2025 Q1 Market Review

• The first 3 months of the year already feel a long, long time Q1 saw an unwind of US post-election equity market euphoria: Trump looked like less of a sure thing from economic policy perspective and some air came out of the AI optimism bubble. Meanwhile, unloved and under-owned Europe saw a rebound in part sparked by renewed German commitments to infrastructure and defense spending. Long time laggards (Europe, China) started to out-perform.

 

• While investors knew that tariffs were on their way they ended up being shocked by their proposed size (which was around double market expectations). A fear that the tariff shock would trip the global economy into recession saw equities fall sharply after April 2^nd. Bond markets (at least initially) rallied.

 

• In equities, what Trump will or won’t do next is essentially unknowable. We left our equity allocations unchanged as the mayhem erupted. We have raised some cash (see below) to profit from the dislocations we see but gambling on what Trump might do or say next feels like just that, a gamble.

 

• Recession risks are, however, clearly rising. After the initial tariff shock, we took some profits in our bond positions in portfolios that have larger fixed income We also trimmed our high yield exposures to reduce risk to any future slowdown.

 

• Our alternatives book was up in Q1 helped by gold and continued bid activity in the investment trust sector. Our alternatives have also proven resilient in the tariff-inspired equity market sell-off. We are

 

continuing to look for attractive alternative opportunities. Potential bid targets in the heavily discounted investment trust space are one example.

 

 

•  Looking forward we remain overweight fixed income which we think should offer some protection if a recession does indeed arrive. Weare also running higher than normal cash levels. Trump headline risk looks here to stay. Higher cash balances should help us navigate this more volatile environment.

 

Tariffs tariffs tariffs

 

The format of this update is normally to write a summary of Q1 and then look forward for the rest of the year. It is my fate, however, to be writing this in the middle of the Trump tariff melodrama. This has rendered a lot of what happened in the first quarter to feel like a very long time ago and makes the outlook for the rest of the year dependent on what one man decides he wants to do next – which I am guessing even he does not really know. So there is – even more than is normally the case – the risk that this update quickly becomes out of date.

But with that disclaimer out the way I feel like I can talk about what we have actually been doing in your portfolios recently. Often it is easier to judge what people really think by seeing what they actually do. I hope that is the case here.

• There are three tariff scenarios from here (i) Trump doubles down and ultimately sticks to what he has announced (ii) he is spooked by the markets and backs off bar a few symbolic tariffs on China say and (iii) something in between (“The Art of the Deal”). Scenario 1 would be very bad for equities, scenario 2 would be good and scenario 3 would be somewhere in the middle. The recent Trump climb down means scenario 1 looks less likely today but the challenge we face is that it is ultimately unknowable where we will end up. I would guess the people closest to Trump in the administration don’t really know This is the main reason we have not altered our equity positioning since the tariff shock came on the 2^nd April. And I don’t see us making too many “risk-on” or “risk-off” type calls looking forward. Gambling on where we think tariff negotiations will end up feels like just that: a gamble.

 

• That said, the real risk is the impact that tariff-related uncertainty is having right now on business hiring plans and Walmart and Delta Airlines have already suspended earnings guidance for the rest of the year. I have to imagine any, if not all, global investment and hiring decisions will be on hold right now. Needless to say, hiring and investment are good for the economy. Will a pause in both tip the global economy into recession? If it does I would expect bond yields to fall and our core fixed income allocations to hold up. The sharp fall in oil and energy prices should also help here (assuming it lasts). High yield is, though, much more sensitive to the ups and downs of the global economy. We therefore took steps to sell some of our high yield exposure and raise some cash. I have a feeling that some extra cash will be helpful as markets continue to play Trump headline roulette. And with cash rates still above 4% (for our sterling and dollar clients at least) the opportunity cost of holding it is not that high.

 

• In the days after 2nd April, equities fell (around) 10% and bonds rose. This meant we became without any effort on our own part overweight fixed income (and underweight equities). We therefore trimmed our fixed income overweight where appropriate (typically for portfolios with higher bonds allocations). For now, these sales are also sitting in cash.

 

• Our alternative assets were up as a group in the first quarter even as global equity markets fell. In Q2 so far, they have been more mixed, but we are still pleased with their performance Gold has been volatile but (as I write) is up this quarter and is of course up strongly this year. Our insurance linked securities are unaffected by tariff noise (which is of course one of their core attractions) and are also up for the month and year so far. Our (limited number) of absolute return funds also held up well in the crisis. Finally – and as we would have expected – our trust assets moved lower in line with broader equities. But they are focused on more defensive sectors like infrastructure, renewable energy and care homes. This defensive nature meant they have proved relatively resilient and are actually outperforming our internal risk assumptions. Part of the reason for this has been continued bid activity in what remains a depressed sector. I do not expect this bid activity to go away and we continue to look for ways to profit from it.

 

Outlook for the rest of 2025

In summary then, our equity book remains (so far) unchanged but fixed income sales mean we are running higher than normal cash levels. This cash is aimed at opportunities these volatile markets might throw our way. Where might these opportunities arise?

 

• The first quarter of 2025 saw Europe and China perform relatively well compared to the US. Partly this was the unwind of some Trump post- election euphoria and partly some of the air coming out of the AI optimism bubble which affected the US technology giants. As we sit here today, the situation looks much more balanced. At least the US has the benefit of whatever tariff revenue it ends up collecting which will presumably at some point be recycled into tax The rest of the world has none of this tailwind but will have to deal with the headwinds tariffs create. Non-US equities are also typically more sensitive to the global economic cycle. The case for non-US equities looks less obvious to me today than it did for much of the first quarter.

 

• The other reason not to give up on the US just yet (no matter how volatile and economically illiterate Trump and his team seem to be) is of course their lead in software and AI is, one way or another, going to revolutionise sectors such as healthcare, law and finance. Having some exposures to companies that are on the right side of this revolution seems essential especially when our job remains to grow your capital over longer time horizons. I write as a European, sitting in the UK, but sadly the leading businesses are mainly to be found in the US and (increasingly) in China.

 

• Pushing against this is, of course, the damage Trump is doing to the United States’ international International equity ownership of the US market has risen sharply recently. Might this reverse? Will US treasuries stop being the default safe-haven asset?

• It is also worth mentioning here that China has remained remarkably resilient so far this year given the size of the tariff As I write the Chinese Hang Seng index is around 14% ahead of the US S&P Index year-to-date. Part of the story here has been the lead many Chinese firms are taking in the software and AI revolution. It is likely the Chinese will continue to stimulate their economy in the wake of the tariff hit they face. If the world is breaking up into trading blocks, then we need to keep paying attention to the one that will build around China.

 

• Away from equities we have had three bids on investment trusts we own in the last 12 months. In spite of this trust prices remain depressed as (i) they are in the still unloved UK (ii) they are often smaller and so lack good liquidity and (iii) their core UK wealth manager investor base is now looking elsewhere for opportunities. This leaves some attractive assets stranded in the trust market at relatively low prices. The opportunity is then yields of 8% or more with some upside if and when a bid does materialize. We continue to look for opportunities in this sector.

We expect these to remain volatile times. I try to keep these updates relatively brief and as they cover multiple portfolios in multiple currencies some of the details are necessarily missed. So if you want to go through any of this or your portfolio performance and outlook then, as ever, please do get in touch.

 

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.