*** Plutos – Switzerland Fund Update *** Our Scenario for 2025 ***
The Plutos Switzerland Fund closes the year in December with a marginally lower valuation of 0.1% – for the full year 2024, this results in a significant decline in NAV of 17.7%. SPI Small/Mid Cap Index lost 0.3% in December and ended the year with +1%.
While the environment was better for once at the beginning of the month and the Plutos-Switzerland Fund was able to benefit from this, the US Fed put the nail in the coffin of the last hope of a Christmas rally on December 18th - and thereby raised doubts about a positive start to the year: the global stock and bond markets fell significantly as the Federal Reserve cut interest rates by 0.25% as expected, but reduced its forecast for interest rate cuts in 2025. The median for future interest rate cuts now only foresees two further cuts of 25 basis points in 2025, compared to four cuts in September, when the projections were last published. Fed Chairman Powell sees the political uncertainty emanating from the new Trump administration as a reason for a more cautious approach.
Making matters worse for the markets was the large options expiry in the same week, which added additional pressure. This combination of circumstances led to a Fear & Greed Index of 22 - the lowest since early August. Overall, we believe that investors should expect a slowdown in rate cuts in 2025 and increasing volatility, and that markets are now recalibrating the Fed's stance. But even if the pace of rate cuts may be slower than expected from now on, the direction of travel remains clear.
In the reporting month, Pierer Mobility, which is allowed to continue business for the time being thanks to a court order and KTM has thus overcome the first hurdle to restructuring, as well as Meyer Burger positive after Bloomberg Intelligence estimated that growth in the solar energy industry in 2025-2027 would be at a similar high level as in 2024. This improved sentiment towards solar stocks, even though Meyer Burger still has a long way to go before it recovers. SKAN benefited from new coverage by a major Swiss bank with a buy recommendation and a price target of CHF 92 – like us, the analyst sees SKAN as a 'hidden gem'. Temenos reacted positively to a new buy recommendation and increased significantly.
After the first two weeks of the month could be summed up under the title 'Sell the losers' and values such as GAM, DocMorris, LEM Holding, Kuehne+Nagel, Comet or Adecco were under selling pressure, the short-term oriented 'investors' then took the strong 2024 performers such as Accelleron, Cembra Money Bank, SFS or the R&S Group Although the picture became somewhat more relative towards the end of the month when there were few reports, we cannot understand either: many short-term losers will probably find their way back into portfolios in January and the winners will remain successful, which will in turn be reflected in the prices.
The SNB's surprise 0.5% interest rate move had a weakening effect on the CHF/EUR and USD, at least in the short term. This is basically good for Swiss exporters - but we have to doubt whether it will remain a sustainable movement. With the political uncertainties in France and the upcoming elections in Germany, there is still too much uncertainty in Europe amid economic challenges. The ECB's minimal interest rate cut reinforces our opinion that the signs of the times have still not been recognized here.
For the Plutos Switzerland Fund In 2024, the second year since the launch in mid-October 2022, many investments had not yet paid off or had even come under massive pressure. We will do everything in our power to make this weak performance forgotten with a significant higher valuation in 2025 - we have learned some lessons regarding the portfolio structure. Nevertheless, the Plutos-Switzerland Fund will continue to be a basket of equities in which more opportunistic, and therefore riskier, but still promising and medium-term equity stories can also have their place, because the Plutos-Switzerland is not an index ETF.
“People often say there's lots of uncertainty, but when was there ever certainty in the markets, the economy, or the future? “I’m just trying to understand the present.”
Bill Miller, American investor, fund manager and philanthropist (1950)
Our scenario for 2025
Our 'Play-Book' for 2024 expected lower Inflation figures, several interest rate cuts by the Fed, the ECB and the SNB, a weaker Swiss Franken, rising Purchasing Managers' Indices and a resurgent China – not all of these assumptions came true, but not all of them were completely wrong either. But a close call is also a miss, and so our portfolio construction was suboptimal, containing too many cyclical and opportunistic stocks that would have benefited disproportionately from a more positive environment. High-quality stocks such as Comet, Adecco, Bucher, Kühne+Nagel, Straumann, VAT or Forbo and Lem Holding lost double-digit amounts in value. The opportunistic investments such as GAM, DocMorris, Pierer Mobility or ams OSRAM had to contend with self-inflicted problems that are even more difficult to overcome in a weak cycle. Although the Plutos Switzerland Fund was and remains invested in some of the most successful stocks with Accelleron, the R&S Group and Belimo and was able to achieve good performance with Holcim, Lonza, Sandoz and the TX Group, the positive influences were ultimately not strong enough to offset the portfolio construction of cyclicals and turnaround stocks that arose from the 'play book'. The result, a NAV that is 17.7% weaker than at the end of 2023, is bad - but it also reflects only one year after we were able to close 2022 and 2023 clearly positively. It seems to me more important today than ever to recommend a three to five year investment horizon to investors. A patience span of one year is simply far too short.
To what extent does our 'play book', our scenario for the stock market year 2025, from which we derive the construction of the portfolio, change?
Well, not much will change, we continue to expect falling interest rates and yourself normalizing inflation rates, but both over a somewhat longer period of time. The SNB will, the ECB must, continue to lower interest rates - what the Fed will do is quite unclear, since Fed Chairman Powell brought the policies of Donald Trump into play at the last meeting. But Trump also has no interest in triggering the next crash. In this respect, it would be presumptuous to expect another 7%+ year after two very strong years on the US stock markets, driven solely by the Mag30 and other heavyweights. We therefore consider it possible that international investors will look for cheaper quality markets - and since Switzerland offers these in abundance, capital flows to Switzerland would be quite predictable.
As already mentioned in the monthly report, the weaker CHF/EUR and CHF/USD unlikely to last long. Due to the political uncertainties in France and the upcoming elections in Germany, there is still too much uncertainty in Europe amid economic challenges - but I am happy to be positively surprised. Because that would be a welcome tailwind for Swiss exporters.
The PMIs, or Purchasing Managers' Indices, remain at very low levels – so low that it is hard to imagine them getting worse. Many companies had already expected an improvement in orders, capacity utilization and consumer sentiment for the second half of 2024. As we know today, this did not happen, even if the indications have at least not moved further into the negative. Many of the Swiss companies have used the current crisis to become even more efficient, leaner and more powerful. The results of this will undoubtedly be clearly noticeable in the next upturn, which we expect at least marginally for 2025, in terms of margins, cash flow generation and the resulting debt reduction. In that case, today's valuation levels for many of the values listed above are clearly too low.
However, most of these companies are also to a considerable extent in China exposed. It seems clear that Donald Trump will once again take a tougher stance on tariffs and duties. To what extent this dispute will be seen as positive for all parties in a currently weak global economic cycle is not clear to me. And so I expect compromises, agreements that are acceptable to everyone. This also applies to the war zones in Ukraine and the Middle East - I hope that the opportunity to end the conflict with the help of the new US administration will not be missed.
In my last blog, I outlined our five lessons from the 2024 stock market year. We remain true to the first lesson, to keep opportunistic exposures to a minimum in a continuing weak cycle, in that we will not build any new opportunistic investments until there are clear signs of an upturn. The second lesson, not to keep an opportunistic position as the largest, could be more difficult to implement, as we see ams OSRAM enormous potential this year. A solution for the Kulim fab is inevitably getting closer and it will undoubtedly be accompanied by a higher share price. Then we would come to the implementation of the third lesson and would also take some profits. We have already incorporated the consideration of the momentum of a security before a purchase, lesson number 4, with the appropriate tools. And lesson number 5, the clearer and better explanation of our investment philosophy and strategy and the necessary time horizon, should be addressed with these lines, the detailed monthly report, but also the weekly, short reporting via the Sola Capital WhatsApp channel be taken into account.
As for the individual values: here I will limit myself to our 'problem children', because companies like Accelleron, R&S Group, Belimo, SFS, Cembra Money Bank, Comet, VAT or Temenos are already doing well, even if the share price does not yet reflect this for all of them. Aryzta, Bucher, Forbo, Kühne+Nagel, Straumann or SKAN, yes also with Komax, LEM Holding and Zehnder I am not worried, they are all strong, well positioned and have become even stronger during the crisis.
Adecco is likely to announce a dividend cut soon, which could have a liberating effect – an upturn will be reflected in a first phase by more temporary employees and Adecco has improved its margin potential by cutting costs.
Pierer Mobility is currently working hard to stabilize its finances and I cannot imagine that Stefan Pierer, whose conviction I have often had the pleasure of personally experiencing, will see his life's work go under without a fight - the stock can be one of the big winners in 2025.
medmix has recently had a new CEO at the helm and the first feedback is very positive. No customers were lost during the crisis, but the warehouses are still full and need to be cleared. The courts have already ordered the copy cats to recall and destroy their products at the beginning of 2024 - this will result in new orders for medmix.
DocMorris was still trading at around CHF 2024 in March 100 - but ended the year at CHF 20...the increased advertising expenditure is preparing the market and will have an impact, even if the Swiss are still lagging behind the German Redcare. The market for e-prescriptions is large enough, even if a new competitor emerges with dm, albeit only for over-the-counter medications.
GAM is under enormous pressure to sell, which is incomprehensible to us. The assets of around CHF 19 billion alone would justify a higher valuation. But the company is poorly informed, the promises of newGAM's managers regarding cost reductions have so far remained unfulfilled and so more investors are selling shares in which they see no buyers. Either we are constantly being lied to about the progress and next year there will be an outrageous offer to the minorities or it will be the most lucrative turnaround story in years. 'In for a penny, in for a pound' - at the current level we are not selling any shares.
ams OSRAM is a potential high-flyer for me, even for 2025. Yes, I know, I said that a year ago, but who could have expected Apple to cancel the microLED project? CEO Aldo Kamper and CFO Rainer Irle are the beacons of hope in whom I put my trust - they will, like the Plutos-Switzerland Fund, make 2025 their year.
I wish you and your families a good start to a healthy, successful 2025!
Stephan
