Markets & Investment Update

This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.

Global | Could the current market’s risk-on mood persist?

There’s been a welcome swing in market sentiment since the agreement between the US and China to reduce tariffs for the next 90 days. Compared to the sky-high numbers announced in April, this agreement marks a notable de-escalation in tensions. That said, it’s only a 90-day reduction (with uncertainty about what comes next), which still leaves tariffs at historically high levels not seen since the 1940s.

For now, the market seems to be primarily focusing on the short term, i.e. tariff-related headlines, and not fully appreciating the economic impact of the whole US policy mix. Over the medium term, proposed tax cuts and deregulation will likely have a positive effect on growth, while moderate interest rate reductions could also help. The US administration has argued that elevated tariffs would generate revenue to fund these tax cuts. Therefore, sharply cutting these tariffs may impact its ability to cut taxes and meet its goal of reducing the budget deficit. Given the multiple exclusions to the tariffs, such as smartphones and computer chips, it’s difficult to gauge which sector will settle at which tariff rate. So, amid the uncertainty and the tendency of the US administration to swiftly change tariff levels, investors may think twice about moving investments to the US.

That’s why we’re staying diversified across regions and asset classes, with an equity overweight to capture the recovery in the near term, but also a moderate one as uncertainty lingers. We stay vigilant and ready to adjust as warranted. We’ve recently sold some of our US assets, as the US is still at the epicentre of the policy risk, and bought better-valued Japanese equities, which should benefit from the country’s ongoing corporate reforms. We still hold an overweight position in European equities, given the extra defence spending in the region, and still own gold, commodities and inflation-protected bonds.

US | What do you make of the disconnect between equities and bonds?

Last week, US equities rose around 5%, while Treasury yields rose around 7 basis points (prices fell). This is a typical dynamic. Risk assets, like equities, appreciate at the expense of safe-haven or defensive assets, such as bonds. However, US inflation came in below expectations, which would usually have sent Treasury yields lower as markets would expect the US Federal Reserve to cut interest rates. The fact that this didn’t happen may reflect some attention shifting to Trump’s spending bill and the US’s large budget deficit, especially if tariffs do not bring enough revenues as mentioned above. This is one of the reasons why we own fewer US Treasuries than normal. Holding fewer Treasuries also reduces our exposure to the US dollar, which we think will weaken this year.

This Week | UK-EU Summit, inflation, and sentiment surveys in focus

The week begins with the UK-EU Summit, marking a significant step in post-Brexit relations. Key discussions are expected to revolve around defence cooperation and trade agreements to improve pan-European collaboration. On Tuesday, eurozone consumer confidence in May is expected to have brightened a bit. On Wednesday, the UK’s April inflation data will be released, with consensus expecting a higher print vs April’s 3.3%, driven by increased utility and water bills. This uptick could influence the Bank of England’s monetary policy decisions, especially considering recent warnings about persistent inflationary pressures. A key focus will be on Thursday’s preliminary Purchasing Managers’ Indices for May, which should have slightly improved in Europe. This can also be expected for Germany’s Ifo Business Climate on the same day. The week concludes on Friday with UK consumer data as well as Japan’s April inflation figures. Focusing on the latter, consensus is for a modest increase to 3.7%, after a slight dip to 3.6% in March. This could add pressure on the Bank of Japan to hike interest rates further down the line.

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Information correct as of 19 May 2025.

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Trade talks boost markets