Trump takes office and China challenges in an eventful Q1

Meanwhile, the sudden popularity of DeepSeek, China’s answer to ChatGPT, rattled US mega-cap technology stocks as investors questioned whether America would remain the dominant player in artificial intelligence.

In Europe, the newly-formed German government unveiled a major debt-funded €500bn spending package over 12 years, focusing on defence and infrastructure.

UK growth revised down for 2025

In the UK, the Bank of England cut interest rates to 4.5% in February due to concerns over weaker economic growth but kept rates steady for the rest of the quarter. Inflation peaked at 3% in January before easing to 2.8% in February, while wage growth continued to outpace inflation.

Labour’s Spring Statement in March introduced spending cuts to adhere to fiscal rules, with the Office for Budget Responsibility revising 2025 GDP growth down to 1% but improving long-term projections.

How did this affect portfolios?

Over the first quarter of 2025, global equity markets (a large proportion of which are US equities) struggled as tariff uncertainty heightened market volatility. Global equities, as measured by the MSCI All Country World Index (in GBP terms) delivered -4.3% over Q1 2025, with US equities, as measured by MSCI USA, delivering -7.4%. It was reassuring to see that the active equity managers in our portfolios were able to navigate this volatility through specific stock selection, and to perform better than the wider equity market.

UK equities had a strong quarter, delivering 6.4% (as measured by MSCI UK, in GBP terms). Large banks, energy and healthcare sectors did well while small and mid-sized companies suffered. Investors also shifted away from the US technology stocks and towards the UK and Europe following heightened market volatility in the US over Q1.

European equities were the strongest performer of all, with MSCI Europe delivering 7.2% (in GBP terms) over the quarter, boosted by Germany’s spending plan and investors rotating away from US stocks.

Emerging market equities delivered a broadly flat performance over the quarter, although news around AI model DeepSeek helped lift Chinese equities. In contrast, other emerging markets suffered as a result of uncertainty around the magnitude of tariffs to be imposed by the US. Japan faced similar difficulties over the quarter for similar reasons. This was especially pronounced for Japanese carmakers, which were subjected to a 25% tariff on exports to the US following President Trump's announcements.

US government bonds performed well over the quarter, bringing an important element of protection to portfolios. Our diversification and exposure to alternative assets such as listed infrastructure also helped to offset the poor performance of US equities.

Our view on the major asset classes

Equities

Within the EU, the approval of the German government’s spending plans has led to a significant shift in our investment outlook for Germany. We have strengthened our positive outlook on German equities, driven by anticipated economic growth and earnings potential, particularly for German domestic and cyclical stocks.

For the US, we have revised down our economic outlook following the announcement of the global trade tariffs.

We continue to expect moderately better value from Japanese markets over the next few years given the positive impact of a push to improve corporate governance, stimulative policy, and good economic growth conditions.

Bonds
We still expect high-quality corporate bonds (bonds issued by companies) to provide moderate returns above equivalent government bonds over the medium term. High-yields bonds, which are typically lower quality and higher risk, may struggle as investors flock to high-quality assets where they feel safer.

The recent moves we have seen in government bonds are also consistent with this increased caution from investors and their preference for less growth-sensitive assets such as equities.

Real assets

We maintain the view that diversification through investments in alternative assets such as listed infrastructure and real estate investment trusts (REITs) is important for consistency of returns. This is because of their low correlation to traditional markets, meaning they don’t typically move in line with equities and bonds.

Overall
Things are moving fast at the moment and markets are very volatile. We are continually reassessing our views against a changing market environment. Reciprocal tariff responses and related market reactions may affect how we feel about different asset classes and regions. We are currently in the process of reviewing our ratings (which may or may not change), but the latest ratings from mid-March were ‘Neutral’ on every asset class.

How do we view portfolio composition moving forward?

This update covers the events of the first quarter of the year, up until, the end of March. Since the details of US trade tariffs were announced on 2 April, we have adjusted our economic outlook on the US. We are now predicting lower economic growth and higher inflation in the US, although we think it will avoid recession.

We design our portfolios to withstand short-term volatility, so we remain focused on longer-term growth prospects instead of trying to ‘time the market’ (buying and selling at exactly the right time, which is impossible to do). We still see value in holding US equities because we believe the economy will continue to grow and equity prices will recover over 2025.

We have spoken to the active managers in the portfolio who are poised to seize opportunities that might arise from short-term market opportunities to buy companies at more attractive prices and take advantage of the drop in stock prices. Pleasingly, they all appear to remain focused on the long-term viability of their investments, or they plan to add exposure where they find good opportunities, which is what we look for when partnering with active managers.



Information correct as of 8 April 2025.

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