Whilst we are not yet halfway through the year, 2025 has shown how uncertainty can drive sentiment and volatility in markets. At times like this, where headlines are extreme and unreliable, it is important to focus on the difference between speculating and investing. Our focus is, and has always been, the latter.
Trump has dominated the news so far this year which has, in turn, been core to most market movements since his election victory in November. After four years of more varied investment commentary, we are reluctant to spend too much thought and time discussing Trump; however, given the noise made so far this year, his government is, inevitably, the focus of our thinking at the moment. We are hopeful that this will not be the case each quarter hence!
The temptation is to try to outsmart the market, taking short term bets on whatever policy the Trump administration might be pushing at any particular moment. The problem with this is twofold: 1) as we learnt during Trump’s first term in office, and have seen all too regularly already in 2025, Trump can change direction with no warning making the likelihood that you are wrongfooted very high; 2) if you are successful in the short term, timing your re-entry to markets can often be even more challenging. Without a crystal ball, this strategy is likely to leave you with the odds significantly stacked against you.
Instead, we try to ignore the noise – which can be misleading and, at times, an overwhelming amount of information to digest and sensibly act on – and focus on the signal. That is, what does the policy rhetoric infer about the direction of travel, and how might that affect the economic conditions over the medium to long term.
One area where it is important to consider the impact of political jostling and what this signals for the medium to long term is tariffs. Whatever the end game might be, and the degree to which tariffs are imposed, retaliated against and reduced as part of wider negotiations, will become clearer over time, however, the direction of travel seems reasonably clear – we are likely to be moving into a more protectionist period for the global economy.
Protectionism is not always a bad thing. When targeted correctly, it can help drive innovations in industries where the cost of R&D is very high, and profits arrive many years after products go to market – a good example of this would be intellectual property rights for developers of new medical treatments. That said, untargeted protectionism in the form of sweeping tariffs, which is the route Trump seems to be favouring, have throughout history proved to be generally bad for all countries that participate – stifling innovation and competition, and by extension growth, as well as resulting in a general increase in prices (inflation).
To what extent this is the case this time is as yet unclear. However, the potential for trade wars increases the probability that economies will shift from the gradual path of disinflation and normalisation of interest rates – good for almost all asset classes – to one where inflation maybe elevated for longer, making it more difficult for Central Banks to justify lowering interest rates without first seeing recessionary pressures emerge. Despite the initial market reaction to Trump’s tariff announcements, this is not automatically bad for all asset classes. It does, however, require more careful allocation than was the case in 2024, where, simply, the largest (often most expensive) companies grew the most.
The increase in probability of this scenario strengthens our view that sensibly valued, high- quality assets should remain the core of our portfolios, and we remain cautious of the more speculatively valued parts of the US market. Fortunately, we feel that there are a number of well valued parts of the market – a side effect of the investors allocating so much capital to the largest US tech stocks in 2024 and ignoring many other markets – so we think that it should be quite possible to build a high-quality portfolio without sacrificing diversification.
Equities
Equities remain the core of most portfolios, with the asset class’s long-term history of delivering above inflation returns crucial when protecting and growing capital values over time. For 2024, the trend was US exceptionalism, with the largest US companies (mostly tech) outperforming the rest of the market by a considerable margin. We had been uncomfortable with the valuations that many of these US larger companies had been trading on, so have been consciously underweight. This meant that we missed out on some of the upside at the end of last year but were more protected during the recent sell-off. Whilst much of the US market remains, in our view, expensive and vulnerable to further volatility, this is the largest market with a vast number of high quality companies so we have retained exposure, albeit in a targeted way.
Whilst US shares have proved volatile recently, UK and European shares have been more robust. Much of this, particularly in Europe, has been due to Trump’s rhetoric around defence spending, however, there are other factors that we feel broadly positive about. This includes the significantly lower valuations shares of UK and European companies can be purchased at relative to their US counterparts (particularly with small and medium sized companies) and the generally more defensive characteristics of the main constituents of the UK and European indices – including banking and healthcare.
Outside of the US, UK and Europe, we remain broadly positive towards opportunities within Asia (including Japan). Japan is an interesting case that has had many a false dawn, however, there are a number of reasons to be positive about the prospects of Japanese equities at the moment. This includes signs of a return of real GDP growth in Japan, predominantly driven by a recovery in consumption, increases in real wage rates which should sustain this GDP growth and possibly create some inflation for the region that has struggled to create consumption stimulus for so long, and importantly the positive impact of the Tokyo Stock Exchange’s reforms to corporate governance.
Asia – home to 60% of the world’s population – has long been a driver of economic growth in the world, with attractive demographics and increasing digital integrations of businesses, people and governments key factors to remember. Investment returns have been sluggish for a number of years (with the exception of Indian equities in 2024) as the Chinese economy slowed, however, the market now looks quite attractively priced and Asian companies may well benefit from greater integrations with Europe as the US seems to pull back. We remain cautious of direct exposure to China as the market can be opaque and challenging to analyse, and prefer to have exposure through specialist, actively managed funds that will invest across Asia and are able to manage their exposure to different regions as opportunities arise.
Fixed Interest
Our view on Fixed Interest has not changed a great deal since our last update. We now feel that there is value to be had in many parts of the market, with the highest quality bonds offering reasonable yields as well as the possibility of downside protection should we see economies fall into recession. That said, we still do not see the benefit of owning lower quality bonds as credit spreads – which illustrate the additional return that investors demand for owning bonds that carry a higher risk of default – remaining at historically tight levels.
To us, this means that the bond market is not rationally pricing certain risks, so our preference when allocating to Fixed Interest is still to own very high-quality bonds and we feel there is good upside for those able to invest actively within the credit market.
Alternatives & Property
After a difficult 2022/23, the recent bout of volatility in stock markets has shown promising signs that investments in ‘real assets’ such as infrastructure and some specialist parts of the property market might be able to provide good risk adjusted returns. These investments tend to provide long term and predictable income streams, often with some form of inflation linking. The factor that negatively affected this sector in 2022 – sharply rising interest rates – is far less likely to accompany any potential increase in inflation and should we see no return of inflation, the possibility for falling interest rates should also be positive for these asset classes.
Due to the negative share price returns seen in 2022/23, many of these assets are trading on what look like quite cheap prices, which offers the potential for capital gains as well as relatively high yields. This has not gone unnoticed from private markets, with a number of large US private equity firms looking to buy these assets which we see as a further confirmation of their value.
Conclusion
As we move further into 2025, the market remains shaped by political uncertainty and evolving economic and investor sentiment. While short-term volatility and headline-driven market moves are inevitable, our approach remains rooted in long-term, fundamentals-based investing. We continue to favour high-quality, sensibly valued assets that can provide resilience throughout the different market conditions that may come.
The increasing likelihood of prolonged inflation, driven in part by protectionist policies, reinforces the importance of careful asset allocation. Equities, particularly outside of US large caps, continue to offer compelling opportunities, while Fixed Interest should provide select areas of value for investors seeking diversification and downside protection. Meanwhile, ‘Alternatives’ such as infrastructure and specialist property appear increasingly attractive, particularly as interest rate dynamics shift.
In a year where speculation will be rife, we remain committed to a disciplined, diversified approach—focusing on strong fundamentals, prudent risk management, and long-term value creation. Amid the noise, the signal remains clear: staying invested in quality assets with a well- balanced portfolio remains a sensible strategy for navigating what is likely to be an unpredictable landscape.
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.