March 2025 Market / Operational Update

March 2025 Market Overview

U.S & Canada

March presented a turbulent landscape for global markets, shaped by growing economic contradictions, rising protectionism, and deepening policy uncertainty. In the United States, labor market data showed mixed signs. Although job creation remained steady, jobless claims surged to four times the levels of the previous year, and the unemployment rate inched up to 4.2% from 4.1%. Federal government job cuts fueled concern that the labor market could be entering a weaker phase. Meanwhile, consumer sentiment deteriorated sharply. January saw the largest monthly drop in consumer spending in four years, and the University of Michigan’s index of consumer sentiment fell to its lowest level since 2022. Inflation expectations also spiked, with survey participants projecting a 4.3% rate for the year, indicating a growing unease among consumers about the economy’s trajectory.

Trade policy developments added further pressure. President Trump imposed sweeping tariffs on goods from Canada, Mexico, China, and the European Union, targeting industries ranging from steel and aluminum to automobiles and consumer goods. The move sparked global retaliation, with the EU announcing 50% tariffs on American exports like whiskey and motorboats. Trump responded by threatening a 200% tariff on European alcohol imports, triggering a sell off in the European beverage sector. This escalation marks the most aggressive rise in trade barriers since the 1930s, drawing comparisons to the protectionist Smoot-Hawley Tariff Act that contributed to the Great Depression. Even prior to Trump’s return to office, countries had begun raising trade barriers, particularly against Chinese exports, signaling a broader global shift toward economic nationalism.

The economic impact of these trade tensions has been significant. The OECD downgraded global growth forecasts, citing the inflationary and demand suppressing effects of U.S tariffs. Domestically, the Federal Reserve revised its outlook to reflect weaker growth, higher inflation, and rising unemployment. The number of officials expecting fewer rate cuts increased, suggesting the investors may be underestimating the Fed’s hawkish bias. New Canadian Prime Minister Mark Carney quickly faced a challenge in responding to Trump’s 25% tariff on imported automobiles – a move that threatens 160,000 jobs tied to Canada-U. S auto trade and is damaging business confidence just ahead of the national election.

Corporate developments further reflected the broader economic unease. Delta Air Lines cut its Q1 earnings and revenue forecast, citing a “pretty significant shift” in sentiment and weakening domestic demand in February. Tesla, too, came under pressure amid political polarization, consumer backlash, and product-recalls – most notably its eighth recall of the Cybertruck over safety flaws. In the tech sector, 23and Me rejected its CEO’s takeover attempt amid financial struggles, with its hares down 86% over the past year.

Amid these developments, policy clarity remained elusive. The University of Michigan survey revealed that consumers not only felt pessimistic about their current financial conditions, but even more uncertain about the future—driven in large part by confusion over the administration’s tariff strategy, which many respondents described as unpredictable and lacking clear goals. President Trump’s early second-term approach, anchored by the promise to reduce U.S. dependence on foreign goods, culminates in a looming April 2 announcement—dubbed “Liberation Day”—expected to unleash further tariff actions. As markets head into the second quarter, they must navigate a volatile mix of inflation pressures, wavering consumer demand, deteriorating global trade relations, and ambiguous policy direction.

Baoro Research

Key Developments

Development #1: Continued halt in Normal Operations

The implied equity risk premium (IERP) which we discussed extensively in our previous monthly letter to investors have shown signs of reversing, with the IERP levels rising from 4.33% to 4.42%, a material shift in the overall figure. We plan on aggressively pursuing our bearish stance until the IERP is has elevated upwards of 6% in which would constitute time to consider reintroducing market risk within our portfolio. Based on our calculations, price decline of 20% to 22% from current S&P 500 levels is likely to trigger such shifts in our view.

Development #2: Considering the next step forward.

             For active managers like ourselves, it is essential to think one or two steps ahead—constructing a forward-looking view of potential market developments as early and as accurately as possible. This preparation ensures that when the time comes to adjust our positioning, we are equipped to act decisively, executing trades at optimal prices regardless of the prevailing market narrative.

Given the current market regime characterized by low equity risk premiums, our focus has naturally shifted toward positioning for the next expansionary cycle. Before outlining the specific actions we anticipate taking, we would first like to reaffirm the portfolio objectives we are committed to upholding:

1)      Allocate a greater portion of capital under management to capture upside during periods of economic expansion—particularly in highly cyclical industries and sectors that have historically demonstrated both return stability and strong asymmetrical reward-to-risk profiles, as measured by required rate of return estimates and security volatility.

2)      Designate a portion of assets to support internal liquidity and enable capital expansion within the portfolio. By building capital organically, we reduce dependence on external inflows and enhance our operational flexibility.

3)      Maintain a dedicated allocation for special situations trading, in line with our core strategy. These opportunities are driven by clearly identifiable value catalysts tied to fundamental changes in business operations or structure.

We are still in the process of determining how best to implement Objective 2 alongside Objectives 1 and 3, given the current limitations in capital under management. As we continue to refine our approach and align these objectives within our existing constraints, we expect greater clarity to emerge over time.

That said, our preliminary view on how we intend to position for the potential upcoming economic expansion is outlined as follows:

The Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL)

NAIL seeks to provide 3X daily leveraged exposure to an index that tracks U.S. companies in the home construction sector. The fund invests at least 80% of its net assets in financial instruments that collectively achieve this objective. The underlying index includes a broad range of companies involved in homebuilding, including home construction firms, producers, sellers, and suppliers of building materials, furnishings, and fixtures. As a non-diversified fund, NAIL is particularly sensitive to sector-specific trends, many of which are positively impacted during periods of economic expansion.

Higher demand for housing typically accompanies economic growth, as rising employment and wages increase consumers' ability to purchase homes. At the same time, credit becomes more accessible and interest rates may remain relatively low, making mortgages more affordable and stimulating home sales and new construction. Increased consumer and business confidence also supports the sector, as individuals are more willing to make large financial commitments like buying a home, while businesses invest in commercial real estate.

Government infrastructure spending during expansions further benefits construction-related industries through projects such as roads, utilities, and public buildings. Lastly, economic growth often drives up commodity prices, increasing demand for raw materials and benefiting suppliers to the construction industry. These dynamics collectively support the potential for leveraged funds like NAIL to outperform in a rising economic environment.

ProShares Ultra Semiconductors (USD )

ProShares Ultra Semiconductors (USD) seeks to deliver daily investment results that correspond to twice the daily performance of an index composed of U.S. semiconductor companies. The underlying index tracks companies engaged in the production and distribution of semiconductors, integrated chips, semiconductor capital equipment, and related technologies such as motherboards. As a non-diversified fund, it is particularly exposed to sector-specific risks and opportunities.

Semiconductors are often regarded as the "backbone of modern economies" due to their foundational role in powering technological advancement. During economic expansions, this role becomes even more pronounced. Consumer spending increases, driving demand for electronics such as smartphones, laptops, gaming consoles, and smart appliances. Industrial and manufacturing growth accelerates the adoption of automation, robotics, and IoT solutions, all of which depend on advanced chips. The automotive sector, particularly electric vehicles (EVs), increasingly relies on semiconductors for autonomous driving, battery systems, and infotainment technologies. Meanwhile, expansion in cloud computing and artificial intelligence (AI) further increases demand for high-performance chips, while stronger fiscal positions allow governments and militaries to invest more heavily in semiconductor-dependent technologies.

Despite these growth drivers, the semiconductor industry faces long-term risks. Chief among them is the potential disruption from quantum computing, a transformative technology that could one day render traditional semiconductors less relevant for high-performance computing. Additionally, the slowing of Moore’s Law due to physical limitations, along with the escalating costs of cutting-edge chip manufacturing, may lead to diminishing returns on innovation.

Geopolitical risks and supply chain vulnerabilities—particularly due to Taiwan's dominance in advanced semiconductor manufacturing—pose further threats, especially amid heightened U.S.-China tensions. If these risks escalate, countries may prioritize domestic production, reshaping the global semiconductor landscape. While semiconductors will remain essential in the near-to-medium term, the most resilient investments will be in companies that embrace new computing paradigms, including quantum and post-silicon technologies, rather than relying solely on legacy chip architectures.

Direxion: Tech Bull 3X (ARCX: TECL)

TECL seeks to deliver three times the daily performance of a technology-focused index by investing at least 80% of its net assets (plus any borrowing for investment purposes) in financial instruments such as swap agreements, securities of the index, and ETFs that track the index. The fund is non-diversified and targets U.S.-based companies within the technology sector. This fund is particularly positioned to benefit during periods of economic expansion, when both business and consumer spending tend to rise. As companies invest more heavily in software, cloud computing, artificial intelligence (AI), and automation, the demand for technology products and services increases significantly. In the early stages of expansionary cycles, low interest rates further enhance the appeal of tech stocks, as their high-growth future earnings are discounted at more favorable rates. Many tech firms—especially those with software-based offerings—boast high profit margins and scalability, enabling them to grow rapidly without proportionally increasing costs.

Simultaneously, substantial investment flows into research and development, fueling innovation in AI, semiconductors, and cloud infrastructure. Market sentiment during expansions often favors high-growth sectors, with capital rotating into tech stocks that frequently lead bull markets. Beyond cyclical factors, long-term structural trends continue to support the technology sector. AI, automation, and digitalization are increasingly embedded in modern business operations, sustaining demand regardless of macroeconomic conditions. Moreover, the global reach of major tech companies significantly expands their addressable market. For instance, Apple derives over 60% of its revenue from international sales. Productivity gains from AI and automation further reinforce the sector’s value proposition, as businesses adopt advanced technologies to reduce costs and improve efficiency. Additionally, increasing demand for semiconductors and hardware—spurred by investment in data centers, AI computing, and mobile devices—benefits key players like Nvidia and TSMC. Finally, the widespread adoption of recurring revenue models, such as Software-as-a-Service (SaaS), provides stability and predictability in earnings, making tech firms even more attractive in growth-oriented portfolios.

Other Opportunities

Canary, our newly developed internal analytics tool, has also identified potential opportunities across several industry sectors and geographic regions. On the sectoral front, promising signals have emerged in the Retail, Capital Markets, Environmental Services, Water, Industrial, AI & Next-Gen Technologies, and Basic Materials spaces. Additionally, Private Equity has surfaced as an area of interest.

From a geographical perspective, Canary has highlighted South Korea, Germany, Taiwan, Netherlands, France, Japan, China, and the broader EAFE (Europe, Australasia, and Far East) region as markets warranting closer attention. These findings will be further evaluated as we refine our strategic positioning and allocation decisions in the coming periods..

Development #3: Expansion of our IERP models on individual securities

The Implied Equity Risk Premium (IERP) has been foundational in shaping our market conviction and directional stance. A low IERP on the broader market signals a period of relative euphoria—typically characterized by elevated equity valuations and stretched valuation multiples. Conversely, a high IERP suggests heightened risk aversion among market participants and subdued valuations, which we interpret as an opportune time to introduce equity risk into the portfolio.

This economically grounded and logically consistent method of identifying prevailing market regimes has added substantial value to our capital management process. It enables us to better time our exposures, often guiding us toward a contrarian perspective within our analytical framework. Furthermore, the precision of this approach has allowed us to expand its application from a macro-level market view to a more granular focus on individual securities.

Our methodology for calculating IERP at the individual security level mirrors the logic applied at the market level. The relevant cash flows we consider primarily include dividends and share repurchase activity. We back out the IERP by adjusting our discounted cash flow (DCF) model so that the model’s output matches the current market price.

We believe that applying IERP at the security level provides us with three distinct advantages:

1)      Refined Valuation Assessment: With an understanding of historical IERP levels, we can more accurately differentiate between truly undervalued securities and those that only appear undervalued on the surface.

2)      Long-Term Positioning with Tailwinds: Given that IERP tends to exhibit slow mean reversion, identifying securities with unusually high IERP relative to our estimate of their justified level allows us to build positions that can benefit from favorable valuation drift over extended time horizons.

3)      Enhanced Valuation Toolkit: In conjunction with other valuation methods, the security-level IERP offers an additional analytical lens through which to assess a business’s worth—further enriching the breadth and depth of our investment toolkit.

Because the intrinsic value of a business is a critical factor in evaluating any type of equity investment, we believe our expanded tool can be applied across all forms of trading we undertake—adding meaningful value throughout our investment operations.

Website Update

The extension of our IERP (Implied Equity Risk Premium) calculations to individual securities has opened up a valuable opportunity to share our valuation insights on some of the largest publicly listed companies across the U.S. and Canada.

We plan to publish weekly valuations on selected companies using the IERP methodology. This initiative not only supports the integrity of our top-down, index-level IERP estimates, but also provides deeper insights into what we believe to be the true intrinsic value of each business.