Given the choice, I’d have liked this letter to be written amid a more stable market backdrop, but of course markets are very hard to predict and impossible to control! So, what is going on in markets?

What is going on right now is arguably a continuation of a much less predictable market backdrop that investors have had to grapple with since the new US administration assumed office in January. Rhetoric and action from this administration has been more direct and confrontational than the market is perhaps used to. Thinking back to a few examples from the past few months, there was talk of reclaiming the Panama Canal, Greenland coming under US control, Canada becoming the 51st state of the United States, a potential Gazan Riviera, and the actual renaming of the Gulf of Mexico. There was also the infamous Oval Office meeting with Ukraine’s President Zelenskiy, which became a major diplomatic event. Alongside this rhetoric there has also been plenty of action. So far this year, President Trump has signed somewhere just north of 110 Executive Orders on a range of issues such as domestic energy resources, withdrawal from the Paris Climate Agreement, establishing the Department for Government Efficiency (DOGE) and dismantling the Department for Education. While the markets looked through much of this (partly because there was arguably too much to analyse in too little time), global equities have been falling since mid-February. Last week market participants received a more direct ‘reality check’, with the US administration announcing a broad sweep of new tariffs on the United States’ trading partners.

While these were expected to a degree, the magnitude of the tariffs was beyond market expectations. There was a baseline 10% tariff on imports for most countries, with higher rates for some specific countries, which escalated global trade tensions, undermined confidence in global economic growth, and increased the likelihood of recession. This led to the sharp and significant losses across global financial markets followed by sharp swings in prices, with intra-day price swings rarely seen outside of crises. Market moves have been pronounced and worrying for end investors.

US equities, which dominate global equity indices, are down double-digits in GBP terms year-to-date. However, UK equities (i.e. the FTSE 100 index) are down just 2% so far this year, and European equities are down just over 3% over the same period. That has been helped by President Trump’s announcement that there would be a 90-day pause in the implementation of tariffs for all but China. The immediate market reaction was extremely positive, with the S&P 500 index having its best day since 2008 (+9.5%) and the Nasdaq index having its best day since 2001 (+12%). Since then, markets have sold off a little more. Whether this was the US Administration’s “the plan all along” remains to be seen, but investors were right to express some initial relief. It’s not that the remaining 10% universal tariff and a full-blown trade war with China won’t harm corporate earnings or economic growth; it will just take time to assess the extent of the damage.

What matters is that investors can now have a bit more confidence that President Trump is not necessarily willing to push markets to the brink. Although not an exact science, double-digit declines in the S&P 500 coupled with a 60-basis point rise from the lows in the 10-year Treasury yield seem to be Trump’s ‘pain threshold’.

It is worth noting that it is unusual for the US dollar to go down in a global risk-off move. For bonds and equities to collapse at the same time is rarer still. It is a reminder that the markets can be a powerful force politically. There is arguably also increasing domestic pressure on the US administration, with some Republican lawmakers uneasy at the approach to tariffs – particularly for friendly allies. In addition, falling consumer confidence (which we are already seeing) tends not to augur well for approval ratings. While we welcome the market respite, we note that the tariffs that remain are still high enough to have inflationary implications and dampen economic growth. Even after the 90- day extension, a universal lowered reciprocal tariff of 10% (except for China where tariffs have increased to 125%) is still much higher than where the tariff rate would have otherwise been. And of course, nobody can be sure what happens next, and uncertainty is generally bad for markets and for investment. Corporate management teams may postpone multi-billion-dollar investment and hiring decisions until there is more clarity.

The post global financial crisis regime being one characterised by benign disinflation, a central bank ‘put’ (which seemingly put a floor under markets), maximum globalisation, a peace dividend (there were many conflicts, but defence spending was low relative to long-term history), and favourable demographics. The potential new regime – which we were arguably already moving some way towards – is one characterised by higher trend inflation (and/or more volatile inflation), greater fiscal intervention, de-globalisation, higher defence spending, and a shrinking working age population. The events of the last week reinforce that we are – at least to some degree – moving further in this direction.

It is incredibly difficult to predict short-term market movements, even in a more ‘normal’ environment, not to mention in these more chaotic market conditions. What we are better placed to do is build robust long-term portfolios designed to navigate a variety of market conditions, and able to take advantage of opportunities that arise from market dislocations.

The Bank of England has delivered only one rate cut so far this year, opting to stay on hold in March. As has been the case for the past several quarters elevated wage and service inflation is driving caution in the Monetary Policy Committee’s (MPC) pursuit to lower interest rates, even as MPC members note growing concern in labour markets. Recognising politics is an emotive subject, we reluctantly point to October’s budget as a drag on UK growth over the medium term. The additional tax burden, imparted through increased employer National Insurance contributions, is weighing on labour market health – hiring intentions have fallen – and consumer confidence. Falling mortgage rates are offering only a partial offset so far but should rates come down more quickly in the coming months then there are reasons to think the UK consumer could start to spend some of their excess savings. On balance we remain alert to the lingering risks recent policy choices present to economic growth and, therefore, anticipate the Bank of England might move at an accelerated pace in cutting interest rates through the remainder of the year. This cautious take on the UK economy doesn’t present a material threat to the UK stock market, however. As is well understood, UK listed businesses derive most of their earnings from overseas.

Following the collapse in its governing coalition last year, Germany held Federal Elections in February, seven months ahead of schedule. The outcome delivered a punishing blow to the SPD incumbents, and a return to office for the CDU/CSU. That party will lead a new coalition. While incoming Chancellor, Friedrich Merz, may represent an establishment Party, he is behaving in a manner unbecoming a status quo politician. Already he has called for his nation to do “whatever it takes” to secure European defences, deliberately echoing 2012 Mario Draghi. Within Merz’ collection of policies we highlight an adjustment to Germany’s ‘debt brake’, which frees up additional capacity for considerable spending on both defence and infrastructure projects. The intended scale of fiscal expansion is a step change relative to Germany’s recent past and runs counter to US’ current efforts to rein in its budget deficit. These changes in fiscal paths help explain the stark difference in US and European equity returns this quarter and, will likely be a key factor driving performance in the coming months and years.

Whether you are an investor, a political analyst, or a Geordie, it has been an extraordinary start to the year. It is one of those periods Lenin refers to where decades have happened in weeks.

Several events this year have catalysed immediate changes in market performance and have the potential to set a very different path for the coming decades. That Germany appears committed to fiscal spending while the US pulls back is nothing short of a paradigm shift. We acknowledge it has been a tricky quarter for investors, but new opportunities abound, and volatility is the price of entry for those seeking to harvest superior long-term returns. Do not fear, embrace these markets.

Call to action

• Clients are advised on the basis of having a medium to long term investment time horizon and we embrace a buy and hold strategy unless tactical investment decisions are thought to be of benefit and necessary. Therefore, do not panic.
• Now is a good time to consider the investment of cash or new monies and for those who can, consideration should be given to making use of tax-efficient allowances i.e. ISA subscriptions and pension contributions.
• Conversely, if circumstances permit, one should consider deferring large withdrawals from invested funds.

Kind regards,

iPensions Wealth Team

Investment risks

Past performance is not a guide to future returns. The value of investments and any income may go down as well as up This may be partly the result of exchange rate fluctuations) and an investor may not get back the full amount invested. The information, data, analysis, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but iPensions Wealth Limited makes no warranty, express or implied regarding such information.

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