Our view on the investment markets

US Tariffs Update

3rd April 2025

Whilst there have been some other more positive developments for investors in recent months, markets had already been nervous over the impact of the new US administration’s tariff plans, and this had been a factor behind asset moves in the first quarter, including a sentiment shift away from the previously dominant US equity market towards other markets such as Europe, the UK and parts of Asia. 

President Trump’s erratic policymaking and frequent change of plans around areas like tariffs had created uncertainty, which markets dislike, but his self-declared ‘Liberation Day’ announcements have at least provided some clarity on details. However, the initial tariff levels were at the more extreme end of what markets were expecting, especially for many Asian exporting countries, so we have seen negative initial reactions in some asset classes, although markets so far have remained orderly. 

These significant tariff increases from the world’s largest economy to levels of at least 10% are widely seen as a negative development for global economic growth and potentially adding to inflation in some areas, with the key US economy also being seen as one of the most negatively impacted areas. There are hopes that ultimately there will be negotiations that will lead to lower tariffs than those just announced, but in the shorter-term much will depend on how other countries react and whether we see tit-for-tat retaliations.  

The UK is seen as one of the lesser impacted countries by these announcements given we are at the low end of the new US tariff rates and our economy is more dependent on services rather than manufacturing, but tariffs are still moving to higher levels and our economy is also exposed to any negative impacts for the global economy, so there are further risks to our already sluggish growth levels.

Recent market optimism had been based on a relatively resilient global economy, growing corporate profits, more subdued inflation and falling interest rates, and these tariff developments have undoubtedly put a dent in those important fundamental drivers. However, we remain optimistic that this will ultimately not be a fatal blow to that broadly positive market backdrop and there are still potential positive drivers such as greater fiscal stimulus in Europe and China, interest rate cuts are still expected, and we will likely see tax cuts in the US. 

Whilst we may be in for a period of higher shorter-term volatility, this can create opportunities and investors should continue to focus on the longer-term attractions of remaining invested through more challenging periods, and diversified portfolios across different asset classes, sectors and geographies can be a good way of managing risk.  

Paul Glover
Chief Investment Manager

Market Review

14th April 2025

An eventful first quarter of 2025 saw a change in equity market leadership away from the US following a flurry of concerning and often erratic policy announcements from the new Trump administration, but some positive developments elsewhere included significant fiscal policy responses in Europe and stimulus and technology progress in China.

The long period of US exceptionalism was driven by their above average economic performance and technology sector fuelled equity market leadership, but this went into reverse as China’s DeepSeek AI model announcement challenged US technology dominance, concerns grew over the potential impact of trade tariffs, and some US economic indicators began to show signs of weakness.

The main tariff announcements would be made in April and expectations of their extent shifted during the quarter, but President Trump did announce increases on certain countries and goods. Higher tariffs are widely seen as a negative development for global economic growth and inflation levels, and alongside public sector job cuts and new immigration policies we saw growing pressure on US consumer and business confidence.        

Within Europe, the German election result and subsequent plan to loosen their strict government borrowing limits with significant spending on defence and infrastructure boosted growth forecasts and was well received by equity investors.    

Alongside a mixed global economic growth picture, inflation remained sticky and above target in many developed markets, and we saw a variety of responses from central banks. There were no interest rate cuts in the US, whilst the European Central Bank was able to cut rates twice in Q1 and the Bank of England saw one 0.25% bank rate cut to 4.5%.

With investors looking to rotate away from the previously dominant US equity market, the lowly valued and relatively defensive UK market was well placed to benefit. Although mid-sized and smaller UK companies remained out of favour, a strong performance from larger companies resulted in the UK FTSE All-Share index gaining 4.5% in Q1.   

Despite sterling terms gains of over 7% from European equities, losses elsewhere including falls of over 7% for the US resulted in an overall Q1 international equity return for UK investors of -4.3%.

There were also many mixed developments impacting fixed income markets, but most asset classes achieved gains over the quarter. Government bonds were stronger in the US than Europe, whilst in the UK gilts achieved a modest gain of 0.5%. Index-linked gilts endured another negative quarter, but there were gains of 0.5% for UK corporate bonds, 1.1% for high yield bonds and 2.3% for emerging market debt.        

The UK commercial property market started 2025 slowly with property valuations generally flat and transaction levels muted as a result of economic and geopolitical concerns. Occupier demand across sectors continued to hold up well, supporting income and rental growth, with overall Q1 total market returns estimated at 1.5%. Overall overseas real estate valuations were relatively flat, with currency moves the biggest factor.

Returns on cash deposits remained comfortably above inflation, but are further off their peak following another cut in the UK bank rate to 4.5% and with additional cuts anticipated.  

Market Outlook

Whilst we remain as focused as possible on the long-term fundamental investment drivers such as economic and corporate growth, inflation, interest rates and asset valuations, the unprecedented actions from the new US administration have created some significant short-term challenges for investors and other countries to digest and respond to.

President Trump’s erratic policymaking and frequent change of plans around areas like tariffs have created uncertainty, which markets dislike. His self-declared ‘Liberation Day’ announcements on April 2nd provided some clarity on details that markets had been speculating about, but the initial tariff levels were at the more extreme end of expectations, especially for many Asian exporting countries, and we saw negative initial reactions across markets such as equities prior to yet another change of policy to pause some tariffs.

These significant tariff increases from the world’s largest economy to levels of at least 10% are widely seen as a negative development for global economic growth and inflation, with the key US economy actually being seen as one of the most negatively impacted areas. There are hopes that ultimately negotiations will lead to lower tariffs than those initially announced, or the negative domestic reactions are forcing a rethink, but in the shorter-term much may depend on how other countries react and whether we see tit-for-tat retaliations and a worsening trade war or we settle at elevated but manageable levels.

The UK is seen as one of the lesser impacted countries by these announcements given that we were at the low end of the initial new US tariff rates and our economy is more dependent on services rather than manufacturing, but tariffs are still moving to higher levels and our economy is also exposed to any negative impacts for the global economy, so there are further risks to our already sluggish growth levels and stretched public finances.

Previous market optimism had been based on a relatively resilient global economy, growing corporate profits, more subdued inflation and falling interest rates, and these tariff developments have undoubtedly put at least a short-term dent in those important fundamental drivers. Trump’s policies have created uncertainty and conflict and a damaging trade war could escalate, however we remain hopeful that this will ultimately not be a fatal blow to that broadly positive market backdrop, and there are still potential positive drivers such as greater fiscal stimulus in Europe and China, interest rate cuts, likely tax cuts in the US, and many asset valuations have become more attractive. 

In addition to the aggressive tariff developments, we have also seen a significant change in US foreign policy towards former allies. Negotiations to progress resolving the conflict in Ukraine are a potential positive, but the bigger initial impact on markets has been seen by the unexpected policy shift in Europe, led by Germany, towards greater self-reliance and increased government spending on defence and infrastructure. Tariff developments have tempered the initial optimism in Europe, but these signs of fiscal stimulus and a more coordinated response have been well received.

China has been suffering a period of below trend growth, weakness in its property market and tensions over relations with the US, which have now further escalated. However, we have seen positive developments including a number of stimulus measures to support their economy, a more supportive environment for wealth creators, and optimism about its technology capabilities following DeepSeek’s low-cost AI model.

A slowdown in the US economy after a period of relative strength was expected to be offset by an improving outlook across previously sluggish areas such as the UK, Europe and China, with the overall global economic growth outlook continuing to paint a subdued but positive picture. Unfortunately, forecasts are being reduced following the latest tariff announcements and recession risks have grown, so we will need to keep an eye on how significant this becomes and how companies navigate this more challenging environment.

Inflation remains a key issue as there are still areas where it has remained sticky, especially those where elevated wage increases have a larger impact such as the services sector of the economy. However, overall inflation has returned towards target and with the outlook suggesting it will largely remain under control, major central banks have had the confidence to continue cutting interest rates. Concerns over government finances and sticky inflation have tempered expectations for the number of future rate cuts and tariff impacts add a new layer of uncertainty, but we are still expecting some further welcome reductions across the developed world. 

With the UK bank rate currently at 4.5%, cash can still provide a useful low risk option for savers alongside other investment assets, but rates are forecast to decline and cash returns are unlikely to match the medium to long-term return potential available elsewhere. 

The period of high inflation and rising interest rates proved painful for most fixed income assets, and concerns over sticky inflation, more limited rate cuts and high debt levels have limited the recent performance of government bonds. With 10-year UK government bonds (gilts) now offering yields above 4.5% alongside the risk reduction benefits they provide in many potential stress scenarios, we have been rebuilding exposures in our portfolios. Other fixed income options such as investment grade corporate bonds, high yield and emerging market debt offer higher income to compensate for their greater risk. These additional yields over gilts (known as spreads) have been narrow by historic standards, but recent events have seen them widen. Spreads could widen further if economies slow significantly, but with company finances reasonably robust default risks remain relatively low and overall yields of around 5-8% offer some attractive levels of income.

Equity markets had navigated the multiple challenges seen in recent years well, with many reaching all-time highs as corporate profits grew, interest rates declined and structural drivers from developments in areas like AI and healthcare provided further growth opportunities. However, the latest tariff moves have damaged market confidence by negatively impacting the global economic outlook and adding to uncertainty which can also impact activity. Whilst more positive outcomes are still possible, much will depend on how long these elevated tariffs remain in place, how negotiations and retaliations develop, and how this impacts economies and companies. 

Elevated equity volatility could persist for some time as Trump maximises his window of opportunity to make policy changes whilst he controls all of the levers of US power, but it is important to remain invested through challenging periods and keep a focus on the longer-term global investment fundamentals which still have attractions. From their current valuations, equities have the ability to maintain their long-term track record of delivering above inflation growth, and we retain our conviction in their ability to offer reasonable longer-term income and growth potential for patient investors who are able to cope with shorter term volatility.

The previous structural headwinds for UK equities are diminishing, valuation and dividend income levels remain attractive, the sector mix and tariff risks are relatively favourable for the current environment, and there is the potential for investor sentiment to turn towards the UK as investors look to reduce their heavy reliance on the US market.

Within international equities, the previous dominance and exceptionalism of the US market is being challenged. The quality of their companies and above average exposure to growth and technology sectors remains a long-term strength, but recent policy concerns and their elevated valuation premium above all other regions means we continue to look to diversify exposures towards those other more attractively valued equity markets. Europe and Asia still have a number of challenges and are also vulnerable to trade war risks, but we have seen positive policy responses such as stimulus measures, and many good companies are now available on below historic average valuations. 

UK commercial property market return forecasts currently remain healthy for 2025 and beyond, but the impact of recent investment market challenges will not be seen across property markets until later in the year. Levels of occupier demand could be negatively impacted by financial stresses, but the UK property sector could be seen as a relatively stable asset class during uncertain times. Overseas real estate and infrastructure will continue to be introduced to relevant portfolios during 2025 as sectors are expected to return to growth, and to provide additional diversified sources of returns.  

In conclusion, Trump’s policies have created a higher risk environment and a damaging trade war could escalate, but we remain hopeful that this will ultimately not be a fatal blow to the current broadly positive market backdrop of resilient global growth, subdued inflation, falling interest rates, fiscal stimulus in Europe and China and likely tax cuts in the US. The more normalised levels of interest rates and bond yields have improved the valuation appeal of cash and fixed income assets, and they now provide useful attributes in mixed asset portfolios. Equities remain vulnerable to tariff developments, but longer-term attractions remain and valuations have moved lower. Overall, whilst we may be in for a period of higher shorter-term volatility, this can create opportunities and investors should continue to focus on the longer-term attractions of remaining invested through more challenging periods, and diversified portfolios across different asset classes, sectors and geographies can be a good way of managing risk.

Paul Glover
Chief Investment Manager
14th April 2025