Liberation Day, and the sell-off that followed
The move started on President Trump's 'Liberation Day' with the announcement of a set of tariffs that were broader and more punitive than expected: a basic levy of 10% on all goods entering the US, plus additional reciprocal tariffs for 57 countries. China responded with its own 84% tariff on imports from the US, and back-and-forth retaliation left a 145% tariff on Chinese goods entering the US and a 125% tariff on US goods entering China. Stocks tumbled and the dollar weakened on fears that a trade war would bring lasting damage to growth and earnings.
A sharp fall, then one of the longest winning streaks in 20 years
US equities bore the brunt of the sell-off, losing more than 10% in two sessions following the announcement, led by the mega-cap technology sector as investors rushed to exit stocks with expensive valuations. The market recovered much of its losses a week later as the US approach softened: the 10% baseline tariff was kept, but a 90-day pause on all reciprocal tariffs (except for China) was announced to allow countries time to negotiate. The rally from the lows saw stocks rise for nine consecutive days, one of the longest winning streaks in 20 years. Later in the month the US and China agreed a temporary truce, removing additional levies for now. The Q1 results season also reassured, delivering steady profit growth with earnings continuing to surprise on the upside, although many companies warned of uncertainty over the impact of tariffs. The US market retraced most of its earlier decline to close 3.9% lower, while most other global markets managed to close the month higher.
Gold blasted past another milestone, extending this year's 30% rally and briefly surpassing $3,500 an ounce for the first time, to close 5.3% higher over the month. Flows into bullion-backed exchange-traded funds and central bank buying have supported the upswing, with prices gaining every month this year. Commodities shed some of their year-to-date gains as the prices of oil and industrial metals weakened amid rising recession fears and a decision from OPEC members to boost supply.
The UK escapes lightly and signs the first new trade deal
In relative terms the UK escaped lightly, with only the 10% baseline tariff on goods exported to the US. It was also the first nation to subsequently agree the principles of a new trade deal with the US, easing conditions for British car exports and the agricultural market for both countries. UK equities closed 0.7% lower, driven by weakness in the energy sector, although more domestically focused smaller companies closed 3.6% higher and bonds rose by 1.0%. The economy grew by 0.5% in February, compared to predictions for 0.1%, and a number of corporate results surprised on the upside. Business survey data weakened significantly, however, reflecting a combination of trade uncertainty and the impact of higher taxes. Inflation eased to 2.6% in March, down from 2.8% in February, raising expectations for a further interest rate cut when the Bank of England next meets in May.
On the economic front, US growth unexpectedly contracted by an annualised 0.3% in the first quarter of 2025, largely due to a sharp increase in imports as businesses brought forward purchases of overseas goods ahead of tariffs; growth would have come in at a solid 3% without this effect. Forward-looking metrics such as consumer confidence fell to the lowest level in four years, and a recent Bloomberg survey saw US GDP growth of 2% in 2025, down from 2.3% in the previous month's poll. More positively, inflation cooled to an annualised 2.4% in March, helping clear the path for the Federal Reserve to cut rates, possibly as soon as May.
Japanese stocks finished the month up 1.7%, with the Bank of Japan leaving interest rates unchanged at 0.5% and downgrading its forecasts for growth and inflation for 2025 and 2026. European equities closed 0.9% higher, as Germany's dramatic increase in government spending supported the defence and infrastructure sectors; the Eurozone economy grew by 0.4% in the first quarter and the ECB lowered borrowing costs by a further 0.25% to 2.25%, with the key message that disinflation is "well on track" while growth uncertainty has increased. Emerging markets registered a small positive return, with Mexico the top performer as it faced no new trade tariffs, while Chinese shares were caught in the crossfire, falling 7.5% despite solid 4.5% GDP growth in the first quarter.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Positive territory in a testing quarter
Overall returns for 2025 remain in positive territory for our standard portfolios, as robust diversification across a range of global markets and additional exposure to gold and gold mining stocks has captured the positive returns in many assets outside of the US. Our exposure to both physical bullion and gold mining shares across standard portfolios has been a major contributor to outperformance against their benchmarks.
A mid-cycle pause, not the end of the expansion
US stocks have gone from scaling record highs to flashing recession worries in a matter of weeks. Policymakers will be watching closely to see the impact of trade tariffs and whether the recent damage to sentiment will translate into weaker spending. Assuming that the tariff war is likely to be resolved in the coming months, the most likely outcome at this point is a mid-cycle pause in growth, rather than the end of the expansion period.
Recent policy changes in the US have compounded the trend away from US exceptionalism, the popular name for the dominance of US assets and in particular the Magnificent Seven mega-cap technology companies that have led the market higher over the past decade. Bank of America's latest survey of fund managers found the biggest switch away from US stocks on record. The US was priced for perfection, and its extreme performance differential meant that some narrowing of this gap was inevitable.
Plenty of opportunities remain, but we need to look beyond the winners of recent years as the 'broadening out' theme continues to play out. Given that markets outside of the US have only delivered a fraction of the returns in the post-2008 surge, the valuation gap is extremely high and, as a result, they have been able to make gains while US markets have pulled back. There is a strong case for equities in the UK, Europe and emerging markets along with infrastructure, precious metal and commodity plays.
The US was priced for perfection, and some narrowing of its extreme performance differential was inevitable.
As investors look to diversify away from the US, robust diversification across global markets, with additional exposure to gold and gold mining stocks, remains the foundation of our approach.
The United Kingdom
The UK market looks well placed to benefit from stock market rotation. UK equities remain undervalued, with an average price-to-earnings multiple of 12, representing a 50% discount to the current multiple of 24 for the US. The mid-cap segment is even more standout, trading at a 20-year low relative to the main index on the same measure. UK equities also have a strong track record in generating income, with a dividend yield close to 4%.
Emerging markets and China
The US monetary policy outlook is likely to be supportive for emerging markets, where equities look set to benefit from stronger domestic growth. We are increasingly optimistic on China, where equities have benefited from a surge in enthusiasm for AI products, and policy measures implemented last year to boost growth are finally starting to translate into economic improvement. A stronger China would further increase the attraction of emerging markets in general and help unlock some of the value that has been accumulating over the past decade or so.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms relative to the level of inflation. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, with the exception of index-linked bonds.
Alternative assets
Alternative assets such as infrastructure, renewables, gold and commodity stocks offer a valuable additional source of diversification, allowing us to hedge against inflation and other potential risks and to capitalise on wider opportunities outside of traditional bonds and equities. Stimulus by China could exert further upward pressure on commodity prices.
Conviction in gold
We continue to view gold as essential portfolio insurance. We have held the view for some time that the combination of higher geopolitical risk, deteriorating fiscal trends and strong central bank demand has the potential to drive a powerful bull market, where multiple pockets of global capital attempt to diversify away from dollar assets into gold as a safe monetary metal. The market is simply not large enough to absorb large flows without much higher prices. For gold mining equities, current prices are likely to translate into record profit margins and the highest growth rate of any sector in the broader equity market.
Capturing the upside, controlling the risk
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk, to dampen volatility and smooth the path of returns.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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