What are investors facing right now? They’re potentially facing an unmanaged decoupling between the US and China.
Sarika:
During the course of April, we saw some big market movements. So today I have the chief investment officer in Hooper with me to unpack that a little bit further. So Ian, last time we met we talked about market uncertainty. How has that landed as it played out as expected?
Ian:
I mean, that’s a difficult first question because when you face stock market uncertainty, it is very difficult to understand what’s going to happen in the short term. But this comes back to that point I made in the last episode. There’s a lot of noise in the moment at the moment around the stock market.
Overview of the month
Ian:
So what happened over the month? Well, after Liberation Day we saw high levels of volatility in growth assets, I think that was in most markets. We saw some disruption in some defensive assets, particularly US treasuries. Then we saw a pause from President Trump. Now, I did say in the last episode, this is a president that has a habit of changing his mind and we saw that, and post that pause we did see an improvement in growth assets and major developed markets recovered quite a bit of their lost ground. We saw some of that disruption in defensive assets settle down by the end of the month.
We also saw the the rhetoric between China and the US subside a little bit. It calmed a little bit because they’re talking about huge tariffs between both of them and that mood improved slightly by the end of the month. Again, that has helped sentiment as the market closed on the end of the month.
US Market and global Economy
Sarika:
So looking back at where you said the the pause helped markets recover, what was the impact of that? Did they recover back to where they were or is there certain areas that are still struggling?
Ian:
Yeah, we didn’t see full recovery. So, if you look at US markets, they continued the trend that they’ve started this year with, which is they’ve been the relative laggards in developed markets and the US didn’t recover fully over the month. There’s still some concerns about a weaker economy and then there’s some short term threat of inflation and that sort of hung over US markets. We did see Japan on the other hand, which at the start of the year closed relatively poorly, close higher on the month. Emerging markets perform relatively well, the reason for that is if you look at a couple of the areas in there, a couple of countries in there so Brazil and Mexico, they’re not facing quite the levels of tariff from the US administration so they perform relatively well on the back of that.
Sarika:
So what what impact is this had, you know, on the global economy then, you know, what are your thoughts?
Ian:
Okay. Well, i’ll use the words that the IMF, the International Monetary Fund use, so they said this month that they think that global growth is going to slow as a result of these tariffs. So let’s put some numbers behind that. So for 2025 and 26, the IMF said that they expect a 3.3% growth from the globe for both years. They’ve now cut that forecast so for this year down to 2.8%, next year, 3%. So that tells you yes, there’s some numbers behind that. You know, it is likely to have an impact on on global growth.
Sarika:
So then specifically looking at the US, do you think that economy is showing signs of weakness or is in weaker position than it was?
Ian:
So I think tariffs will have an impact in the short term on the US economy. So why is that? Well firstly consumer confidence, because consumers are going to be facing higher prices when they go in the store. That will have an impact. Then we’ve got business investment, so the read across there is lower confidence will restrict business investment.
So you and I were running a business in the US and right now, would we invest heavily with the current market and sort of economic turbulence?
Sarika:
No, it’s that uncertainty, isn’t it? You don’t know what’s going to happen. You wouldn’t want to then put further money in and invest into something that there’s that uncertainty in.
Ian:
You know, business investment, stock market investment, they hate uncertainty and that’s what we’ve got right now. Then that third strand or impact of tariffs is on trade. So you’ve got global supply chains, you’ve got the two economic juggernauts of China and the US, effectively we’ve got what I would describe as a non-managed decoupling of those two entities. That’s going to have a massive reset if it continues on global supply chains and trade.
The output of all that is lower corporate profitability, companies making less money. So if you and I have got a share portfolio in those companies, we might see in the short term at least those share prices falling. And there’s a wealth effect for you and I as a result of that. So that’s the consequences, you start with that sort of global slowdown into the US and then it ends up that as investors, we might feel in the short term at least some of that pain.
Data points
Sarika:
So we’ve talked about the U.S. economy. Is there any kind of data points that we can rely on that support that information and that view?
Ian:
I mean, I love data, as you probably expect, and survey data, Sarika, is the thing we should be monitoring in the US over the coming months. So let’s use an example from April. So there’s Michigan consumer confidence numbers out for April, they were at the second lowest level since the index started in 1978. So what is that telling you about consumer confidence in the US right now?
Sarika:
I guess then that’s almost the opposite of what Trump was expecting to happen when he’s put these tariffs in. It was all about supporting the US economy, the industry growing, having more trade within the US. So I suppose, you know, it is giving the opposite message.
Ian:
It was about making America great again. This is where the policies come from. In the short term at least, the market’s not convinced that that’s what will play out. The data points, let’s look at inflationary data as well, so, the headline and core inflation data in March, published in April in the US, was lower than expected. That we think might change in the very short term. We think the inflation will start to rise again in the short term because of the impact of tariffs. But markets financial markets still think that interest rates will fall throughout this year, partly because of that economic growth story or lack of economic growth story in 2025.
Sarika:
But the general investors, what impact is that going to have? What benefits can they take from that?
Ian:
I mean, the central bank in the US, that Federal Reserve, will want lower rates. It means that, you know, it’s cheaper for your mortgage payments. It’s cheaper to get a loan so you’ve got more disposable income that you go and spend on the high street and that will have a positive effect on the economy. There’s a word that’s doing the rounds right now, which is stagflation, which is where you actually get full economic growth, but rising inflation, and that is not a great place to be. That is probably one of the concerns from some parts of the market that we’ve got that scenario, and that can be quite crippling in the short term in terms of the economy.
Sarika:
Not really a place where the economy wants to be.
Ian:
No. It more likely to be a negative in terms of markets if we were in stagflation situation. So central banks will be looking at the data and the survey data really hard in the coming months.
THE BENEFITS OF DIVERSIFICATION
Sarika:
So let’s just touch on diversification and the benefits of that. We mentioned it in the last episode, how has that played out this month?
Ian:
So if we had a portfolio in April of just energy and commodity stocks, it would have been a pretty uncomfortable month. So energy stocks and commodity stocks were impacted because of fears of recession, particularly in the US and OPEC, which they oil nations, they increased supply so that lowered the price of oil. So if we own a portfolio of just those two sectors, you have some pretty poor returns over the month of April.
That’s diversification put simply, you need to spread the risk over lots of different sectors and stocks because they don’t all perform the same at the same time do they?
That’s exactly what we saw through April. There’s nothing wrong with having pockets and baskets of those within your portfolio but, you know, we saw value companies in April driven by that energy story and value bucket performed relatively poorly.
We saw smaller companies performing relatively poorly because when markets are more volatile, investors tend to move away from risk a little bit and they go looking for those bigger companies with the bigger balance sheets and the stronger financials and they leave the smaller companies for a little bit. I think we saw a bit of that price action.
European Market
Sarika:
So we’ve talked about the US, looking at Europe then, what’s happening in the European market?
Ian:
I think the main headline in Europe was the European Central Bank, the ECB, they reduced interest rates by 0.25% over the month.
So that’s the third reduction in rates so far this year, the deposit rate declined to 2.25%. This happened for a couple of reasons, one, to try and protect the eurozone from the threat of these tariffs, but also combat the challenge the eurozone has about growth at the moment. So that was the reasons why we saw rate reductions.
Sarika:
So then looking closer to home — the UK — what’s happening in terms of the UK economy. How’s that been impacted?
Ian:
It’s an interesting question about the UK because the UK from a GDP — gross domestic product — perspective, was the data coming out, it was ahead of expectation at the start of the year and we saw quite buoyant retail sales. These are all positive signs, but then we had the Deloitte report that came out that said businesses were going to reduce headcount, or hiring to the lowest level since 2020, since Covid. So that’s a significant headwind for the UK.
Sarika:
So, specifically then the UK and tariffs, what’s the story there?
Ian:
Let me give you some OBR — Office of Budget Responsibility — data. Really interesting data points. The OBR said if we see on average a 20% increase in US tariffs globally, that will shave off around 1% of UK GDP. If we see an extended period of tariffs at a high level that seems, as a read across, we’re going to see a significant headwind on the UK economy.
This hasn’t played out yet. This is sort of modelling that the OBR has to do, but it just shows you the impact, if this plays out in a certain direction there’s likely to be an impact on the UK economy as well.
US Treasury Bonds
Sarika:
So we’ve seen US Treasury bonds, they’ve taken a bit of a hit. Historically they’ve been quite a safe haven. What are your thoughts on that?
Ian:
Okay. So it was an interesting month for US government bonds and as you say traditionally US government bonds are seen as, what we call, the risk-free rate of return, from a financial modelling economics perspective.
The reason why it’s called the risk-free rate of return is that if they fail to pay, the whole economic system falls. That’s why there’s no deemed risk to it. But interestingly, over April, we saw a very short term price action that was out of line with that thinking and after the announcement of Liberation Day, we started to see yields on US treasuries or the ten year Treasury, start to creep up.
What we expected, of course, is the yield to come down as price was going up because people were buying and that was a safe haven. So what was that telling us? It was saying actually as investors we think they’re not quite as safe as we thought, for now, and we want compensating by a higher yield return for taking a little bit extra risk. That is unusual and this started to concern Wall Street. Now, I’m sure we’ll all be watching the news and social media over the last month and President Trump used I think the phrase “people are starting to get yippee” and as a result of people are getting yippee, I think what he was talking about is Wall Street was getting a bit uncomfortable with this creeping up of US treasuries, which wasn’t expected.
Sarika:
I suppose that then relates to that confidence piece we spoke about earlier and how that’s impacting the movement of equities and bonds.
Ian:
Business confidence, the government, they’re all interlinked aren’t they? If you think about it, if the US government’s got to pay more for its debt, that impacts public spending, It impacts budgets. There’s a huge debt pile the US has to furnish and it’s costing them more and that impacts the whole US infrastructure. I mean I wouldn’t use the phrase yippee, but that was the phrase that was used and I think yes that yippee action was, in part, the reason why there was a pause for 90 days. Once that happened, yields started to come back down again and the market gave us a bit more confidence back about US treasuries.
Defensive assets
Sarika:
So the US treasuries didn’t behave as we were expecting. Was there anything that did?
Ian:
Within defensive assets there was high quality credit or corporate debt. They performed in line with what the market was expecting. So when we saw growth assets declining, these defensive assets’ price went up and their yields went down. The reason for that is, in general, corporations have been shrinking the amount of debt on their balance sheets.
They’re in better shape. They’ve been to the corporate gym and they lost a bit of that debt burden. That’s why investors saw them as the traditional safe haven in volatile market conditions.
What can investors do?
Sarika:
So we’ve covered a lot of what’s been happening in the markets and the impact of various decisions.What can investors do? What are the key things that they need to take into consideration?
Ian:
Let’s take a step back. What are investors facing right now. They’re facing an unmanaged decoupling between the US and China, potentially. There will be fallout if it plays through, particularly to trade and global supply chains.
It’s really tempting as investors to get drawn into that, and that will be an uncomfortable situation in the short term for markets. But we’re going to look through that. So to answer the question, it’s sticking to an investment philosophy and plan through these challenging times.
So to repeat what I said in the last episode, it’s about diversification of assets and sectors. Spread your risk over different assets. Do not try and time the markets. It’s time in the market that counts. So stick with your investment plan through this difficult time. By doing those things, we can navigate through volatility. Volatility is likely to continue in the coming months because once the 90 day period ends, inevitably there will be more rhetoric from Trump and that will drive the noise, and decisions. When it’s on the 10:00 news again, there will be a reaction from markets so when that’s happening, what I want investors to think about is — let’s go back to the key principles: diversification and time in the markets, these are your key principles right now.
Sarika: Cut out the noise.
Ian:
Exactly that. Yeah.
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