in over 30 years,’ March 5, 2025
[2] World Bank, ‘Households and non-profit institutions serving households consumption expenditure,’ as of end 2023. Most recently available data used.
[3] National Bureau of Statistics of China, ‘Statistical communiqué of the People's Republic of China on the 2024 national economic and social development,’ February 28, 2025
[4] Financial Times, ‘Germany’s ‘whatever it takes’ spending push to end years of stagnation,’ March 6, 2025
[5] Politico, ‘Germany’s spending bazooka propels euro and borrowing costs higher,’ March 6, 2025
[6] European Commission, ‘Press statement by President von der Leyen on the defence package,’ March 4, 2025
[7] Reuters, ‘Goldman, Nomura lift Germany's 2025 economic growth forecast on fiscal boost,’ March 6, 2025
[8] JP Morgan, ‘German federal net issuance projections,’ as of March 7, 2025
[9] The White House, ‘Fact Sheet: President Donald J. Trump Adjusts Tariffs on Canada and Mexico to Minimize Disruption to the Automotive Industry,’ March 6, 2025.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of March 10, 2025, and may change without notice. All data figures are from Bloomberg, as of March 7, 2025, unless otherwise stated.

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