MPS April Newsletter

Japanese equities – another 2024 darling – also fell, while at the global sector level technology, consumer discretionary and communication services names delivered negative returns. In the case of tech, the release of a new AI model from Chinese company DeepSeek led investors to question commercial assumptions regarding the vast capital expenditure plans for AI infrastructure build-out.

Turning to bonds, markets were heavily influenced by the geopolitical backdrop. US Treasuries rose in value on the back of rising recession risks fuelled by growing tariff concerns. In contrast, European government bonds came under pressure, with Germany’s election signalling a step change in the country’s approach to public spending. The EU’s renewed commitment to materially increase the bloc’s defence spending and manufacturing was another significant hallmark of the period. In the UK, gilts finished somewhere in between, delivering a marginally positive return of around 0.5%. Rachel Reeves used the Spring Statement to announce spending cuts, with rising bond yields and slower economic growth having erased her ‘fiscal headroom’.

Strategy Returns

Medium to higher risk strategies, with larger international equity allocations, saw low to mid-single digit falls over Q1.

• This was driven by the sell-off seen across the US and Japanese equity markets, but was partly offset by the positive contributions from the UK, Europe and several of our emerging markets This broader divergence of market returns speaks to the value of diversification across investments.
• In a similar vein, down the lower end of the risk spectrum, a lower allocation to international equities and a more significant contribution from the fixed interest holdings shielded investors from most or all of these falls (depending upon the strategy).
• A positive return was also generated by the strategies’ commercial property exposure: an allocation we added to earlier in the quarter, with several of the REIT holdings rising on the back of bid activity taking place within what remains an unloved segment of the UK market.

Trading Activity

During March we made several adjustments at the individual stock level.

• In the US we trimmed our position in Alphabet, increasing our underweight stance vs. the market, which served us well over the quarter. Our ‘Magnificent 7’ exposure remains tilted towards those names in which we have higher conviction (such as Microsoft, Meta and Amazon), and away from those names – Alphabet (an underweight position relative to the market), Apple (also underweight) and Tesla (which we do not own) – where we are less positive on the outlook. We also added to holdings in Mondelez, the global food company and a more defensive holding within a more defensively orientated sector, as well as S&P Global, the diversified ratings, data and indices giant.
• In the UK we narrowed our underweight banks position, adding to the existing holding in HSBC. We also reduced our mid cap exposure amid growing concerns for the outlook of the domestic economy, trimming the holding in the Vanguard FTSE 250 holding as well as exiting the position in JD Sports. The position in Bytes was also reduced: while we retain conviction in the stock, the decision ties in with our broader review of the strategies’ aggregate exposure to Tech, and the potential for improvements to other sectors’ prospects. A recent addition that fits this description is Persimmon, one of the UK’s leading housebuilders. Trading on an inexpensive valuation, we see the company’s focus on more affordable parts of the country to be to its advantage. Recent results have been well-received by the market, with improvements in profitability and operating margin demonstrating signs of recovery.
• In Europe we added to existing holding Alstom, the French manufacturer offering a range of equipment and services including high-speed trains, metros, trams and digital mobility solutions. We see the stock as inexpensive, with scope for re-rating, while recent developments in European infrastructure spending plans should also prove beneficial over the longer-term. We also topped up existing holdings in European banks ING and BNP Paribas. Elsewhere, we exited our holding in utility company EDPR. The position has been a disappointing one for us, and while it is always painful to cut an underperforming holding, we see it as justified given the uncertain outlook for the stock and sector, and higher conviction ideas elsewhere. Finally, we adjusted our weightings in the European Telecoms space, trimming Cellnex and adding to Deutsche Telekom.
• Lastly, across the strategies we marginally increased the duration of the fixed interest allocation, seeing an attractive pickup in yield given the steepness of the curve.

Outlook - Tariffs

The investment landscape has clearly changed in the days following the quarter end, with the tariffs announced by President Trump on 2 April leading to a severe reaction across financial markets. While the backdrop remains unclear and the headlines fast changing, at the time of writing we have seen heavy selling across global equity indices, interrupted by periodic bouts of optimism, with investors digesting a series of announcements that go beyond market expectations in scale.

The direct impact of tariffs on company earnings varies by sector and region, but the potentially wider reaching implications are around the overall impact for economic growth and the second order impacts of a growth slowdown should these remain in place. The situation is obviously subject to change — we have already seen this year how President Trump has used tariff threats to extract political concessions – but has significantly increased uncertainty, something companies and markets dislike intensely. Indeed, these latest developments are perceived as negative for US and global growth, and therefore detrimental to future equity returns, hence the sell-off seen in equity markets. China has also since retaliated with its own tariff levy, with both parties currently reluctant to back down.

Maintaining an analytical approach is crucial in this environment, and avoiding knee-jerk reactions ensures better investment outcomes over time. Having selectively trimmed equity exposure in January and moved the strategies’ bond exposure (comprising a large allocation to sovereign debt) back to target weights, we have refrained from making significant changes to our positioning amid what is a rapidly changing backdrop. Sharp market sell-offs, however, do undoubtedly create opportunities for active managers, and the end-to-end control that the strategies’ ‘Building Block’ structure affords has enabled us to move swiftly, adding to positions which we perceive to have been disproportionately impacted in these volatile conditions. This has certainly been measured, with no desire to try and call the bottom of the market, but by working closely with our extensive team of research analysts we remain ready to deploy capital in a manner deemed beneficial to longer-term returns.

To conclude, while the tariff tensions remain a cause for concern, both in the US and globally, we recognise this is a fluid situation and could quickly change. The risk of a US recession has risen materially in recent months, although one positive to cite is the strong growth backdrop going into this market shock, not to mention a robust earnings picture that will undoubtedly be tested over the course of the forthcoming weeks. We will continue to carefully monitor emerging data, while being alert to any signs of negotiated compromise or ratcheting up of tensions. In the meantime, we would highlight the diversified nature of the multi-asset strategies’ exposures at the asset class, regional and sector level, with an overweight allocation to sovereign debt offering historically high yields, as well as safe-haven characteristics should economic data deteriorate.