Investment Update: April 2025

INVESTMENT UPDATE APRIL

*all returns in local currency terms

Overview

Normally, our update would restrictively cover events which occurred in the preceding month. However, such was the extent of the potential disruption to world trade, and impact on financial markets, caused by President Trump’s ‘Liberation Day’ announcement on tariffs on April 1st, that it would be remiss to not take the opportunity to pass comment.

Market volatility during March, which in some cases seemed quite significant, has since increased as Trump’s actions seemed to threaten to alter the nature of a world trade system in place since the 1930s (i.e., that of generally free trade and, in recent decades, increased globalisation). The ‘reciprocal’ tariffs that he has imposed on all countries, which vary between 10% and over 100% in some cases, seem to make no sense from a calculation point of view and take no account of what America can, or is able to, produce itself. They also ignore the internationally interwoven nature of world trade systems, with many products’ components crossing several borders before getting to their place of eventual assembly, which may often be by US companies manufacturing in the US.

Whilst one of the Trump administration’s objectives is to re-industrialise the US – harking back to an era that existed in the early part of the last century – this desire takes no account of factors such as who is going to provide the labour for this.

The US, as with many other maturing economies, has shifted over time to a more service-based economy. Manufacturing now represents less than 10% of the US economy, versus the service sector’s over 70%, with much of the labour force enjoying the working conditions afforded by industries in the latter.

Whilst the imposition of tariffs may encourage some companies to relocate production to the US, building production facilities can take years. What is more, companies have no way of knowing if the tariffs will still be place when production commences. And the labour scarcity in the US makes it more expensive there than in many other countries.

So, what of the impact on the world’s economies and stock market? As we have mentioned on previous occasions, markets are averse to uncertainty and part of the current problem is how much Trump is prepared to back down. Certainly, the way he has reacted to China’s imposition of higher tariffs on US goods by raising the level of tariffs to over 100% suggests to the market that he isn’t prepared to give way to those who stand their ground. On the other hand, his temporary suspension of the full reciprocal tariffs, whilst still maintaining the minimum 10%, suggests other nations may get some success through negotiating. But this will take time.

Meanwhile, it does seem that a higher level of tariffs generally is here to stay, and strategists are at least able to estimate the impact. The first point to note is that the impact is not believed to have as great an impact on the global economy as either COVID or the GFC. However, estimates suggest that tariffs could knock 1% to 1.5% off global GDP, and 2% off US GDP, even pushing the country into recession. This, in turn, will have an impact on corporate earnings, which will be further affected by the potential reduction in US consumer buying power, and by companies putting their energy into ways to circumvent tariffs and establishing new trading partnerships or supply chains, rather than focusing on their core business. However, we should also bear in mind that there will be companies selling into the US benefitting from their products attracting lower tariffs than competitors domiciled in other, higher tariff, territories. Notwithstanding the last point, the impact on corporate earnings is one of the key drivers for stock market volatility.

Whilst this may seem to paint a bleak picture, we are seeing a reset of expectations for equity market returns going forward, and when the stock market is at the high end of historical valuations, such as the US market is, the level of reset was always bound to be greater. We have seen market corrections like this before against a similar valuation backdrop, but ultimately the markets prevail – it’s just not a very pleasant experience whilst corrections are occurring. We have used the chart below in other communications, but its significance should never lessen.

Companies that make up stock markets are adaptable. Ultimately, their shares (equities) will always outperform cash over the longer term as they benefit from GDP growth, company earnings growth and inflation.

We turn now to individual markets:

US

The irony of Trump’s isolationist policies is that it is the average US citizen who is likely to suffer. Many goods will cost more due to tariffs, as well as a weakening dollar, which also increases the costs of imports. This is likely to impact demand, and so is the potential wealth shock from the stock market falling. Many individuals in the US have their long-term savings tied up in the stock market, so any significant falls in market value can have an impact on their willingness or ability to spend. Some US companies face challenges presented by tariffs, even if they’re manufacturing in the US. Apple is an example of this, with components manufactured and assembled overseas. Coupled with the challenging stock valuations, this left the market susceptible to a correction. But, as we know, such things are normal. Remember that the S&P 500 index went up over 20% two years in a row, so even after the correction, returns over the last two years are still impressive. The US is the largest economy in the world by far and has some of the largest and best companies in their field based there. Whilst the impact of recent events presents challenges, we know that corporations are likely to prevail, especially in the US, which possesses unique ‘animal spirits’.

UK

The UK economy faces several challenges, culminating in what appears to be a ‘stagflationary’ (low growth with higher inflation) environment. However, the FTSE 100 is comprised of many companies that do well in a lower-growth environment, with many ‘old’ economy companies with strong balance sheets that are paying high dividends to investors. These companies are also global in terms of their business activities and earnings and therefore less reliant on the health of the domestic economy. The UK market, unlike the US, is also not expensive in historical terms, so stable returns are more likely. Any further slowdown to economic growth may be compensated for by the Bank of England having more room to manoeuvre on reducing interest rates. Whether Keir Starmer can negotiate a way out of the 10% flat rate, or 25% tariff on auto exports to the US, remains to be seen.

Europe

The optimism over the potential for an economic boost to the regional economy from vastly increased defence spending, including Germany’s lifting of its ‘debt brake’, was quickly quashed by the announcement of the US 25% autos and reciprocal tariff rate. As a major market for Europe, this was seen as a particularly hard blow for a region heavily reliant on manufacturing. These tariffs may cause the continent to look increasingly inwards in terms of economic ties, echoing the effect of the reduced US commitment to NATO. However, this will need to be reconciled with the already high levels of debt in some countries. The EU does seem more galvanised by these developments, however, and we may well see a long-term positive impact. Here too there is a higher likelihood of lower interest rates now.

Japan

Japan has its ‘trilemma’ of needing to address rising inflation, requiring potentially higher interest rates. However, doing this may suppress already weak demand and strengthen the yen, thus creating problems for exporters. This has clearly been exacerbated by recent events. The combination of a weaker dollar and tariffs has created an even higher level of downward pressure on the stock market. So, it is little surprise that the authorities there were amongst the first to engage with the US following April 1st. Again, the immediate outlook requires some visibility on what real tariff rates may be in future and how the dollar moves from here.

Asia and Emerging Markets

The outlook for China, the world’s second largest economy, is certainly the cloudiest. The authorities there were already grappling with addressing the deflationary impact of the collapsed property market and now they are fully engaged in a trade war with the US. Attempting to call the outcomes of this scenario, with the personalities involved, would be foolhardy. But China is an incredibly pragmatic country: it has already increased its political and trade links in regions which the US has recently neglected, and one can only envisage that policy continuing as the US becomes ever increasingly inward looking. As for the rest of the region, much depends on the outcome of negotiations over tariffs.

Summary

Whilst we have some respite on the tariffs front, with a 90-day window for negotiations, there are still 10% minimum tariffs in place plus other, higher ones and, of course, an ongoing trade war with China. The jury is out as to whether tariffs on their own are inflationary, without a corresponding increase in the money supply, so US inflation figures will be the subject of close monitoring over the coming months. Thus, uncertainty is still a factor – and that is likely to mean volatility, especially given the mercurial nature of Trump’s policymaking. However, as we navigate this period, we continue to ensure that portfolios remain invested and are as diversified as possible to reduce any impact. Whilst our lower-risk assets (bonds) have been volatile, they have still contributed to reducing the impact of movements in equity markets on portfolios. When markets can rise 10% in a day, this demonstrates the importance of our approach.

Rockhold Asset Management, with contribution from 7IM, Marlborough and LGT, April 2025