Investment Update - March 2025

Mar 23

Overview

Investors continued the trend of shifting assets away from the US and into Europe, including the UK, as they began to express concerns that the raft of tariffs being announced by the new US administration could lead to an economic slowdown there. Consequently, we have seen equities outside the US outperforming since the beginning of the year; a phenomenon which we haven’t been used to for some time now but has rewarded taking a more global approach in asset allocation.

On the fixed interest front, we have also started to see bonds across regions move in different directions. In the US, bond yields have started to decline, whereas in mainland Europe rates are rising. This illustrates the different drivers emerging. In the US investors believe that the imposition of tariffs and cutting of public sector payrolls could lead to a slowdown in consumption and thus leave the Federal Reserve more room to move on reducing interest rates than had previously been believed to be the case. In Europe however, there is a realisation now that the continent will have to shoulder significantly more of the costs of its own defence, following Trump’s cessation of military aid to Ukraine and threats to reduce America’s support for NATO. Consequently, the prospect of higher levels of borrowing have forced up borrowing rates, manifested in higher bond yields.

The combination of a weaker US market and a resurgent pound (which reduces returns from overseas investments), meant that all portfolios were down over the month, although all are still showing positive returns for the year to date.

United States

Although over 70% of S&P 500 Q4 earnings reports were ahead of expectations, concerns still abounded about the prospects for technology companies following China’s Deep Seek throwing doubt over the AI trade, as evidenced by the performance of the Magnificent 7 stocks which fell as a group overall. Tesla, which is seemingly facing a consumer backlash against Elon Musk’s involvement with the US administration and DOGE, as well as likely to be adversely affected by tariffs, saw its share price fall by over 25%. Consequently, we saw the NASDAQ slip by over 3%. Smaller companies fared worse, as worries emerged about the impact of widespread tariffs on domestically focused companies.

At the political level, we are all familiar now with the unpredictability of President Trump’s policy making, as tariffs are imposed one minute and reversed the next. This creates uncertainty for businesses as well as investors. Added to which, geopolitics, weaker US consumer confidence, persistently sticky inflation printing at 0.3% for January and a flash GDP report showing 2.5% year-on-year growth conspired to dampen sentiment. The new Treasury secretary, Scott Bessant, is maintaining the same policy of his predecessor of using shorter dates bands to finance the deficit in order to keep longer term borrowing rates lower. He has also stated that he doesn’t believe that tariffs will be inflationary unless accompanied by an increase in the money supply.

Europe

The narrative in Europe shifted somewhat in February. We saw political uncertainty in Germany ease following the election win of Friedrich Merz’ CDU party; although he will require a coalition with the SDP, as the right-wing AFD party secured enough votes to impact any proposed changes to the constitution, which will be required to raise the debt ceiling in the country. The latter is something that will be needed in order to address many issues such as infrastructure and defence spending. However, the unwelcome actions from Donald Trump in respect of Ukraine and NATO, have galvanised the political elite into moving as quickly as possible to avoid AFD led disruption. Indeed, the possibility of political stability in Germany, increased spending on defence across the continent and the belief that Ukrainian post-war reconstruction could act as a stimulus for the wider European economy, helped to support strong stock market performance, although it was no surprise that defence stocks led the way.

United Kingdom

The UK main market, the FTSE 100, benefits from its position as a home for globally centric businesses. This year it also appears to have benefited from the geopolitical situation, as the UK currently sits at the edges of what is developing into a global trade war. Domestically, we witnessed an uptick in inflationary pressure. As of February 2025, the UK economy is showing signs of slow growth, with the Bank of England revising its GDP growth forecast downwards to 0.75% for this year, significantly lower than previous predictions; this is attributed to a weakening labour market and a projected moderation in wage growth despite recent highs; inflation is expected to rise to 3.7% by quarter 3 before gradually easing back to the target rate. UK interest rates are expected to fall albeit only very modestly against the backdrop of higher inflation. The environment continues to look stagflationary (low growth coupled with higher inflation) and goes some way to explaining why the more domestically focused FTSE 250 index was down nearly 3%, in contrast to the main market’s positive return.

Japan

The Japanese economy continues to be driven by competing forces. On the one hand inflation has returned, which is taking some adjustment by consumers, although wages are rising and in a significant fashion for Japan, but consumers struggle with higher food and energy prices, which reduces demand elsewhere. Thus, the Bank of Japan has the problem of desiring to limit inflation and balancing this with not slowing down growth further by raising interest rates. It also has a high level of government debt, so raising rates pushes the interest rate bill up and at a time when the country is looking to bolster spending in areas such as defence. These factors, coupled with the tariff threat from the US, helped to deliver stock market declines across the board.

Asia and Emerging Markets

China’s President Xi Jinping, lent very public support to the country’s technology sector during a meeting with leading tech entrepreneurs. This included meeting with some who had been politically chastised only a few years previously over excess in the sector. In a change of stance, Xi made it clear that the sector was very important to the future of the Chinese economy. Such public political support lent itself to a strong rally in tech stocks, many of which are listed on the Hong Kong stock exchange rather than in Shanghai and whilst the latter market rose over 3% over the month, the former was up over 12%. Whilst political support for the sector was welcomed, such enthusiasm is unlikely to extend to the wider economy, which remains mired in property related debt and deflationary pressures.

Elsewhere in Asia and Emerging Markets, returns were broadly negative, as concerns grew over possible application of tariffs on the regions.

Outlook

The increased volatility in markets is likely to continue for a while, given the unpredictability of policies emanating from the White House. Markets dislike uncertainty and it comes at a time when many sectors of the US stock market were exhibiting high valuations and thus more susceptible to negative news flow. However, recent moves should be kept in context, as they come after three years of excellent returns, and we should bear in mind that US companies lead the world in many fields. That is unlikely to change. The emergence of other markets as sources of return is to be welcomed during any period of price reset in the US. The differences in moves seen across regions, in both equities and bonds does increasingly support a global approach and whilst some sectors such as technology may suffer, others can benefit from political change. So, we continue to offer an active approach to both asset classes.

Rockhold Asset Management, with contribution from Alpha Beta Partners, Marlborough and LGT, March 2025.

Disclaimer: This document is issued by Journey Invest Limited. Its content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.

Victoria Turrent