April monthly investment update - Reflections on March 2025 and a look ahead

At the time of writing, President Trump's global tariffs are both the 'big story' and the 'big unknown' for financial markets.

There is also no guarantee of any clarity post the 2nd April 'Liberation Day' announcements, whereby the President announces the next round of border taxes. During March, there were other sideshows, including substantially higher spending plans from the new German government and, of course, the Spring Statement here in the UK.

Let’s look at the Spring Statement in a little more detail. It was much lower profile on a global stage, but all the same, it had the potential to upset a gilt market (UK government bonds) which still bears the scars of the mini-budget debacle of September 2022, and more recently, the extra bonds needed to shore up the Chancellors original plans announced at the Autumn Budget of 2024. However, Rachel Reeves looked to have walked a financial tightrope with her Spring Statement and miraculously restored her somewhat-notional £9.9bn fiscal surplus – all without causing too much disturbance to bond prices - arguably the best assessor of whether a government's plans are credible.

As the Office for Budget Responsibility (OBR) downgraded near-term UK economic growth assumptions and raised their inflation forecasts, the Chancellor's cuts to welfare payments were just enough to enable the Government to borrow (slightly) less than expected in the year ahead. This produced a small sigh of relief from a nervous gilt market, though the Chancellor's 'wriggle' room remains very small and could easily be wiped out by trade tariffs coming out of the US in April.

The UK economy desperately needs growth and, like many countries, the thought that it could be impeded further by those proposed trade tariffs is a major concern shared by many UK economists. Some private forecasters had already revised down UK GDP estimates for 2025 to just below 1% (similar to the new OBR forecast), which is closer to the 1.1% recorded for 2024 growth.

The figures released for January showed the UK economy went backwards, with GDP falling 0.1% according to provisional data, as manufacturing disappointed. Cognisant of both the weakness of the economy and an expected re-acceleration in inflation later this year, the Bank of England held rates unchanged at 4.5% in March (after cutting them in February). Headline inflation eased to 2.8% in February but a rise in the energy price cap in April, alongside increases to employers’ National Insurance contributions and the minimum wage (known as the National Living Wage), will undoubtedly combine to push prices higher in the months ahead.

Over in the European Union, Germany’s parliament agreed substantial spending plans in March, in the hope of reviving the largest economy in the European Union (EU). These include the country scaling up on its defence spending - an insistence from President Trump back in January for all NATO member countries to become less dependent on US defence support. This is something the UK Government was already on top of as Prime Minister Starmer announced in February he was increasing the country’s defence spending – news welcomed by the White House administration.

America – still ‘rosy’ in the garden?

In the US, it is becoming more apparent that the country itself is at an economic crossroads. On one hand, the recent official (or 'hard') data looks healthy, but the survey (or 'soft') data looks far 'less rosy’. Recent measures of consumer confidence suggest a dip, but official data on employment and economic growth do not yet give cause for concern.

The Federal Reserve (the Fed) left US interest rates unchanged in March, with no indication they will reduce them any time soon. However, signs of a weakening economy could force the Chair, Jerome Powell’s, hand. Lower interest rates would certainly please President Trump, who has made no secret of the fact he wants the Fed to lower them – and he may be right if the impact from trade tariffs proves material. Alternatively, if inflation is not 'transitory' (i.e. temporary increases in prices rather than long term), and those trade tariffs disturb prices by more than expected, or for longer, then lower US rates may not be on the cards for some time to come.

China is in recovery, but for how long?

We couldn’t mention the US without going into more detail on China this month, as the row between these two super-powers over trade agreements is only set to intensify. It’s a subject that has been rumbling away in the background since 2018 (when President Trump was previously in power) - with the US, at the time, putting various strategies in place to address their trade concerns with this Asian powerhouse.

In 2025, with the President now back at the helm, China looks set to be one of the countries hit hardest by those US trade tariffs – and the timing couldn’t have been worse. Things are just starting to look a little brighter for the country’s economy in recent months – notably for its important manufacturing sector. China has set an ambition to grow its economy by as much as 5% this year. What is surprising, however, is there are no signs of a 'big bang' approach to rejuvenate growth to this level. Perhaps they are keeping their powder dry ahead of the (further) imposition of trade tariffs to come.

Trade tariffs - impacts are still unknown

President Trump seems prepared for "a little disturbance" in stock markets during the trade tariff announcements (which he is making on 2nd April). The scope of possible outcomes and scenarios is incredibly difficult for financial markets to digest at the moment. This was evident during March, which turned out to be a tough month for investors in both equities and fixed income markets. Ironically, it was US stocks which bore the brunt of the selling and finished down 8% for the month. Geopolitical tensions were also a factor at play, as Israel's two-month ceasefire with Hamas ended, and Russia's President Putin rejected requests for a full and immediate ceasefire in Ukraine.

Tariffs will set the direction for markets in the short term but with volatility comes opportunity. We make no secret of the fact that Wesleyan, as patient investors, openly look for buying opportunities when markets fall. We believe, in the long term, healthy returns will come through as valuations recover.