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The first half of 2025 was marked by sharp volatility and a surprising rebound. A global equity selloff in April, triggered by renewed US-China trade tensions, briefly erased earlier gains. However, a policy U-turn, dovish central bank pivots, and resilient earnings helped major indices recover. The S&P 500 ended slightly positive, while Europe and Asia outperformed, led by Germany and Hong Kong. Overall, H1 underscored the need for flexibility and diversification amid shifting policy, inflation risks, and rising geopolitical uncertainty. We know we must go global, but where do we go from here? We highlight what we see as constructive for the second half of the year. 

Europe and energy: Constructive on clean energy

While geopolitics and oil’s price surge grab much attention, notable developments on energy markets should not be overlooked. The past months were exceptionally sunny in Europe, resulting in a record number of hours with zero or negative power prices around noon as solar energy is abundant. These dynamics depress energy producers’ cash flows and profits, which the surge in battery storage investments cannot yet fully offset. Such conditions, where there is an abundance of wind and solar power generation and low energy demand, known as ‘Hellbrise’, have become very frequent. Interestingly, the rarer opposite, called ‘Dunkelflaute’, when renewables are scarce rather than abundant, is better known. Europe’s electricity costs are competitive, with mainly high levels of taxation or other red tape compensating these advantages. 

Meanwhile, regulatory changes in both the United States and China, which either reduce support or foster competitive dynamics, add additional pressure to the clean energy business’ cash flows. That said, with technology costs declining further thanks to scale and innovation, strong corporate demand for clean energy due to low costs, and battery storage potentially soon smoothing out power price volatility, we believe that the fundamental downcycle is troughing. As a result, we raise our view on clean energy to Constructive.

German infrastructure: Set to boost spending over the next decade

Germany’s defence and infrastructure spending spree still feels like a wake-up call for European fiscal policies. It paved the way for an allegedly ‘historic’ NATO summit and dominated the debate about Germany’s budget, which was presented last week, alongside a longer-term spending plan. Germany’s infrastructure issues are well documented and are also reflected in international rankings, in which the country has fallen behind in recent years. As a percentage of economic output, its gross infrastructure investments stayed below 3% over the past five years. In 2023, Germany’s share was the third lowest across the EU. After accounting for depreciation, Germany’s net infrastructure investments almost approached zero during the past few years as many municipalities faced increasing budget restrictions and/or were forced to prioritise other forms of spending. This resulted in what Germans call ‘Kaputtsparen’ – focusing solely on austerity and losing sight of the necessary investments.

Against this backdrop, we very much appreciate the infrastructure investment plan, which is set to boost spending significantly over the next decade. We have no doubt that Germany has the fiscal leeway to finance these investments by raising new debt. We also counter the claim that this debt will become a big burden for future generations. Instead, we are convinced that insufficient infrastructure would be a much bigger burden. An appropriate, frictionless, and functioning infrastructure is the backbone of every economy. 

A boost to the construction industry 

In terms of implementation, capacity constraints in the construction industry should not be an issue, with the utilisation rate being down to around 65% from more than 80% at its recent peak in 2022. In terms of sub-segments, civil engineering has been more resilient than building construction. Germany’s infrastructure package should thus boost the business outlook for construction companies, some of which have already rallied more recently. It should provide a significant uplift to the industry, which generated revenues of around EUR 160 billion last year, assuming that planning and permitting processes will also be reformed.

The draft federal budget confirms Germany’s willingness to swiftly change course. Even though the net supply of bonds will inevitably increase, we do not expect the spending spree to push yields up massively, as Germany has fiscal leeway and the fiscal impulse should not be very inflationary.

What does this mean for investors?

More of the same or a year of two halves? We lean towards the former for H2 2025. Sure, the bearishness on US assets currently opens one or the other contrarian opportunity. But if history is any guide, a continuation of established trends is more likely. That means tuning in to the innuendo of going global – most notably to European and Asian bourses – while adding to some safe-haven assets, such as gold.

Find out more about the current investment environment in our Market Outlook Mid-Year 2025.

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