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

Following the global elections of 2024, we are now potentially starting to see the formation of a ‘new world’ order. Whilst far too early to draw any firm conclusions, we've already seen a change in the relationship between the US, Israel and Russia, more solidarity between European member states, and increased trade friction in the Americas.

The common link is, of course, President Trump. Fresh from his inauguration in January, he wasted no time in implementing proposed trade tariffs on Mexico, Canada, and China to level the playing field back towards American businesses (at least according to his way of thinking). Tariffs on Europe (and others) are likely to follow, covering area such as automobiles, pharmaceuticals, and semiconductors.

We had mentioned last month of our expectation that market volatility would increase as we approached the imposition of those much-anticipated trade tariffs, and whilst February started off calmly, we've seen falls in global stock markets in more recent weeks - including notable weakness in some of the big US technology shares that had performed so exceptionally well last year.

US exceptionalism - is it waning?

US exceptionalism has been a theme of markets for some time and investors are, perhaps, starting to question the assumption that this trend can continue unabated.

The US economy has been consistently strong since rebounding from Covid and has proven many wrong (including ourselves) regarding it's durability. However, there are signs that the new Trump administration has started to cause concern for US businesses and consumers alike – which could have global repercussions and throw into doubt the long-held belief that the US is somehow ‘superior’ in comparison to other nations.

Let’s explore that for one moment: The predicted recession in the US never materialised in 2024, and the strength of its consumer spending has proved a strong ‘flywheel’ to keep the economy powering ahead. However, some economic indicators, such as consumer confidence, have recently started to soften - not by much - but it could be enough to cause that doubt to creep in, and allow for some re-thinking of that 'exceptionalism' narrative.

European economic growth has been weaker than the US, and China has been slowing in recent months, too. But they do both have potential catalysts to help them kick start growth - including lowering interest rates, or delivering fiscal and economic stimulus packages. We’ve already seen improvements in other countries. Japan, for example, has delivered improved economic growth in recent times.

February was the month in which Ukraine surpassed the third anniversary of the Russian invasion, but US support for the country now looks to be fading. In response, there is pressure from President Trump for the EU to increase defence spending - urging Nato’s European members to spend 5% of GDP. Whilst likely too high, any additional spending on defence, could help boost economic growth in regions like Europe.

Interest rates, rising inflation and marginal UK economic growth

Here in the UK, The Bank of England reduced interest rates by 0.25% in February (as expected), but surprised markets when two members of the MPC (Monetary Policy Committee) actually voted for a bigger cut. However, any excitement that rates could be falling faster than previously predicted was quashed when the Bank's own forecasts showed that it now expects inflation to be higher than previously suggested. And, of course, CPI inflation (which includes food and energy prices) rose from 2.5% in December to 3.0% in January (the latest figure at the time of writing) – moving further away from the Bank’s 2% target.

As announced in the 2024 Autumn budget, from April onwards, we’ll see the impact that the rise in employers National Insurance (NI) rate, and the National Living Wage, will have on wage bills. Some companies may have no choice but to increase their own prices to offset these headwind costs. Whilst this could add to inflationary pressures (until at least 2026), we expect the Bank of England to 'look through' these higher costs so it doesn’t necessarily stop them from cutting interest rates again this year. UK economic growth in December proved stronger than expected at 0.4% (up from 0.1% in November) though this was boosted, in part, by government spending rather than a healthier underlying economy.

Looking at the bigger picture

Cognisant of the potential for shifting sands within investment markets, our fund managers remain vigilant about the future shape of the world. We are ‘valuation-driven’ investors, rather than ‘trend followers’, and always pay attention to the ‘bigger picture’. There are plenty of good opportunities in both fixed income and equity markets but, as we've said before, choosing carefully will be key - especially given the changing landscape (much of which has been mentioned here).