Latest market activity
In contrast to the general optimism observed in January, the anticipation of 25% trade tariffs on Mexican and Canadian imports, along with 20% tariffs on Chinese imports, has caused declines in US equities as investors adjusted their expectations based on the potential business disruptions.
In Sterling terms, the US market fell by 2.9%, unlike UK and European equities which rose by just over 2% each in Sterling terms. This divergence in returns is unusual, though it is worth noting that the US is starting from a much higher base. Over the past two years, Japanese, European, and UK equities have returned around 20%, while the US has achieved around 40%—roughly double—even considering this recent downturn.
In the Fixed Interest market, Gilts and credit performed reasonably well, increasing by 1%, benefitting from the risk-off sentiment. However, yields have been rising in Europe in March due to increased defence spending across the continent. While it was not an ideal month for risk-taking, it is reassuring to observe fixed income securities maintaining their stability in such a challenging economic environment.
Strategy Returns
Due to market volatility, most Building Block funds had a moderate positive return of up to 0.5%. Fixed interest, Asia & Emerging Markets, Europe and UK all rose between 0.25% to 0.5%, while the US market dropped by 5%.
Consequently, our highest risk portfolios with significant US equity exposure fell by 2-3.5%, medium risk portfolios decreased by around 1%, and the lowest risk portfolios remained mostly flat, with slight positive or negative returns thanks to bond performance. However, year-to-date for the first two months, all strategies are still in the positive territory, ranging from 1-2%.
Trading Activity
- In the UK, we made a minor adjustment to the underlying energy allocation by reducing our position in Shell and increasing our investment in BP. This decision was influenced by the news that activist investor Elliott Management is acquiring a significant stake in BP, which is expected to result in a comprehensive strategy overhaul including considerable cost reductions and changes to the board. We view these developments as positive steps as the relationship between BP and Elliott Management evolves.
- In Europe, we have adjusted our healthcare allocation by reducing our holdings in the global pharmaceutical company Novartis and increasing our investment in Roche, the Swiss pharmaceuticals and diagnostics holding company. This decision better aligns with our strategic preferences based on our analysis that Roche is expected to have several catalysts throughout the year.
- In the US, we marginally reduced our exposure to AMD, to fund an increase in Palo Alto Networks, the cybersecurity company. Palo Alto has seen solid momentum in its platform strategy which allows new products to be bolted on easily and is successfully driving larger deals.
- In the Alternatives Building Block we topped up some of our REITs exposure - recognising the stable valuations and strong growing yields on offer in the sector.
Market outlook
Trump's policies are affecting global bond and equity markets. Many of the policies are announced, then adjusted or postponed, implemented, and sometimes exceptions or extensions are granted for specific industries. At Quilter Cheviot, our experienced equity research team continuously monitors the businesses, industries, asset classes, and equity regions impacted by these policies. They keep us informed on whether any announcements warrant action within the portfolios and given the Building Block structure, we can act promptly within the funds if necessary and update clients accordingly.
In light of recent events, we continue to assess our strategies’ exposure to US equities. On a tactical basis we can see there is more downside risk to US equities given their higher valuation and the potential disruption to corporate earnings that Trump's trade war could cause. However, over the longer term we believe it remains best-in-class in terms of highly profitable, technologically advanced businesses. Therefore, in our high-risk strategies we're maintaining our US positions, noting of course that we are diversified globally across other developed and emerging markets.
Within lower-risk strategies, where US equity exposure is reduced, we balance these risks by holding more defensive assets such as bonds and alternatives. These assets are expected to provide some downside protection should the US equity sell-off worsen and offer opportunities to acquire high-quality businesses at lower prices when appropriate. It is important to note that this represents a bear case scenario rather than our base case; we still anticipate strong global corporate earnings in 2025.
Investing involves taking measured risks and maintaining a long-term perspective, which is the approach we are committed to.
Authors
Antony Webb
Head of MPS Investment Funds