Market update: the calm after the storm?
Stepping back from the edge
After a peak-to-trough drop of nearly 20% in sterling terms, global equity markets have recovered some of their poise in the past three weeks. This has been primarily due to the introduction of exceptions, temporary pauses and much-appreciated nuance to the initial, aggressive trade tariff policies announced on President Trump’s Liberation Day of 2nd April. Robust quarterly earnings reports have also delivered reminders of the corporate world’s underlying fundamental strengths coming into April.
At the time of writing, European markets have made positive returns since the tariff announcements, compounding on previous returns secured earlier in the year. The Japanese market has been volatile, reflecting its exposure to global growth concerns, but also on account of the unfamiliar challenge of a strengthening Japanese yen against the US dollar. Dollar softness and easing energy prices have provided support to emerging market returns, demonstrating resilience in the face of broader volatility.
The picture in the UK is nuanced, as small and medium-sized companies have performed better over this period than larger ones of the FTSE 100 Index. Initially rewarded for its defensive characteristics, the latter has recently been held back by exposure to falling energy prices and the US dollar-denominated revenues of global companies.
US assets remain firmly in focus, with international unease about whether US equities, government bonds and the dollar should remain at the heart of investors’ portfolios. We discuss the topic in more detail here, but our view is that it is too early to declare that the era of dollar dominance is over. What is clear is that investors’ have taken note that the priorities of the second Trump administration are very different from the first one, and we should expect other countries’ responses to policy announcements to differ too.
Source: Bloomberg, with Netwealth calculations. Returns in GBP unless otherwise stated.
Uncertainty remains
Now, despite a strong market rally, uncertainty remains the watchword among policymakers and CEOs. Trying to anticipate how longstanding trading relationships, intricate supply chains and consumer behaviour will change in the coming months is proving difficult. So central bankers are retreating to ‘data dependent’ outlooks and company bosses are withdrawing guidance on earnings calls as they wait to see if labour market data and sales figures are as poor as sentiment surveys suggest they will become.
Source: Bloomberg, Baker, Bloom and Davis
Markets are often said to be efficient at processing new information relating to companies’ prospects or to changing macro-economic news. They are less equipped to price the risks of more binary events. The sudden realisation that tariffs were bigger, broader and blunter than many expected, with an added credibility premium provoked the outsized market reaction. As the dust has settled, asset prices are reflecting an expectation that the worst fears on global trade and its implications for economic growth will be avoided, even if there are concerns about the future relationship between the US and China. Anecdotal evidence suggests the adjustment could still be painful: the shipping behemoth AP Moeller-Maersk saw freight volumes between the US and China drop by 30 to 40% in April.
Some cyclically-sensitive sectors have bounced back strongly, but smaller companies’ performance in the US remains lacklustre as revenues and margins are expected to remain squeezed. A pivot in presidential attention away from tariffs and towards de-regulation and lower tax rates are needed to restore confidence.
Looking ahead
Some of our portfolios’ defensive cyclical positions which added value through the volatility, such as underweight positions in corporate bonds and overweight positions in the euro have given back ground made as markets’ appetite for risk has improved. However, the real beneficiary has been the allocations to gold held in all but the most ambitious risk level portfolios. Longer term, we still believe gold has a role to play for its ‘everything hedge’ characteristics – often rising in price with market fears of slowing growth, rising inflation or of geo-political alarm. A more normal environment could bring gold back down to earth and see historical relationships return.
Source: Bloomberg, with Netwealth calculations.
If this has been the perfect environment for gold, other assets have faced far less favourable backdrops. In line with our long-term outlook to managing portfolios, the team are considering whether the time has come to increase exposure to recently undervalued assets. Fundamentally, in such an uncertain environment, our approach will continue to remain close to our strategic allocations, focusing on diversification, timely rebalancing and efficient implementation to deliver on our clients’ investment goals.
As always, if you would like to discuss your portfolio with a client adviser, please get in touch via advice@netwealth.com.
Please note, the value of your investments can go down as well as up.
