What’s been happening over the last quarter…
The first quarter of 2025 has been a tale of two halves in terms of market returns. The first half through January and early February, markets were buoyed by the news that US President Trump would delay the imposition of tariffs on global trading partners where the US was in a wide trade deficit.
The markets also warmed to the ongoing positivity surrounding the fourth-quarter 2024 company earnings reports which saw a solid trend of better-than-expected results. The economic backdrop looked positive, and the Federal Reserve continued to pause the rate cuts, leaving interest rates at 4.5%, whilst signalling stability. The market reaction saw all-time highs on both UK and US markets during this period.
From Mag-7 to Lag-7…
However, over recent weeks there has been a significant reversal in trend, particularly the Mag-7 (magnificent Seven ‘tech’ stocks), more recently coined the Lag-7 as their shares have stalled in favour of more defensive assets. With treasury yields also falling, it seems markets are now factoring in the possibility of slowing growth.
The early catalyst for the recent market volatility is multi-fold. However, among the standouts were the results from Walmart, the giant US consumer goods store, which highlighted that profit margins were under pressure due to inflation, and their guidance for the upcoming year was more conservative than expected, citing management worries for potential challenges ahead.
Trumps tariffs…
More recently the imposition of the Trump tariffs on Canada, Mexico and China has led to a spike in market volatility as investors digest the prospect of higher prices (tariffs are effectively a tax on the consumer buying the affected imported products) feeding into the system.
This has come at a time when US unemployment is on the rise as Elon Musk’s Department of Government Efficiency (DOGE) is having an impact due to the Federal workforce layoffs and the cancellation of certain government contracts.
Investors have been pricing in the prospects of an economic slowdown and higher inflation, otherwise known as stagflation, a difficult economic backdrop to navigate.
Trump weighs in on Ukraine…
It’s been a challenging period in Europe as Trump weighed in on the Russia/Ukraine conflict in his own unique style, calling Zelensky a ‘Dictator’, whilst simultaneously staking a claim for minerals in Ukraine. Any move towards a peaceful end to the conflict could spell further positive news for the global markets.
This could bring relief from rising energy costs which has been a leading contributor to inflation throughout Europe, although perhaps too optimistic for our domestic bills at home.
However, the Oval Office scenes earlier in the month, and Trumps push for a mineral deal presents an increasingly volatile situation that we will be monitoring closely on how it pertains to markets.
How markets have performed quarter to date…
The markets have been mixed through the course of the quarter. The FTSE 100 was up 6.11%, the S&P 500 in GBP terms was down 7.12%, and the FTSE All World Index in GBP terms was down 3.95%.
Bonds also had a quiet quarter with the benchmark 10-year gilt up 1.11%, and the 10-year US Treasury Note up 6.13%.
Meanwhile, the gold price has continued to rally due to geopolitical uncertainty, up 15.74% in GBP terms for the quarter.
What we have been doing on our DPS portfolios…
We have recently completed a round of gardening to portfolios, bringing them more in line with our core investment view. We have slightly reduced the equity exposure, whilst continuing to favour US equities over UK.
We did take some profits on US tech winners to lock in gains, the proceeds of which have gone into a global index-linked bond fund to provide some inflation protection in the face of the recent hotter than expected CPI figures. Our direction of travel will be to favour the US over the UK and Europe, whilst the latter continue to struggle for growth as we fear stagflation may start to take hold. We continue to actively monitor key areas for an entry point, including opportunities in healthcare, materials, energy transition, and adding India specifically as part of our Emerging Market exposure.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
