Articles

What happened, what next, what should we do?

Johnny Hughes, Head of Global Equity and Multi Asset Investment Specialists May 2025.

In early April, the Trump administration’s imposition of steep tariffs unleashed a whirlwind of economic and market uncertainty. This period was characterised by a succession of threats, fleeting pauses and vague promises of future deals. As we survey the aftermath, the pressing question remains: how have markets weathered these turbulent tides?

What happened? Blinks and beats

Despite growing expectations for a significant economic downturn, markets have defied predictions of recession or, at the very least, stagflation. This resilience serves as a salient reminder that market conviction often lags actual economic conditions. Central to the market’s unexpected stability are two critical developments, dubbed ‘blinks’ and ‘beats’, which have served as market circuit breakers.

‘Blinks’ represents the recent policy reversals and reconciliations that have moderately eased prior economic tensions. The White House is now placing emphasis on tax cuts and deregulation, diverting focus away from the potentially adverse impacts of tariffs and efficiency drives, known colloquially as DOGE (Department of Government Efficiency). These adjustments signal a strategic pivot from provocation to promotion, spurring cautious optimism among investors.

‘Beats’ encapsulates the renewed market optimism stemming from robust earnings reports, particularly from the technology sector. While there is speculation about demand being pulled forward, a significant tail risk has been mitigated. Despite gloomy soft data from surveys, there is a hopeful narrative shift, with market sentiment evolving from pondering the worstcase scenario to considering potential positives.

What next? Market direction conditional on three Cs

The future trajectory of equity markets is increasingly seen as contingent upon three critical factors: confidence, China and cuts.

The first factor, confidence, hinges heavily on consumer behaviour and capital expenditure. Investors are closely scrutinising soft data to determine its alignment with hard data outcomes. The forthcoming payroll data emerges as a significant touchstone in this respect, potentially providing clarity on employment trends and wage growth, thereby influencing consumer spending power and corporate investment decisions.

Equally pivotal is the role of China. As the global economy’s linchpin, the outcome of trade discussions and the scale of economic stimuli from China hold profound implications for global market dynamics. Recognised as the most crucial source of trade deals, consensus now suggests a tariff reduction from 145% to 60%, which could reshape supply chains and recalibrate economic relationships, significantly driving market sentiment.

Finally, the prospect of cuts signals a potential shift in monetary policy, particularly in the US. Recent indications point towards a Federal Reserve (Fed) stance inclined towards recession mitigation, suggesting possible interest rate reductions. Such a policy trajectory could fortify bond markets by making borrowing cheaper, thus facilitating investment during turbulent times. As economic uncertainties persist, the Fed’s approach may prove instrumental in stabilising financial conditions and promoting market confidence.  

What should we do? Learning from market inefficiencies and the great rotation

Even with the profound insights offered by seasoned experts and unrivalled access to expansive data, markets persist in demonstrating capricious volatility. Events like the Japan flash crash and recent ‘Liberation obliteration’ underscore that human actors are not always the marginal price setters. Embracing the discomfort of volatility can be advantageous, revealing opportunities amidst market dislocation.

Reflecting on current trends, investors are witnessing a swift shift in market orientation. Recognising that the future holds little similarity to the past becomes crucial, especially as we potentially encounter a peak in dollar valuations, be it cyclical or secular.

The prevailing consensus is to leverage these rallies by offloading dollar-based assets amid a transformation that accelerates the rotation towards varying international markets. Specifically, regions such as Asia, global emerging markets, Europe and the UK are emerging as focal points for capital allocation, offering broader opportunities as market dynamics evolve. In keeping with these shifts, a strategic focus on equity income and diversification has become essential, in our view. Equity income can present a dual benefit, offering diversification whilst delivering returns through dividends. Given the current climate, where price-to-earnings expansions appear to be tapering off, dividends and earnings could reassert their roles as pivotal drivers of equity returns. In such an environment, adopting dividend strategies may offer investors the opportunity for steadier returns and a way to navigate transitional phases.

Four scenarios

1 Recession / Hard landing

In the current economic climate, investors are bracing for the potential ramifications of a recession or hard landing scenario. Within this context, bonds may become increasingly attractive given the likelihood of global rate cuts aimed at stimulating economies. Such monetary interventions could support portfolios centred around absolute return multi-asset strategies, offering a hedge against market volatility and capitalising on fixed income opportunities.

2 Stagflation

Conversely, stagflation presents a uniquely challenging landscape that calls for defensive strategies. Asset-backed approaches, especially those involving listed infrastructure, present options for navigating economic turbulence, exemplified by the recent power disruption in Spain. In the UK, commodities, banking and real estate may offer stability amidst fluctuating growth rates and inflated prices. Meanwhile, Japan stands out for its distinctive economic cycle, presenting astute investors with potentially favourable opportunities within this scenario.

3 Brinkmanship and MAGA (Make America Great Again) works

This paradigm shift marks a move from Wall Street to Main Street, as deregulation reshapes the operational landscape for technology-driven sectors. This shift could enhance the emphasis on value and income strategies both in the US and globally, by capitalising on traditional industries that gain from deregulation. As tech-heavy sectors face challenges adapting to these changes, value-driven investments may find new avenues for growth, reflecting the broader move towards enduring economic fundamentals.

4 Great rotation

The uncertainty surrounding US economic policies, including tariffs and pressures on the dollar, is driving attention toward more promising global markets. As faith in ‘US exceptionalism’ is increasingly scrutinised, the concept of the ‘great rotation’ emerges as a compelling narrative for investors seeking to reposition their portfolios. This shift reflects growing bullish sentiment in regions such as emerging markets, Asia, Europe and the UK, presenting diverse opportunities for those aiming to capitalise on evolving geopolitical dynamics.

Embracing change

As we navigate this era in equity markets, one imperative stands clear: adaptability is no longer a mere advantage but a necessity. Global economic shifts, driven by the prospect of an economic downturn and changing geopolitical landscape, demand a strategic reassessment. With market dislocation and waning confidence in US-centric investments, fresh opportunities are to be found elsewhere. As dividends and earnings regain significance, prioritising value-driven, diversified strategies becomes crucial. By embracing change and seeking out untapped markets, investors can not only potentially mitigate risks but also position themselves for sustainable growth in the face of change.

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