Commentary for May 2025
Market Overview
Markets rebounded with a vengeance in May, as easing trade tensions reduced fears of a global recession and fuelled broad based gains, erasing the losses of March-April. Global equities advanced 4.9% in aggregate, with all regions moving higher. However, UK small caps were the star performer, surging 7.7% on the back of improving economic data. Shares were supported by some robust Q1 corporate earnings out of the US. The technology sector led the gains after a poor start to 2025, while healthcare underperformed, as President Trump announced a major reform of drug pricing. Gold traded sideways, digesting recent gains, while the oil price declined by 5%. However, this latter move has since been reversed with the outbreak of hostilities between Israel and Iran post the month end.
The US and China agreed a 90-day suspension of tariffs on most goods. Tariffs elsewhere were still a source of market volatility, as new threats of a 50% levy on the EU from 1 June created a brief wobble in equities. However, these negotiations were subsequently also extended. US investors coined the ‘TACO Trade’, an acronym for ‘Trump always chickens out’, in response to the President’s frequent policy U-turns.
The UK fared better in terms of tariffs, negotiating a new trade deal that saw the 25% levy on US imports of British Steel scrapped and those on domestically manufactured cars cut from 27.5% to 10%, the standard baseline rate that will remain on all exports to the US. As a result, the effective tariff rate on the UK will fall to 11%, low in international terms but still up 10% from 1% prior to ‘Liberation Day’.
Global bond market struggled in May, falling slightly as fiscal concerns resurfaced. This was triggered by Moody’s downgrading of the US credit rating, which was then followed by the unveiling of President Trump’s ‘One, Big, Beautiful Bill’. The Reconciliation Bill – which was approved by Congress and is now required to be passed by the Senate – received criticism for potentially adding trillions of dollars of debt to the nation’s already bloated balance sheet. These concerns drove US Treasury bond yields higher (and prices lower). A similar dynamic played out in the UK, where limited political appetite for either the higher taxes or lower spending needed to cut the deficit is also placing upward pressure on government bond yields.
On the economic front, US consumer confidence rebounded sharply from almost a five-year low as the threat of tariffs receded. Business confidence also improved markedly. The labour market remained resilient, with non-farm payrolls showing that 177,000 jobs were added. Inflation for April came in at 2.3%, the third month in succession that the reading came in below expectations. This would normally boost hopes for a US interest rate cut, however the Federal Reserve chose to remain on hold while current trade policy uncertainties play out.
The UK economy expanded by 0.2%, while retail sales increased 7% in April. The BoE now expects growth to expand by 1% this year and a slightly higher 1.5% in 2026, as increased government spending boosts demand. The resurgence of inflation was a less welcome surprise. The Consumer Price Index rose to 3.5% for April from 2.6% in March, the highest reading since January 2024. The Bank of England cut the base rate by 0.25% to 4.25% as expected, although the disappointing inflation figures trimmed expectations for further cuts this year to only 0.25%.
Looking Forward
In a remarkable turnaround, global equities are back at levels approaching their February highs. Investors are clearly hoping that President Trump’s tariffs are likely to settle closer to 10% on average, considerably lower than the outlandish numbers threatened in recent weeks. The past month has also seen a welcome rebound in forward looking US data following a notable dive in April. Recession fears have faded for now but rising bond yields and lingering inflation risks as US trade tariffs take effect are likely to keep markets on edge, even as hopes shift from hard economic landings to softer ones.
Conversations among asset managers continue to revolve around geographic diversification and reducing exposure to the US. The US market is struggling to sustain its former strong performance, as political uncertainty and slowing growth have made investors less willing to pay a steep premium for assets. Existing allocations to the US are being reevaluated and capital is flowing to other geographical regions.
Taking a step back, it’s important to recognise that the past decade or so of outsized returns in the US has been exceptional and that such performance is historically unsustainable over longer periods beyond 10-15 years. Statistically, a period of low returns is more likely going forward.
Plenty of opportunities remain, but we need to look beyond the winners of recent years as the ‘broadening out’ theme is likely to continue to play out. Given that markets outside of the US have only delivered a fraction of the returns in the post-2008 surge, the valuation gap is extremely high and, as a result, they have been able to make gains while US markets have pulled back. There is a strong case for equities in the UK, Europe, Japan and emerging markets along with infrastructure, precious metal and commodity plays.
Our Strategy
Overall returns for 2025 are now in respectable positive territory for our standard portfolios, and comfortably ahead of the respective benchmarks. Robust diversification across a range of global markets and additional exposure to gold and gold mining stocks has captured the positive returns in many assets outside of the US.
Our standard portfolios have also benefited from a higher-than-average allocation to the UK market, which has been a star performer this year. As investors look to diversify away from the US, we would not be surprised to see this trend continue. UK equities remain undervalued, with an average price-to-earnings multiple of 12X, representing a 50% discount to the current level of 24X for the US. The mid-cap segment is even more standout, trading at a 20-year low relative to the main index on the same measure. Encouragingly, small and mid-cap stock are now outperforming the majors.
Japanese equities are also extremely cheap at 14X. The region offers strong diversification benefits with the lowest correlation to other developed markets. Corporate returns are rising and share buybacks have risen to record levels. The export sector is also likely to benefit from recent yen depreciation, which has greatly boosted its competitive position.
The weaker US dollar is supportive for emerging markets, where equities also look set to benefit from stronger domestic growth. Profits growth across the region has picked up in recent months and is now growing at a faster rate than in the US.
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms (relative to the level of inflation). Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer (except for index-linked bonds).
Alternative assets such as infrastructure, renewables, gold and commodity stocks offer a valuable additional source of diversification and allow us to hedge against inflation and other potential risks and capitalise on wider opportunities outside of traditional bonds and equities. Stimulus by China could exert further upward pressure on commodity prices.
Our exposure to both physical bullion and gold mining shares across standard portfolios has been a major contributor to outperformance against their benchmarks. We continue to view gold as essential portfolio insurance. We have held the view for some time that the combination of higher geopolitical risk, deteriorating fiscal trends and strong central bank demand have the potential to drive a powerful bull market, where multiple pockets of global capital attempt to diversify away from dollar assets into gold as a safe monetary metal. The market is simply not large enough to absorb large flows without much higher prices. For gold mining equities, current prices are likely to translate into record profit margins and the highest growth rate of any sector in the broader equity market.
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.
