2025 began with a roller-coaster first quarter for markets, as escalating geopolitical tensions and the implementation of trade policy changes fed into sharp swings in investor sentiment. Over the month, investors were forced to adjust their expectations for US economic growth amid tariff uncertainties, with major indices such as the S&P500 and Nasdaq 100 recording their worst quarters since 2022. This has provided investors with an opportunity to gain exposure to high quality assets at more attractive prices, with the medium to long term outlook remaining positive as we look past the short-term noise currently depressing investor sentiment. Against this backdrop, the Volatility Managed OBI portfolios have benefitted from their low directional US exposure and higher exposure to low risk fixed income assets, with the gilt exposure within the portfolios partially offsetting a wider decline in valuations as investors look towards safe haven assets. Turning to the long hold portfolio suite, the income-focused portfolios have held up well compared to the IA sector benchmark due to their focus on quality and high yielding assets, while the growth-focused portfolios have broadly followed the market, as is expected with more growth-oriented assets which require a longer-term investment approach.
Financial market volatility remained a key theme over the first quarter of the year, with uncertainty over trade policy and rising stagflation fears causing headaches for investors as President Trump announced sweeping changes to US policy. After struggling for direction earlier this month, announcements on tariffs led markets lower, as investors speculated on the potential size and impact of the latest package of tariffs to be applied on foreign imports in the US. It can be argued that uncertainty surrounding tariff implementation has a more severe impact on risk appetite than the tariffs themselves, and with greater clarity following the ‘Liberation Day’ announcements yesterday, we believe that while we are likely to see further volatility in the short term, companies can better prepare themselves and economists can make more informed forecasts as we move through 2025.
What Has Been Announced?
- Broad “reciprocal” tariffs on imports from US trading partners across the world. The US will impose a minimum 10% tariff on all trading partners and implement even higher rates on about 60 countries that hold large trade surpluses with the US. For example, the reciprocal rate on imports from China will be 34%; from the European Union, 20%; and from Vietnam, 46%. The global 10% tariff will go into effect on 5th April, and then will be replaced by the individualized higher tariffs on 9th April.
- Under the current plans, UK imports will be charged at the lowest rate of 10%, although trade discussions are ongoing, with UK negotiators looking to remove this entirely.
- The tariff increases announced by the US are higher than markets had previously been anticipating, raising effective US tariffs rates to the highest level since the 1930s. This represents a significant step in President Trump’s efforts to reconstitute the US’s economic relationship with the world.
The announcement brings greater certainty on the US approach, however all tariffs announced may not actually go into effect – negotiations with 60 countries will now likely commence, and potential shifts in tariff rates by the day / week are likely. That said, the implications are significant and are likely to result in a re-routing of global trade, with the response of other countries still to be seen.
What Does This Mean For Global Growth and Markets?
Over the last week, equities have sold off on the increasing likelihood of a sharp slowdown in US economic growth. Having started the year with a relatively low probability of a recession in the US, policy changes have resulted in an increase in recessionary concerns in recent weeks, leading investors to re-assess the risk outlook and adjust expectations as we move through 2025.
In the short term, President Trump’s tariffs are likely to dent business confidence and result in higher prices for US consumers. This comes at a time of declining consumer sentiment, weak spending and rising prices, reinforcing concerns about the economic fallout of the new administration’s trade policy to what was previously a relatively robust US economy. As a result, many economists have revised their expectations for financial market performance in 2025, with growth targets being revised lower to reflect lower confidence in the US economy, however we are not expecting a US recession. We are expecting to see an increase in inflation in the US, however with weaker economic activity, this does not materially change our expectations for monetary policy, with bond markets confirming this view in their response today.
In recent weeks, a shift away from the theme of US exceptionalism has led the way for flows into other areas of the market such as European equities and Emerging Market assets amid a weaker dollar. Government bonds, with their safe haven status, stand to benefit should recessionary fears continue to gather momentum as we saw in 2023, potentially providing an opportunity to benefit from the overweight position within the OBI strategy. As global trade is re-calibrated following these announcements, the UK appears to be in an attractive position with the lowest tariff rate in Europe, potentially providing a boost to UK assets. Goldman Sachs economists now forecast that the Fed and ECB will cut interest rates three times this year to prop up economic growth, which could bode well for more interest rate-sensitive assets.
The recent de-risking in financial markets has led equity valuations lower, and as the dust settles from the latest announcements, we see this as an opportunity for long-term investors to buy back into equities at more attractive levels, particularly if the market begins to price in an unrealistic level of risk or ‘overreacts’ based on the initial announcements, when the reality following negotiations proves less severe. As we know from Trump’s first Presidency, the reality can often prove quite different to the rhetoric, and there could be upside ahead as pessimism abates within the market. A bounce back could be on the cards with reduced uncertainty, or if tariffs are reduced/delayed due to negotiations, the latter of which is a possibility given the use of tariffs as a bargaining chip with various key US trade partners earlier this year.
What Does This Mean For The Portfolios?
Against a changing economic landscape, we continue to favour quality assets which we believe can weather a period of turbulence and provide a greater level of stability during periods of negative investor sentiment. Across the portfolios, we hold a blend of growth and defensive assets, with the OBI Volatility Managed portfolios remaining overweight towards UK fixed income as risks clear in the short term. As a reminder, the Volatility Manged portfolios are designed to manage short term risks and mitigate excess volatility over the long term, while the Long Hold portfolios concentrate on the medium to long term outlook, with the aim of achieving strong growth within positive market conditions. By having a blend of these portfolios, investors can protect against near-term risks, while also positioning for long term growth based on their individual risk profile.
Our Outlook Moving Forward
When reviewing the various risks and potential scenarios ahead, it is key to consider the impact of heightened uncertainty on the markets. In the lead up to the second Trump Presidency, it was argued that the only thing worse for global growth than tariffs is uncertainty, and this has certainly been a key driver behind the volatility in markets this quarter. We expected Q1 to be volatile, however with some clarity on the policy side moving into Q2, and with support from central banks, it is our view that this will result in a brighter outlook for financial markets.
We understand that the recent turbulence across global financial markets can be unsettling, and while the portfolios have faced headwinds over the month, we remain optimistic on the medium to long term outlook for risk assets. While growth expectations are likely to be revised lower on the latest trade announcements, fears of a global recession are overdone, and the portfolios are well positioned to generate positive risk adjusted returns as the medium-term outlook improves.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
