To say that the first half of 2025 was eventful feels like an understatement. From a stock market perspective, the year started with optimism spilling over from Trump’s November election victory – with markets predicting Trump’s second term would mimic the business-friendly theme of his first term. This optimism, and its abrupt end, was seen most clearly in share prices of the large US tech companies (many of which made up the so called Magnificent 7). From the date of Trump’s election victory to three days after Trump took office, the tech-heavy Nasdaq 100 index grew 14.42%* from what were already historically high levels. However, four days into Trump’s second term, market optimism quickly turned to fear. Aggressive and inconsistent trade policy, sweeping government layoffs and an unnerving approach to international diplomacy resulted in widespread investor and business uncertainty, as well as the risk of fanning a now just simmering rate of inflation. The same Nasdaq 100 index quickly moved from gains to losses – falling c.-25.02%* from peak to trough in late April.
Trump’s ability to change direction at speed – moving from one hard line stance to almost the entire opposite with little regard for the damage it causes to society, his reputation or that of his political allies – means one of the most predicable things about Trump is his inconsistency. This tendency to capitulate was evidenced, yet again, in late April with a 90-day ‘pause’ on his initial tariff policy, resulting in relief for markets and a return to growth.
More recently, we have seen a saddening escalation in the conflicts in The Middle East. It feels like a crass analysis given the human cost of this conflict, but from an economic perspective, the main impact so far has been volatility in oil prices. Inflation is a notoriously difficult indicator to predict given the number of inputs, but oil is so engrained in supply chains that price changes can quickly feed through to inflation. Given that interest rates are already at relatively restrictive levels and economic growth is reasonably delicate, we do not think that this conflict is likely to see economies and markets return to the sort of environment we have just left, but a prolonged conflict might reduce the likelihood of additional interest rate cuts.
Whilst it is tempting to read into the patterns and catalysts of these decisions and try to position your portfolio accordingly, to do so requires the sort of short-term speculation that is at odds with long-term investing, leaving one vulnerable to losses and significant volatility. As a long-term investor, we must be focussed on fundamentals over speculation, managing for known risks whilst considering how different assets classes and sectors might act over time. The aim, therefore, is not to be right when everyone else is wrong for any given micro event, but to ensure that portfolios are structured in a way that can produce good long-term outcomes without taking unnecessary risks.
Equities
Equities continue to form the foundation of most portfolios, with their long-term track record of delivering above inflation returns playing a vital role in protecting and growing capital over time. Unlike in 2024, the theme of US exceptionalism has evaporated. The combination of political uncertainty and hard-to-justify valuations has resulted in above average volatility and less exceptional returns.
As you may have seen in previous commentaries, we have been cautious about the elevated valuations of many of these US companies for some time, and as such have maintained a marginal underweight position. This has resulted in some underperformance during periods of market strength, such as the months that followed Trump’s election win in November, but provided welcome downside protection during more recent bouts of volatility.
That said, despite ongoing concerns about valuations and potential political volatility in the US, it would be foolish to write off such a large and dynamic market. We continue to see opportunities in certain parts of the small and mid-cap sector and, perhaps more modestly, parts of the tech sector. With this in mind, our exposure remains targeted, with a preference for high-quality businesses offering robust fundamentals and long-term growth potential.
UK and European equities, in contrast, have been more stable relative to much of the global market so far in 2025. In Europe, this resilience has been partly supported by political rhetoric – with political stability and trade deals in the UK and defence opportunities in Europe to name a few – but we also see more fundamental reasons for optimism. Notably, valuation differentials remain significant, with UK and European shares (especially among small and mid-sized companies) still offering attractive entry points relative to their US counterparts. The sector composition in these markets, including the weightings toward financials, energy and healthcare, also lends itself to a more defensive profile which has been helpful in more volatile markets.
We remain broadly positive about the prospects for Japanese equities which have enjoyed a combination of modest inflation, real GDP and wage growth and structural reform to the stock market that should help to improve productivity, competitiveness and shareholder value. The main risk in Japan is its ageing population and, from an economic perspective, an increasing demand on the working age population to support a growing number of pensioners. This is an important factor to consider for domestic companies; however, we think that the trajectory for large cap Japanese companies with international demand remains strong.
Asian and Emerging Markets are a vital engine of global economic growth. Favourable demographics and accelerating digital integration across sectors offer a compelling long-term investment case. While broader Asian equity performance has been mixed – largely due to a slowdown in China, and also potential implications of an extended US/China trade war – valuations now appear increasingly attractive. After a strong 2024, Indian equities struggled towards the start of the year, however, they have shown promising signs of recovery and we think should continue to provide good growth opportunities for long term investors. We remain cautious around direct exposure to China, given the market’s opacity and unique political risks, preferring instead to access the region through actively managed, specialist funds with the flexibility to adjust regional exposure as conditions evolve.
Fixed Interest
Our outlook on fixed income remains largely unchanged. We continue to see value in high-quality bonds, which are offering reasonable yields along with the potential to act as a portfolio hedge in the event of a downturn. Government and investment-grade corporate bonds remain our preferred areas of focus, particularly as we believe they offer more reliable risk-adjusted returns in the current environment.
Conversely, we remain wary of lower-quality bonds. Credit spreads remain quite tight by historical standards, suggesting that investors are still not being adequately compensated for the risks associated with higher default potential. In our view, the bond market is not fully pricing in these risks, and as such, we continue to favour a high-quality, actively managed approach within the fixed interest allocation with a preference towards managers that share our view.
Alternatives & Property
Following a challenging 2022/23, recent market volatility has renewed investor interest in real assets such as infrastructure and specialist areas of the property market, where yields are reasonably good and reasonably predictable. Crucially, the primary headwind for these sectors in recent years – rising interest rates – now appears to be less of a concern. Most developed economies having brought their rates down from recent highs and are signalling for a gradual normalisation. Should interest rates begin to decline, the outlook for real assets becomes increasingly attractive.
Shares in many of these funds continue to trade at wide discounts to their Net Asset Value (NAV) which should offer further upside potential in the form of capital gains, alongside relatively (albeit not guaranteed) high income yields. We have seen yet more M&A activity in this space with private equity companies buying up these cheap assets, which helps reaffirm our views on the value that they offer as part of a diversified portfolio.
Conclusion
The first half of 2025 has highlighted just how dynamic and fast-moving global markets can be. While political developments, particularly in the US, created moments of sharp volatility, they also served as a reminder of the value in staying focused on long-term fundamentals rather than trying to react to short-term noise.
Encouragingly, we are seeing attractive opportunities emerge across a number of asset classes and regions. With equities, more balanced valuations and shifting leadership away from an over-concentrated US market offers the chance to build exposure to high-quality businesses in the UK, Europe, Japan, and parts of Asia. In fixed income, more attractive yields and greater stability provide a renewed case for including high-quality bonds as both an income source and a defensive anchor. In addition, the alternatives sector – particularly real assets such as infrastructure and specialist property – are once again showing their value as a source of diversified income as interest as rate pressures ease and valuations remain attractive.
With this in mind, we believe portfolios built on quality, diversification, and thoughtful risk management remain well-placed to benefit from the opportunities ahead. Rather than trying to predict each political or economic twist, our focus remains on constructing resilient portfolios designed to deliver good outcomes over time. In a world of constant change, we think that this patient, long-term approach continues to be the most sensible way to manage portfolios through short term uncertainty.
*Source: FE Analytics, 28/06/2025
This note is intended as a general market update and should not be regarded as specific advice or treated as a recommendation to invest in any particular fund or asset class. Stock market investments can fall as well as rise. If you would like to discuss the implications for your own portfolio, please do get in touch.