MARKET UPDATE | 14 MARCH 2025
Trump: ructions and rumpus
After a very positive start to the year, it has been a tough few weeks for financial markets. Stockmarkets have generally retraced their steps and been subject to heightened daily volatility, with weak sentiment spilling over into currency markets and impacting hitherto strong currencies like the US dollar too.
It will come as little surprise that the principal cause of this heightened volatility has been the words and actions emanating from the White House following Donald Trump’s inauguration as US president in mid-January. The entrance of DeepSeek, a supposedly cheaper artificial intelligence (‘AI’) newcomer from China, into technology markets has additionally raised questions about business models and valuations in a dominant market sector, whilst geopolitical risks have escalated too. Markets have steadied a little in the past few days, but are likely to remain quite twitchy until we have greater clarity on a number of fronts, most notably just how far the US president is prepared to push others around in his quest to ‘make America great again’, what retaliatory measures are taken by America’s other key trading partners and how all of the ructions and rumpus, ultimately, impact the world economy, inflation and central bank policy.
Financial markets have a natural aversion to uncertainty, and it is this broad undercurrent that is driving weak market sentiment at present. Business leaders are understandably reluctant to invest and are finding it difficult to plan ahead whilst so many nebulous forces, particularly related to trade tariffs, are at work.
“…volatile periods like this are typically times for calm heads and not knee-jerk reactions, particularly when there are so many unknowns.”
Although we are watching and analysing events closely, volatile periods like this are typically times for calm heads and not knee-jerk reactions, particularly when there are so many unknowns. Our investment strategies are built on longer term investment themes and growth expectations, not on guesswork or short-term sentiment. At present we are content to let the underlying managers do the heavy lifting – we are meeting and talking to them constantly and most are reporting that they too are sitting tight, waiting for more concrete data or evidence that something has changed and an altered stance needs to be adopted. If they have cash to deploy, a selected few are taking advantage of the sudden cheapness in quality growth franchises, but in the main they are content to ride out this period of uncertainty. We are too.
It is interesting to note that, in contrast to his first term as US President, Trump has (so far) been unusually silent on the topic of the US economy and stockmarket. His preoccupation with imposing trade tariffs, talk of land grabs and clumsy attempts at acting as global peacemaker seem to be more pressing than calming market and investors’ nerves. Trump’s rhetoric could, of course, swerve if the economic data begin to materially alter for the worse – markets have reacted poorly to recent retail sales and consumer confidence data, but news on inflation and jobs is, so far, not raising any alarm bells. US companies continue to deliver solid earnings growth and whilst the US economy is not growing as fast as it was earlier in 2024, and is likely to show weakness in the first quarter of this year, its superior growth path relative to other developed economies is not expected to come off the rails either this year or next.
“…we are confident that both we and our underlying managers will be well positioned to participate in a more diversified and discerning market recovery…”
But there does appear to have been a subtle, and perhaps healthy, shift in investor appetite in recent weeks. For the past few years the US stockmarket, and particularly the technology-skewed market heavyweights, have enjoyed most of the limelight, having had a dominating influence on global equity market returns. That narrative does appear to have shifted in recent weeks. Although the US equity market remains the largest slice of our global stockmarket positioning, and is likely to remain so, our allocation via a range of active managers continues to give much broader representation of the US economy and stockmarket. Recent market turbulence has tarred many companies with the same brush, including negatively impacting our recent foray into smaller US companies – these businesses should actually be the ultimate beneficiaries, not the casualties, of Trump’s harsh tariff tactics, but at present markets are not being particularly selective. Once the dust settles, we are confident that both we and our underlying managers will be well positioned to participate in a more diversified and discerning market recovery, including one that is not totally pre-occupied with, and dominated by, large-cap ‘technology’ stocks. We are still happy to maintain our dedicated commitment to the global AI theme, comforted by the fact that the active managers of this fund had already been taking steps to shift away from the more expensive enablers of AI to the cheaper users of it, evolving their portfolio in a quest to uncover the next growth opportunities that will undoubtedly come to the fore in the coming years.
At a more general stockmarket level there is also evidence to suggest that current uncertainties are causing investors to seek some wider investment diversification, including slight shifts to cheaper, previously unloved, areas like the UK and continental Europe. This is despite their expected economic growth rates remaining unremarkable in contrast to areas like the US and Asia – the lion’s share of our stockmarket allocation is still positioned towards these latter, faster-growing economies. But we see the early signs of some regional ‘levelling up’ as no bad thing, and perhaps an indication that market participants will also soon be ready to pay more attention to investment fundamentals again, including valuation, the quality of business franchise and reliability of corporate earnings. These are factors that have largely been left by the wayside in recent years. A return to such fundamentals should play to the natural skillsets of active managers, but as ever we too remain prepared to make adjustments to both our regional and market-specific positioning if there is a strong case to do so.
At present, we are content with the diversification and exposures we have in place, including – where appropriate to the risk mandate – allocations to more defensive assets such as fixed interest and alternative investments. These are fulfilling their role as partial dampeners of portfolio volatility for lower risk appetites.
Overall, there is still ample time for markets to be reassured by any one of a combination of more resilient economic and/or corporate data, stimulative actions by central banks and some change in Trump’s mercurial tactics. Being invested in markets when sentiment and confidence return (which can often be quite quick, as we saw at the very start of the global pandemic) is generally a more successful strategy than trying to swap and change in the heat of market volatility.
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