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MPS provider investment teams are asked how they expect to change their asset allocation over the next quarter.
The investment landscape is shifting—and your clients need your guidance more than ever. In Blackfinch’s latest CIO Outlook, Chief Investment Officer Dr. Dan Appleby challenges the long-standing belief in "There Is No Alternative" (TINA) to US equities and introduces a compelling new paradigm: There Is an Alternative (TIA).
Key Takeaways for Financial Advisers & Paraplanners:
• US Dominance Under Threat: After years of tech-fuelled outperformance, US equities—especially AI-driven giants like Nvidia—are facing competition. China’s DeepSeek has disrupted the narrative with a lower-cost rival to ChatGPT, casting doubt on US tech’s unassailable lead.
• Geopolitical Repricing: A more isolationist second Trump term and a strained transatlantic alliance have spurred Europe to boost its military independence—led by Germany's historic €500bn+ infrastructure and defence stimulus.
• Global AI Race Ignites: While US Big Tech continues to pour capital into AI, emerging markets and European firms are now credible contenders in the AI arms race. Diversification is no longer just smart—it’s essential.
• European Equity Resurgence: The German DAX and European defence stocks have surged, while the S&P 500 lags. Could this signal a long-term rebalancing in global market leadership?
• Investment Strategy Update: With structural shifts underway, now is the time to revisit portfolio allocations. European and emerging markets offer new avenues for growth, while diversified multi-asset strategies help mitigate volatility.
Why Read the Full CIO Q2 2025 Outlook?
If your clients are asking:
• “Is now the time to shift away from US equities?”
• “How do we position portfolios for an AI-driven future?”
• “What does growing European independence mean for markets?”
...then the Q2 2025 CIO Outlook has the answers. Backed by in-depth analysis and data-driven insights, this report equips you to deliver informed, forward-looking advice in an increasingly multipolar market environment.
Link to full outlook: https://tinyurl.com/CIOOutlookQ22025
Our AiQ investment process continues to favour increasing weightings within European and domestic equity markets, relative to those in the US and it appears that President Trump’s extraordinary stance on the introduction of trade tariffs supports this move. Our allocation to physical gold provides some welcome diversification and bonds, especially at the short end of durations are very much the order of the day at present. With market’s currently poised on every new news development, we remain wedded to our systematic process and the flexibility that this gives us during the potentially treacherous and volatile months ahead.
US trade policy brinkmanship significantly increases inflation risks through tariffs and supply chain disruptions while fiscal policy will remain loose. Such a backdrop will likely force the Fed to maintain rates higher for longer and put upward pressure on yields. Regardless, we see diversification benefits in UK and US 10 year sovereign bonds, as well as short term pan-European credit.
While we expect volatility to remain elevated in the short term, we do not view this as an opportune time to reduce risk exposure within portfolios. We will continue to monitor the balance of risks to US equities, but as of now we remain comfortable with balancing exposure to parts of the market with stretched valuations with equivalent equal weighted indices. We see cyclical stocks around the world as a risk diversifying source of returns as major developed economies look inwards in search for growth and resolutions to major geopolitical frictions come into view.
The US have raised effective US tariff rates to their highest level since the 1930s. This policy announcement worsens the near-term growth/inflation trade-off, increasing the risks to both economic activity and price stability in the short term. As such, we have downgraded our score on equities from positive to neutral, but have broadened regional exposures due to varying valuations.
We are neutral on government bonds, with US bonds fairly valued after recent corrections. Commodities are mixed; positive on industrial metals and gold, but neutral overall due to excess supply in energy markets. Corporate bonds have been downgraded to neutral due to tight valuations and policy uncertainty. In currencies, we have downgraded the US dollar to neutral and the Swiss franc to negative, while upgrading the euro to positive. Emerging markets local currency bonds have been upgraded to positive for diversification benefits and attractive yields.
No change to our models SAA. 2024 has been another good year for global equity investors; however, the US president-elect warnings of trade tariffs, continued geopolitical tensions and uncertainty around inflation and rate cuts are all potential headwinds that can weigh on markets in the year ahead.
We emphasise that advisors and end clients remain invested in globally multi asset portfolios aligned to the appropriate strategic asset allocation that matches the clients' risk appetite i.e. tolerance for loss and drawdown and to resist the temptation to time markets, switch between defensive and risk assets or pick regions, sectors or stocks, all of which have been shown to erode performance in the long term, with the consequential sub optimal outcome for the end investor.
The recent decline in equities highlights market sensitivity to US economic data, associated interest rate expectations and the broader geopolitical outlook. Meanwhile, credit spreads have widened slightly, suggesting a modest uptick in perceived credit risk, though overall corporate fundamentals remain resilient.
This environment points to a more selective investment approach, favouring quality assets with strong balance sheets. While volatility will likely persist in the near term – at least until we get a clearer picture of the new tariff regime – we are happy to harness some risk as and when discounted prices present in selected markets
Market Positioning Update We've adjusted our allocation to reflect the shifting macro landscape. US equities have been trimmed just under neutral, acknowledging valuation concerns and heightened policy uncertainty. The risk-reward dynamic has softened, particularly with AI-driven names facing headwinds.
Meanwhile, we've increased exposure to Europe, the UK, and China, bringing all three to a slight overweight. Europe offers a compelling mix of attractive valuations and improving growth prospects, while the UK continues to benefit from resilient earnings and a more stable rate outlook.
In China, sentiment remains fragile, but policy support and deeply discounted valuations justify a tactical move higher. Broadly, we remain selective, leaning into areas of undervalued opportunity while keeping dry powder amid policy and market volatility.
Markets are likely to by choppy but, in our view, there is still money to be made for investors who can hold their nerve. A robust economic backdrop, increased fiscal spending, and room for monetary loosening are all positive for investors. However, increasing policy uncertainty is a risk that must be managed.
Our key positions are below:
• Holding a pro-risk stance: positive view on global equities, listed real estate, and emerging market debt
• Additional diversifiers: gold can provide support during geopolitical uncertainty, while benefiting from falling interest rates
• Broadening allocations: broadening US exposure beyond market capitalisation weighting to increase exposure to high quality earners with attractive valuations. Adding to UK equity market given its defensive characteristics
• Cautiously reintroducing bonds: Fixed income valuations look appealing, while the prospect of potential rate cuts encourage us out of cash
The Trump administration's policies have caused significant volatility, creating uncertainty in global trade and impacting sentiment negatively. U.S. markets have weakened in 2025 due to softer economic data, though we believe the economy is cooling from a strong 2024 and remains supported by solid EPS growth and a robust labor market.
However, we are monitoring whether the weaker data reflects the emergence of a broader trend. Taking an underweight position on the US at this stage appears to be an overreaction, considering the de-rating of the Magnificent 7 companies amid ongoing AI advancements. We remain cautiously optimistic about Europe's fiscal developments and potential Chinese stimulus, maintaining a neutral stance on risk assets and a record-high bond allocation, primarily in government bonds, as a defensive buffer against growth risks.
The recent downgrades to US growth this year are fair. The sharp decline in investor business and consumer sentiment precipitated by policy uncertainty will affect the economy. We don't foresee US recession though. The US and the global economy were in good shape prior to the impacts of tariffs and DOGE – Department for Government Efficiency.
Our views in the portfolios remain unchanged: we have more in equities spread across the US, Europe and Asia and less in government bonds. There was too much bad news in global stocks following the election and ex-US markets are playing catch-up. We retain the tactical overweight in the US because there is a decent chance uncertainty recedes and attention could return to what are good fundamentals for company profits.
There seems to be an air of despair around investing in the US at the moment that we do not think is wholly justified, the US is still one of the most corporate friendly and innovative markets on earth and we intend to maintain our exposure. We do however share the sentiment that the current paradigm does favour European cyclicals and Japanese domestics.
As global growth continues to remain resilient in the face of higher rates, we still see central banks taking a cautious but proactive approach to lowering rates this year.
However, with Donald Trump re-entering the White House, we could see inflation becoming more persistent as both his economic and immigration policies take shape.
Whilst the US market continues to be out of favour, developments in Europe and in particular, Germany, look set to deliver constitutional reform to unlock higher defence spending and public investment. We think these measures will boost GDP growth by 0.5-1.0% over the next few years.
Due to this, we have recently rotated equity risk by closing our infrastructure overweight to fund a neutral European Equity position.
The recent rise in credit spreads has also provided an opportunity to close our high yield bond underweight, a move funded by reducing our overweight to short-dated government bonds.
At Apollo, we have long advocated that patience and valuation are key to long-term investment success. While we were early in calling the rotation away from US mega-cap tech, we remained steadfast in our conviction that select regions, sectors, and themes presented once-in-a-generation opportunities. Our equity exposure is built on high-quality yet undervalued companies, managed by alpha-generating active managers across regional, sector-focused, and thematic strategies.
We find diverse geographical exposure particularly compelling, with Europe, Japan, Emerging Markets, and Asia standing out as the most attractive opportunities for long-term investors. Absolute return allocation remains a key diversifying asset class, designed to deliver low-risk, low-volatility returns within our portfolios. By focusing on strategies that generate consistent, risk-adjusted performance, we enhance stability while maintaining diversification across market cycles.
Plans announced by US President Trump should stimulate growth, but at the risk of inflation and slowdown elsewhere in the world. Many countries are now forging alliances to become less reliant on the US, but this takes time. Base rates will not be cut as quickly and sharply as hoped, and higher bond yields are possible longer term driven by US tariffs, soaring debt levels and rising interest payments.
We have been underweight US equities and Technology based on their high valuations – the recent sharp underperformance in these markets has led us to outperform, but we are looking at any further weakness to increase exposure. We remain underweight Bonds given their uncertain outlook, illustrating another area where we have been adding relative performance.
Equity market volatility has picked up recently, initially on the emergence of DeepSeek’s AI model which challenged the dominance of US mega-cap tech in the AI sector. This has been followed up by concerns over the implications of Donald Trump’s tariffs policies and potential repercussions. We maintain an underweight to the Magnificent Seven within our US exposure as even though share prices have fallen considerably year-to-date, valuations remain demanding. Additionally, influential voices within the administration argue that the US dollar's status as a safe haven and reserve currency has its drawbacks, and that the US could benefit from a weaker dollar.
If the US is no longer perceived as a safe haven and investors shift away from the US dollar as a reserve currency and US Treasuries as risk-free assets, this would be a monumental change. It is a difficult risk to price or trade, but gold remains one of the few assets that could benefit. Diversification remains key and our fixed income portfolio duration provides some buffer to our overweight equity position.
Markets have corrected in recent months, with prior optimism for pro-growth deregulation and tax cuts from the new Trump administration being punctured by a highly aggressive approach to global trade, including tariffs on leading trade partners. This uncertainty has been compounded by several leading central banks moving to pause rate cuts during the quarter, awaiting further economic data regarding the interplay between growth and inflation.
The considerable deviation in sentiment compared to only a quarter ago, provides support to ebi's philosophy of seeking to allocate investments on a long-term basis to the market, rather than attempting to achieve alpha through short-term tactical moves or market timing. We continue to enact this through our index-tracking, buy-and-hold, and factor-driven approach.
At a portfolio level, our global multi-asset approach remains overweight Equities. We continue to invest across the full market cap spectrum, as well as blending different styles within our equity allocation, currently split 70% to value and 30% to growth. In Fixed Income, we maintain a barbell approach, balancing long-duration government debt with short-duration corporate credit, high yield, and hybrid bonds to navigate varying market conditions and manage both inflation and interest rate risk.
To enhance portfolio diversification, we continue to invest in alternative assets, including infrastructure, gold, and defined return strategies. These provide different sources of alpha and reduce correlations within our portfolios. This multi-faceted approach aims to optimise returns across different market cycles, balancing growth potential with defensive qualities.
Markets seem to be getting a good post-Trump election reality check at present. Euphoria in the US is giving way to the recognition that a combination of wider tariffs being applied and large layoffs in the public sector could equate to a slowdown in the US economy. This in turn is being reflected in stock prices particularly for those that were previously beneficiaries of the speculative AI trade. Conversely,
European indices are beneficiaries of the volte face in US foreign policy towards Russia and Ukraine, although bond markets are reflecting the potential cost of this. Portfolios have previously positioned towards lower duration and are globally diversified. This is a good thing, as acting in haste during higher volatility is usually an unwise move. Trying to read the next policy shift drama coming out of the US is a fool's errand, so patience is required as we await a period of stability on this front.
Having benefitted YTD from our UW US Equities and OW UK and European equities, we are looking to reduce the UK and Europe equities UW vs our SAA. Within bonds we took profit on US Treasuries positions and trimmed our positions there, adding to European government bonds. We are looking to rotate our listed infra and property positions into our recently launched UCITS fund of investment trusts which continues to perform very well.
Trump’s policies since his inauguration threaten growth, but tariffs in particular risk increasing inflation expectations. The good news is that so far inflation expectations remain anchored. This means the Federal Reserve will be able to cut interest rates (which the market expects them to do three times in 2025) if growth is indeed slowing significantly.
There is also good news in that investor sentiment has fallen to levels that have previously been profitable buying opportunities. So, we have not changed our asset allocation. We remain with a small overweight of equities and underweight of bonds
Following a particularly strong 2024, the first quarter of the year marked a sharp change for equities. The dominant US market was volatile was the centre of significant selling from late February, underperforming peers. Unusually, government bonds saw little change as although interest rates have begun to come down, stubborn inflation moderated expectations for future cuts. Geopolitically, uncertainty remains elevated as the threat of tariffs and changes to the US alliance framework leave many questioning what the future will look like and who the beneficiaries or losers will be.
Economic momentum continues to ease although modest growth remains. Particular focus has been on the US economy, which was already showing signs of slowing. Policy volatility, mainly on tariffs, has impacted business and consumer confidence. Given the direction of economic momentum, combined with greater uncertainty on trade, there is a realistic risk of recession in the world's largest economy. This is now being priced into markets. Monetary policy has also been more of a headwind than a help, as central banks have on balance moderated their expectations for rate cuts given persistent inflation. This is particularly notable in the US, where the Federal Reserve may potentially make no further adjustments this year. However, should a significant economic slowdown or recession occur, some easing would be expected, even with the high inflation backdrop.
Europe has had more scope to ease policy as inflation is contained, approaching the 2% target rate. Furthermore, Eurozone economy has also been more sluggish, increasing the arguments for stimulus. Developments in the Ukraine conflict have been volatile, although the prospect for peace increasing as the US is forcing discussion. The potential for peace has already impacted energy prices in Europe as the prospect for Russian gas exports returning could ease supply pressures. A potentially bigger and longer term impact of the way the negotiations have been conducted is how European (and other) nations perceive the established US alliance framework and guarantees. The current administration has forced European nations to take their own defence into their own hands.
The shift in mindset has been rapid and the scale of the change will be significant for many European nations. In particular, Germany, which has underspent for many years and has significant fiscal headroom, is likely to see a seismic shift in the amount of defence spending over the coming years. Markets have taken this positively as investors see a potential renaissance in European manufacturing. Some barriers remain, however, several stars appear to be aligning for the European economy.
Investor enthusiasm for Donald Trump appears to be fading. While tax cuts and deregulation haven't materialised, his administration's disruptive elements have. As US investor and consumer confidence declines, the White House might adopt more market-friendly policies. Trump's tariff on Chinese exports negatively impacts China, but its internal economic stimulation is crucial for its future and global growth, which could bring more inflation.
The UK and Europe face near-term growth challenges, but defence investment could change that. Economic weakness suggests possible rate cuts, especially in Europe. Global equities have a positive outlook, although past returns may be hard to match. Stock performance relative to bonds remains uncertain. Given ongoing risks and rewards, we are maintaining our current portfolio weightings across regions and asset classes.
An interesting start to the year has given markets reason to reconsider the accepted wisdom of 'US exceptionalism'. The shock announcement of near AI equivalence from DeepSeek in China, at a fraction of the cost, has shaken assumptions of Western supremacy and associated capital spending. The threat of tariffs as an economic policy tool may be more real than just a negotiating tool. And finally post WWII institutions, such as NATO and the World Bank, designed to ensure peace and economic stability, may not have the US backing always presumed.
Uncertainty is elevated, the risk of something going wrong is heightened and stretched valuations look vulnerable. However, many valuations are not stretched and we remain fully invested but deliberately diverse, with a view to being more actively invested than passively.
The macroeconomic outlook for March 2025 highlights a mix of risks and opportunities. The U.S. faces rising recession risks due to weakening consumer spending, stagnant wage growth, and persistent inflation, exacerbated by uncertain trade and immigration policies under the Trump administration. Federal spending cuts and restrictive monetary policies further strain growth, with GDP projected to slow to 1.6% in 2025. However, improving market valuations and Europe’s bold fiscal expansion, including Germany’s €900 billion defence and infrastructure plan, offer hope. These measures aim to counter sluggish growth and could position Europe as a relative outperformer. While remaining tactically underweight risk, the outlook suggests a potential shift toward neutrality if U.S. valuations improve or Europe’s stimulus continues to gain traction.
Markets have faced a turbulent first quarter so far as political and economic shifts have driven sentiment. Donald Trump's second term has begun with a flurry of executive orders, heightening trade concerns. US equities have been volatile and are weaker this quarter so far, particularly in the technology sector after a Chinese AI breakthrough unsettled investors.
Meanwhile, Europe has shown signs of recovery, supported by expected interest rate cuts. Germany's election result reassured markets, easing fears of political extremism and signalling increased government spending. Bonds have performed well amid softer economic data and rising uncertainty, while gold hit record highs. Currency markets have been mixed. As this quarter ends and Q2 begins, interest rate trends and US inflation remain key risks, with policy uncertainty likely to drive further volatility.
The U.S. stands to do better in a trade war against any individual country but the Trump administration seems willing to go after many countries at once. This could impact growth in the U.S. more severely than if the U.S. were to just focus on a smaller group of countries.
After Germany and the European Union (EU) made announcements in March about defence spending, fiscal policy looks set to become more supportive of European growth. We remain overweight gold and equities. We are neutral on fixed income but overweight sovereign and underweight global bonds.
US equity valuations have dipped during the recent market decline, with the sell-off driven by policy uncertainty and a corresponding change in sentiment, as opposed to significant earnings revisions. Furthermore, while recent developments have caused alarm, it's worth noting that most economic indicators are not flashing warning signs, and there remains a reasonable margin of safety above a recession. Against this backdrop, we retain our marginal overweight to equities, with a corresponding tilt towards high quality sovereign bonds.
Looking ahead, there are three potential areas of concern that we continue to keep a close eye on: - The predicted slowing in the growth of AI capital expenditure. - The detrimental effect that higher levels of uncertainty can have on growth stocks. - Higher interest rates due to trade tariffs. With these potential risks in mind, our experienced research team continuously monitors the businesses, industries, asset classes, and equity regions that could be impacted. In turn, our unique Building Block structure enables the MPS team to act swiftly across strategy exposures, mitigating risks and taking advantage of opportunities as they arise.
The start of 2025 has witnessed a sharp reversal of the previous outperformance of US equities versus the rest of the world. We were already positioned to be underweight the US relative to global indices at around 40% of the overall equity portion of portfolios. This relative performance begs the question of whether it is time to increase our weighting to the US, in effect "buying the dip". We think not yet. Valuations in the US remain elevated, particularly in the technology sector, and investors have been wary of the potential impact of President Trump’s economic and trade policies.
Meanwhile European and Emerging Market equity markets appear to be the main beneficiaries of capital flows away from the US. We believe that these conditions could persist for some time.
2025 has marked a rotation in both flows and performance for equities. The US, having led the way on both for an extended period of time, has meaningfully lagged YTD. All very short term at this point, but the mood music does feel as though it's changing. Diversification has been a hindrance to asset allocators for some time but if this trend continues, and returns continue to broaden out, staying clear of a market cap approach may well be the smart play.
We maintain an overweight to US small cap - at the expense of large cap – viewing them as a beneficiary of the Trump administration once policy focus turns more domestic. Alternatives exposure has also been increased, a hedge to the growing risk of elevated inflation combined with a continued slowdown in economic growth.
We expect a modest rather than meaningful slowdown in global economic growth in the months ahead, with easing inflation leading to gradual interest rate cuts in developed economies. After a period where US tech giants have dominated, we expect market returns to be spread across a broader range of companies and for equity markets elsewhere in the world to begin to narrow the gap with the US.
We believe bonds look attractive because demand from investors is likely to increase as rates on cash deposits fall. In particular, we favour government bonds. We have made a measured increase to our exposure to UK equities, on the basis of attractive valuations and a more supportive macroeconomic backdrop. We also expect infrastructure to benefit from lower rates and have added an allocation to portfolios.
In light of a more cautious stance on global economies and heightened geo-political tensions we are moving to be slightly more beign towards equity markets. Long-term we are bullish on growth markets and sectors, but this year could be a 'risk off' year due to the multiple volatility levels that has come into play this year. For us at Binary Capital, the US market is still a key investment market, and we maintain conviction here.
2025 so far, has been turbulent for investors. The increased volatility could be attributed to the on-again, off-again tariffs being implemented by the US Government with little or no notice. But beneath it all, lies an old-fashioned 'growth scare'. The market is concerned that these tariffs will feed through into weaker economic growth, particularly in the United States. Our response to this challenge is relatively straightforward.
Rather than focus on the news headlines we focus on the data. Overall, we start from the position that it would be unusual for a recession to occur when interest rates are falling and where the labour market is close to full employment. But of course, we have never had a president quite like Donald Trump. In the context of this uncertainty, we are not making any immediate trades in portfolios but are continuing to wait, over the coming weeks, for the data to build.
Investors haven't been as positive on European and UK companies over the last few years compared to US companies when looking at their ability to grow. We feel that narrative is starting to change in that while America's economic growth has been exceptional over the past five years, the profitability of its equity market has not been much better than Europe's.
Investors seem to be stuck in the 2010s' paradigm. In the US, economic uncertainty brought about by Trump's policies have reversed the surge in "animal spirits" (the emotional factors that influence behaviour and decision-making) that followed the US election. Couple that with household savings rates being depleted, disposable income growth after inflation slowing and the valuations that US stocks trade on relative to their European peers still being historically high.
Ultimately, when looking at where we place client's money in the market, we have to focus on what the data is telling us. That is why we believe that a diversified portfolio with exposure across regions and more importantly, across different sectors within those regions leads to smoother returns over the long term and avoids being concentrated into what's doing well today but may not do well tomorrow.
We are maintaining a broadly 55/45 split between North American and Rest of World equities. Plans to introduce small cap to models have been shelved given current uncertainties, with allocation predominantly in large cap, with some exposure to mid-cap. Fixed income remains largely the short to medium dated investment grade, but with credit spreads very narrow, there has been some move toward short to medium dated government bonds.
Instead of unveiling a clear and consistent policy on tariffs, US President Trump's approach has been chaotic, with positions changing daily. The sell-off in the US stock market is reflecting this policy uncertainty and increased risk of stickier inflation. However, we see US earnings growth remaining resilient and further market weakness could be a potential buying opportunity.
Increased fiscal stimulus in Europe and UK could continue to pressure UK and EU bond yields higher, while Tariff policy could stoke inflation in the US and global markets. We remain selective in fixed income and retain exposure to inflation-resilient alternative assets such as Gold and precious metals, infrastructure. Our approach is to remain adaptive and nimble during such uncertain market conditions.
The volatility of policy and atypical delivery methods under the new political regime in Washington and this has clearly started to have a material impact on global growth outlooks and we need to consider is the impact on consumer confidence with the potential impact of job losses within government departments and agencies. A key factor in the outlook is going to be whether this rotation from the US to rest of world equity – particularly European and Chinese equity – is the start of a significant mean reversion or a shorter-term trade.
With so much going on we are maintaining a moderately cautious stance and a willingness to be flexible with the positioning of the portfolios. As we have said for many years diversification will be key to maintaining the overall risk and return profile of our portfolios and this seems even more pertinent now.
Over the next 12 months, we expect: Economic growth to be positive but slowing as rate rises and political uncertainty weigh on confidence. We wouldn't be surprised to see US GDP growth at 2%, rather than 2.8%, for example. But 2% ain't bad! We'd also expect to see investors re-engage with businesses outside the tech sector – which probably means looking further afield than the United States.
We're sticking to diversification. Spreading our allocations widely before there's a reason to do so – because by then, it will be too late. So despite the scary headlines, we've seen no reason to cut equity allocations – neutral's just fine. And we haven't felt the need to suddenly sell all of our US tech stocks, because we've been diversifying away from them for some time. The first few months of 2025 have made us look like smart short-term asset allocators – but really, this is a long-term process that's just starting to play out.
As we enter Q2 2025, we expect markets to remain challenging amid ongoing geopolitical tensions, evolving trade uncertainties, and shifting investor sentiment. We anticipate further divergence between US and international equities, reinforcing the necessity of diversification. After a sustained period where investors have been paid for concentration in the US and growth style companies, US equities are likely to encounter continued headwinds - driven by persistent trade tensions and the chaos surrounding tariff policies.
Additionally, volatility in technology sectors, particularly the "Mag 7" stocks, may persist amid evolving dynamics within the AI industry, notably influenced by DeepSeek's emergence and fading optimism that AI will deliver the huge rapid improvements to company's bottom lines. International equities, however, present promising opportunities, with regions such as Europe and China expected to maintain resilience and still offer attractive valuations.
Certain markets, including India, may remain under pressure due to global trade tension, but the relative attractiveness of some Indian stocks has markedly improved. Fixed income assets should continue providing stability and potential modest gains, underscoring their essential role as portfolio diversifiers. If everything bases off the 10-year treasury, then a starting yield of circa 4.3% offers plenty of opportunities, especially for the active managers in this space Our portfolios remain strategically diversified, positioned cautiously yet optimistically to capture opportunities across the globe during anticipated market volatility.
Q1 has been a volatile period for markets and whilst we hope the jitters will calm down somewhat over Q2 2025 the new administration in the US will certainly keep markets on their toes. Whilst alarming for some investors, the recent sell-off has released the pressure valve of the US equity market somewhat and forced extended valuations to be rerated. The tariff war shows no signs of abating and concerns around US economic growth are rising. The oppositional force these factors have on the course of interest rates will make the FED’s decisions even more difficult.
Turning to the other side of the pond, the prospects for Europe are looking up after the need to stand on its own two feet militarily was made apparent by the US. It will remain to be seen over Q2 and beyond whether the boost to European stocks ripples out into wider spheres than the defence sector so watch this space.
Our valuation driven process bore fruit during the quarter, following our rotation into Europe and holding our nerve with China at our January rebalance. There are natural questions over how much this dispersion of returns in equity markets has to run. We're comfortable holding our positioning, knowing that our disciplined rebalancing will take profits in the regions and add back into the US underperformance, whilst maintaining our diversified exposure.
We still believe bond markets are not reflecting the risks of inflation, and the incoming data has been supportive of our view that service sector inflation and wages are proving sticky. Markets are starting to come around to our way of thinking, with the yield curve steepening, but it still offers slim compensation for any shock, in our view.
2025 kicked-off strongly, but the lustre quickly came off of US markets, as import tariffs took hold. The result has been a sharp drop in equities as consumers and businesses globally digest the knock-on impact for inflation and growth expectations. 'Uncertain' best describes the current situation, with the war in Ukraine and the apparent shift in global political allegiances.
In the face of heightened uncertainty we stick to our long-term goals of controlling risk for clients and remaining well diversified across asset classes. This approach helps to mitigate against uncertainty and should serve our clients well for the current environment and beyond.
As we enter Q2 we foresee that peak tariffs will occur in this quarter, as a consequence we look to reduce our overweight on inflation-linked bonds. We believe nominals will offer a better return as we see inflation subsiding into the latter half of 2025. We persist with our overweight on Asia and added to China specifically during Q1, in response to the "Deep Seek" moment that brought attention back to Chinese tech and its undervalued equities in general.
US markets are likely to continue retreating from elevated valuations, coupled with downward revisions to earnings forecasts, we see further potential for declines. In fixed income, we continue to favour sovereign bonds. Early signs of widening credit spreads have emerged, and our primary scenario anticipates this trend persisting, justifying our minimal allocation to credit.
We are neutral on equities, where we see risks as well as opportunities within the asset class. We have reduced exposure to US equities on (over) valuation concerns and concentration risks; the top 10 largest companies make up nearly 40% of the main US stock market. We have increased exposure to emerging markets where valuations are more attractive and the earnings outlook positive, as well as listed infrastructure, a defensive sector which has tended to perform well when interest rates have peaked.
We hold a lower risk (minimum volatility) equity strategy, in case recession risks increase. We are overweight value, which helps diversify exposure away from the largest US companies and where valuations are compelling; at these levels value has historically gone on to outperform over the next five years. Given the rise in bond yields, we believe the case for bonds is more attractive now than it has been for years. Our preference remains for high quality bonds, a reduced sensitivity to interest rates and increased exposure to inflation linked bonds, given the uncertain path ahead for inflation.
Market volatility has picked up significantly over recent weeks due to the rolling out of tariffs from the US and subsequent retaliations. It is important to remember that volatility works in both directions! We are getting announcements on wars/tariffs almost daily and whilst currently these are escalating, it is not without possibility that they could deescalate quickly too. This is why markets will continue to be volatile in both directions. This is across asset classes (bonds/equities/commodities etc) and regions (Europe, China, US etc). As and when we see opportunities we will take advantage of this short term volatility with our focus on delivering long term returns
We have noted that during the last 15 years there have been numerous periods of market volatility on the back of worries over the state of global economic growth. Whilst none have been caused by a trade war, in many of these occasions markets have bounced back after economic conditions were better than expected, central banks and governments stepped in, and markets had sight of more certainty going forward. We are not necessarily at the position of certainty yet, and things could be volatile in the coming months, but we do believe that signs of negotiations will be taken positively. We continue to monitor events and will be keen to act in the event of a change in economic conditions.
Over the past 120 days, global markets have experienced significant volatility, primarily driven by escalating trade tensions and the implementation of substantial tariffs by the U.S. administration. The S&P 500 has declined approximately 15% year-to-date, reflecting investor concerns over potential economic slowdowns. While such market fluctuations can be unsettling, it's crucial to recognize that they often represent short-term reactions rather than fundamental economic weaknesses. Historically, markets have demonstrated resilience, recovering from similar periods of turbulence. Maintaining a long-term investment perspective and staying the course with a diversified portfolio remains a prudent strategy amid the current noise.
The main equity market has had a difficult start to the year, led by the US, mainly due to the uncertainty surrounding US economic policy, in particular the level and impact of US trade tariffs and any retaliatory action. This is likely to remain a focus for most markets, including fixed income markets, until there is a greater degree of clarity.
Tariffs, and their potential impact on inflation, are influencing central bank interest rate policy. Most of the major central banks, with the exception of Japan, would like to cut rates but there is uncertainty as to how many cuts they can make given the economic backdrop. As a result, we are maintaining current portfolio positioning due to significant policy uncertainty.
