Keeping You Informed Matters
Economic Review April 2025
The start of 2025 has been defined by a cautious recalibration – markets are digesting the reality of Trump’s new term alongside rising geopolitical tensions driven by US tariffs, shifting international alliances, and increased policy uncertainty. Central banks have gently pivoted, carefully navigating slower US growth and tighter fiscal policy, while Germany emerges as a new focal point for economic stimulus. The tech euphoria of recent years has given way to a more grounded realism following China’s AI breakthrough, prompting investors to prioritise resilience, rotation, and valuation discipline.
The Outlook
All change!
It is clear that the world has just changed, with important implications for trade, spending, international relations… and lots more besides. Rising uncertainty demands caution and valuation discipline from investors. Amongst the most prominent changes are US tariffs (real and threatened) on its trading partners, plus retaliatory counter-tariffs. Tensions have been fuelled further by the approach of President Trump’s self-declared “Liberation Day” on April 2nd – a sweeping policy shift centred on trade protectionism that has already contributed significantly to volatility in markets through the first quarter. A new security order is being shaped in Europe; the US is disengaging from multi-lateral institutions such as the World Health Organization; and there is an ongoing ‘purge’ within the US federal bureaucracy.
There are also important cultural, societal and business changes, not least with respect to climate change and hiring policies. Business leaders have quickly fallen in line with the US government. Meta Platforms Inc, for example, has stopped fact-checking on Facebook, Instagram and Threads, and exited its diversity and inclusion programme, while Blackrock and others have quit investor climate groups.
Unexpectedly, relations with Canada have become notably tense. Trump’s imposition of tariffs, combined with talk of Canada becoming the 51st US state, is surprising, though apparently not new. According to historian Adam Tooze, William McKinley placed punishing tariffs on Canada in 1890, while pressuring it to become the 45th US state. Clearly, McKinley failed in absorbing Canada into the USA back then, but his policy is being reprised this year.
These geopolitical shifts naturally lead to a significant economic rotation, reshaping global investment opportunities.
Economic and market rotation
We normally associate free trade, high trust and stable policies with economic success. Today, we have rising constraints on free trade, declining trust between nations, and frequent policy swings. This combination could (should!) have implications for business sentiment and economic activity. ‘Uncertainty’ also has an impact on asset prices. Greater uncertainty usually means that investors require lower prices to encourage them to hold shares – academics call this a ‘risk premium’. While long-term returns may remain fine, near-term conditions become weak and choppy.
Related to all the above changes, an important economic rotation is underway. After years of huge deficits, the US is now attempting to slash Federal government spending. If spending is indeed cut, then this should have an impact on total employment and economic growth, at least in the short term. And on cue, a measure of economic growth from the Atlanta Federal Reserve known as ‘GDPNow’ suggests a sudden, sharp drop in US growth expectations for this year.
Central banks have so far remained cautious, aware of geopolitical risks and uncertain economic outlooks. Their careful management of monetary policy could further amplify regional rotations in growth, particularly if US fiscal tightening contrasts significantly with Europe’s renewed stimulus.
By contrast, and four thousand miles to the east, Germany has just approved a huge borrow-and-spend programme. The money is to be spent on defence and infrastructure, and this should boost economic activity after two years of flat to negative GDP growth there. From the point of view of government spending, a huge economic rotation is occurring from the USA to Germany. The stock market is recognising this rotation, with German shares rising strongly during the quarter, but
US shares falling, producing the largest relative shift between these markets since the bursting of the ‘dot.com’ bubble over twenty years ago.
AI Shock
January saw the launch of DeepSeek-R1 – a Large Language Model developed in China that competes effectively with Open AI GPT-4, while reportedly only needing a fraction of the training costs to develop. It achieved this by incorporating a different mathematical approach to training, known as ‘mixture of experts’. Furthermore, the model is open-weight (akin to open-source) and this challenges some existing AI business models.
Given that AI stocks had previously driven market gains, our belief is that the narrative around AI has now changed: one can no longer argue that scale alone will determine success in building an AI business. This could be a permanent narrative shift. As the markets absorbed the implications of DeepSeek-R1’s launch, an index of large AI stocks fell by over 20%. And towards the end of the quarter, Alibaba Chairman Joe Tsai cautioned investors about data centres being built to serve AI uses: “many of those projects are built without clear customers in mind” he argued.
Meanwhile, the use of AI tools continues to grow and there is now evidence of specific AI-related job losses in the US amongst writers and computer coders (source: Financial Times analysis of the US Current Population Survey, Brookings Institution and OpenAI). There’s currently a huge debate amongst investors around the correct expectations for AI-related investments, and we follow this issue closely.
How we invested
Our valuation-driven approach continues to emphasise diversification and quality, positioning portfolios defensively during periods of elevated uncertainty.
There were two main themes in stock markets during the quarter. First, US shares performed poorly compared to the rest of the world.
Our clients’ portfolios have been underweighted in the US relative to benchmarks (largely on valuation grounds) and so this theme was helpful.
Second, riskier shares generally underperformed safer shares, possibly due to fears of a global economic slowdown. We felt that the relative cheapness of smaller shares more than compensated for their additional risk, but markets disagreed with us, at least during this quarter. Our overweight position in smaller and mid-sized shares detracted from performance.
Our position in gold was helpful, as the yellow metal powered ahead to an all-time high. The strength of gold likely came from foreign central bank buying, caused by growing geo-political risks.
The main trades that we made during the quarter were to switch some active funds into similar, but lower-cost, index funds, where our analysis revealed little evidence of an active fund manager’s decisions adding value over time. This had the effect of lowering overall costs for our clients. We retain those active funds where there is clear evidence of added value from the fund managers.
Outlook
With growing constraints on free trade combined with declining trust and high policy uncertainty, caution is warranted. The Trump Tariffs, at least initially, have done for world equities what Truss and Kwarteng’s mini-budget did for UK gilts in 2022. Forecasting the next specific move in markets, though, is almost impossible.
A portfolio that contains gold, high quality bonds and some cash should be resilient. We expect cautious markets with periodic volatility ahead, reinforcing the need for balanced, quality-focused positioning. On stock markets, valuations should finally come to the fore, as speculation ebbs and investors pay more attention to the price one pays for an asset.
Our clients’ portfolios are well-balanced and valuation-conscious and so should be well-positioned for this new environment.
Key facts about the world
United Kingdom
- Inflation continued to rise in January, peaking at 3.9% before falling to 3.7% in February. The Office for Budget Responsibility (OBR) expects an average rate of 2.6% for the year.
- The OBR reduced GDP growth expectations for the year, to 1% from 2%.
- UK equities rebounded modestly, supported by takeover activity and stronger-than-expected corporate earnings, as investors began to look outside of the US for growth.
Europe
- Germany announced a €1 trillion stimulus package, with €500 billion allocated to infrastructure over the next 12 years and a significant boost to defence spending.
- Eurozone inflation falls to 2.2% in March. Market pricing implies a 54% chance of a further cut to interest rates to 2.5% by the European Central Bank (ECB) in April.
- Mixed data suggests continued manufacturing challenges in Europe, despite French Purchasing Managers’ Index (PMI) ticking up and economic confidence surging in Germany in March.
Asia
- China’s manufacturing activity moves into expansionary territory in March, with official PMI rising to 50.5 – its highest level in a year.
- The Bank of Japan continued to raise short term interest rates in January, raising it from 0.25% to 0.5%, but policymakers were divided in March, maintaining the current rate on concerns over potential US tariff impacts.
- After a 5 month losing streak, India’s stock market recovered lost ground in March, buoyed by investors scooping up beaten-down stocks, the return of foreign inflows after a selling spree that began in late-September and improving economic indicators.
North America
- US stocks posted their worst quarter since 2022 on the risk of a trade war as Trump continues with his tariff threats.
- Latest GDP growth forecast revised down to -1.8% in March for Q1 2025, as fears mount on government spending cuts, inflationary tariffs and softer consumer demand.
- The Federal Reserve held rates steady at 4.5%, emphasising data-dependency as inflation progress stalled in March.
South America
- Brazil’s Central Bank hiked its key interest rate to 13.25% in January, and 14.25% in March, in more bad news for President Luiz Inacio Lula da Silva’s government, which is struggling to curb high inflation.
- Argentina continued negotiations with the IMF over debt restructuring terms, with the peso experiencing renewed volatility in March.
Africa
- Nigeria projected to record 3.1% GDP growth in Q1, helped by higher oil production and easing inflationary pressures.
- South Africa’s energy crisis continued to weigh on economic output, with rolling blackouts affecting key sectors such as mining and manufacturing.
- The African Continental Free Trade Area (AfCFTA) secretariat announced progress on cross-border digital payment systems to support intra-African trade.
Q1 2025 Performance Review
Unconstrained strategies
Key facts
Resilient performance in challenging markets
Strong returns from Alternatives and Fixed Income
Equity allocations affected by US weakness
Property holdings modestly negative amid sector pressure
Continued strength in gold and infrastructure investments
Cost-effective structural enhancements through passive investments
Summary
Despite challenging market conditions shaped by geopolitical tensions, escalating US tariffs, and shifting economic stimulus policies globally, our strategies have delivered resilient performance during the quarter.
Alternatives led portfolio contributions, notably driven by the Royal Mint Responsibly Sourced Physical Gold ETC (+15.9%) and Downing Renewables & Infrastructure Trust (+9.6%), both benefiting from increased investor demand for safe-haven and income-generating assets. The Downing position was sold towards the end of January taking advantage of increased liquidity and share price performance when a large buyer – Bagnall Energy Ltd, which is ultimately managed by Downing LLP – started buying their own shares. Otherwise, as part of a strategic review, we broadened commodity exposure by selling the BlackRock Natural Resources Growth & Income fund (+6.3%) and introducing the lower-cost L&G All Commodities ETF, enhancing our inflation protection.
Fixed income delivered positive returns, providing stability amidst volatility. The allocation included solid performances from iShares $ Treasury 1-3 Year Bond ETF (+1.6%), Vontobel TwentyFour Sustainable Short-Term Bond (+1.3%), and Artemis Corporate Bond (+0.7%).
The equity exposure proved more challenging this quarter, negatively impacted by significant weakness in the US market. Tech heavy TM Natixis Loomis Sayles US Equity Leaders (-14%) was significantly weaker than the broader S&P 500 (-7.1%) in sterling terms, with the Xtrackers S&P 500 Equal Weight ETF (-3.7%) providing a more defensive return as intended. All detracted from performance however, as valuations adjusted downward following last year’s strong rally and recalibration in technology shares.
To enhance diversification and cost efficiency, we replaced the global equity funds – Guinness Global Equity (+0.61%), Lindsell Train Global Equity (-1.1%) and American Century Global Small Cap (-8%) and WS Havelock Global Select (+4.5%) – with a diversified blend of four ETFs: Vanguard FTSE All-World High Dividend Yield, Vanguard FTSE Developed World, Vanguard Global Small Cap, and Xtrackers MSCI World Momentum ETFs.
Property allocations posted modest declines amid ongoing sector pressures, with Schroder Global Cities Real Estate (-1.8%) impacted by uncertainty over global economic growth. This has been replaced by the iShares Environment & Low Carbon Tilt Real Estate ETF, retaining sustainability exposure at a lower cost.
In the UK, adjustments in the quarter coincided with the JOHCM UK Opportunities fund being merged with a sister fund. This would have changed the objective for holding the fund to closely mirror the exposure already held via the BlackRock UK Income fund, largely tracking the FTSE All Share index. To avoid duplication and streamline holdings, we replaced both with the iShares UK Equity Index ETF. Additionally, we moved from the iShares MSCI Japan ETF to the Vanguard ESG Developed Asia Pacific All Cap ETF, broadening our regional diversification across Asia-Pacific markets while strengthening our ESG approach.
Looking ahead, our strategies remain balanced and valuation-conscious, carefully positioned with exposure to resilient assets like gold, short-duration fixed income, and infrastructure, providing the necessary stability in the face of ongoing uncertainty.
| SECTOR | Q1 2025 | 1 year to 31/03/25 | 1 year to 31/03/24 | 1 year to 31/03/23 | 1 year to 31/03/22 | 1 year to 31/03/21 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | -1.4% | -8.4% | -7.0% | -27.1% | 3.8% | -1.0% | -8.6% |
| IA £ Corporate Bond | 0.9% | 3.2% | 7.3% | -9.4% | -4.4% | 9.2% | 0.9% |
| IA Property | 0.1% | 1.7% | -1.2% | -10.7% | 10.5% | -2.3% | -0.6% |
| IA UK Equity Income | 1.3% | 7.4% | 7.7% | -0.3% | 10.8% | 32.5% | 11.1% |
| IA UK Smaller Companies | -7.4% | -2.9% | 4.8% | -17.0% | -3.8% | 67.4% | 6.3% |
| IA North America | -7.4% | 2.0% | 25.2% | -4.4% | 15.9% | 42.5% | 15.0% |
| IA Europe Excluding UK | 5.8% | 1.2% | 12.5% | 6.6% | 4.4% | 39.5% | 12.1% |
| IA Japan | -1.0% | -1.6% | 17.5% | 0.4% | -4.5% | 31.9% | 7.9% |
| IA Asia Pacific Excluding Japan | -2.8% | 4.2% | 0.3% | -2.4% | -5.1% | 48.5% | 7.5% |
| IA Global Emerging Markets | -1.1% | 3.4% | 5.9% | -4.4% | -8.7% | 47.3% | 7.1% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q1 2025 Performance Review
Ethical strategies
Key facts
Resilient returns in a cautious environment
Positive performance from Alternatives and Fixed Income
Equity allocation modestly negative, led by US and UK weakness
Continued strength in gold and renewable infrastructure
Ethical fund changes implemented to improve cost-efficiency and alignment
Summary
Against a backdrop of mixed economic signals and rising geopolitical uncertainty, the Ethical strategies delivered resilient returns in Q1 2025. The environment remains particularly sensitive for investors, as inflationary risks have become more nuanced, interest rates appear to have peaked, and markets continue to digest regional divergence in policy and performance.
Alternatives were the largest contributor to performance, led by the Royal Mint Responsibly Sourced Physical Gold ETC (+15.9%) and Downing Renewables & Infrastructure Trust (+9.6%), both benefiting from their defensive characteristics and investor demand for diversification. The Downing position was sold towards the end of January taking advantage of increased liquidity and share price performance when a large buyer – Bagnall Energy Ltd, which is ultimately managed by Downing LLP – started buying their own shares. BNY Mellon Sustainable Global Equity Income (+3.8%) also contributed positively, while EdenTree European Equity (+8.6%) stood out within equity for its regional strength.
Fixed income provided reliable ballast to the strategies, with broad-based gains across most bond holdings. Notable contributors included the Rathbone Ethical Bond Fund (+1.1%), Vontobel TwentyFour Sustainable Short-Term Bond (+1.3%), and Trojan Ethical (+2.1%), which offers a flexible mix of high-quality assets including equities, government bonds and gold. Cash also added modestly to the positive returns as yields remained supportive.
Equity allocations detracted slightly from overall performance, reflecting ongoing volatility in both the UK and US markets. Weakness in the iShares US ESG Screened ETF (-8.9%) and Montanaro UK Income (-7.2%) weighed on returns, with additional softness from Jupiter Ecology (-4.0%) and Janus Henderson Global Sustainable Equity (-2.3%).
During the period, we have added to Trojan Ethical, reinforcing the core defensive posture of the lower risk strategies. In UK equities, we sold the CT Responsible UK Income fund following the departure of its longstanding manager, replacing it with the Amundi MSCI UK IMI SRI PAB ETF to improve diversification and reduce costs while maintaining ethical alignment.
These changes reflect our continued focus on building a core of passive investments as the range of low-cost funds grows that meet our ethical screening criteria. With global ESG regulations diverging and sustainable investing entering a more mature phase, we remain committed to delivering ethical portfolios that are robust, cost-effective and built on enduring principles.
| SECTOR | Q1 2025 | 1 year to 31/03/2025 | 1 year to 31/03/2024 | 1 year to 31/03/2023 | 1 year to 31/03/2022 | 1 year to 31/03/2021 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | -4.5% | 1.0% | 17.9% | -1.4% | 10.5% | 34.8% | 11.8% |
| UK ESG Enhanced | 4.5% | 11.4% | 9.7% | 3.2% | 10.6% | 24.8% | 11.7% |
| US ESG Enhanced | -7.1% | 5.4% | 27.1% | -3.0% | 19.1% | 42.9% | 17.2% |
| Developed Market Europe Sustainable | 4.4% | 2.5% | 11.9% | 4.1% | 8.2% | 34.6% | 11.7% |
| Emerging Market ESG Enhanced | -2.6% | 0.0% | 5.3% | -7.9% | -7.1% | 37.4% | 4.4% |
| UK Corporate Bond Sustainable | 0.1% | 1.5% | 6.9% | -12.6% | -5.4% | 8.7% | -0.5% |
| Global Corporate Bond Sustainable | -0.1% | 2.2% | 2.4% | -1.5% | -1.9% | -0.7% | 0.1% |
| Global Green Bond | -0.1% | 0.2% | 2.2% | -7.0% | -6.2% | -0.8% | -2.4% |
| Global Renewable Energy | -3.8% | -3.1% | 0.1% | 3.3% | 7.1% | 56.3% | 10.9% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.