Market commentary
Global markets entered 2025 on edge, rattled by a new wave of US protectionism.
President Trump’s April tariffs – which he dubbed ‘Liberation Day’ – liberated investors from over seven trillion dollars. Equities are now pricing in retaliation risks and a rising chance of a US recession. US equities had their worst quarter since 2022. North American equities fell over 7% as fears of stagflation grew. Tariff-driven inflation, weaker demand and slowing job growth hit investor confidence hard. A key manufacturing index slipped into contraction territory.
The UK economy delivered a surprise boost early in the year. February GDP rose 0.5%, with help from services, manufacturing, and construction. But inflation – pushed up by energy costs –kept the Bank of England from cutting rates. Base rate remained at 4.75%. Government forecasts now project just 1% growth for the rest of 2025. Despite budget cuts, UK markets stayed calm, with bond yields and equities unchanged.
European equities saw a strong quarter, fuelled by defence spending and investor optimism. They climbed 8%, led by defence stocks that were up 70%. As the Germany ramps up military spending to cover shrinking US support, investors are backing European defence firms over US suppliers. The European Central Bank cut its deposit rate to 2.5% to support growth.
Meanwhile, China made major strides in tech and green energy. The launch of DeepSeek’s new and cheap artificial intelligence model lifted Chinese tech shares, shifting the balance in the global AI race. Meanwhile, electric car makers such as BYD posted strong sales.
Fund Activity
The fund produced a slightly negative return that was behind the sector for the quarter. The main challenge came from equities, especially our global high-quality holdings. However, our allocation to sterling bonds added value as yields moved higher, while our alternatives exposure gave extra support.
In response to large falls in the sector, we reduced our exposure to high-quality stocks from 9.4% to 5.2% and shifted to global high-dividend stocks, mainly in financials and utilities. This should improve both the fund’s income profile and its defensive positioning in an uncertain policy environment. We continued to trim exposure to technology over the quarter in favour of broadening out sector allocation across the fund. Within fixed income, we allocated more into sterling bonds to reduce currency exposure.
Outlook
Investors face an unpredictable environment. Equities are volatile, worsened by the new protectionist US trade stance. Treasury yields have swung as investors brace for more tariffs. Inflation remains high, and growth is slowing.
US equity positioning is becoming more important. President-led changes are driving a new world paradigm. The US global security policy change has many impacts, some profound. The US is presenting itself as a less predictable, internally-focussed partner. The tech sector – itself a key security issue and a substantial weight in the equity market – is also in the middle of a cash-intensive growth phase. This is creating much valuation uncertainty.
A potential US recession would most likely lead to a fall in global demand, pulling down economies tied to American consumption. Synchronised slowdowns could follow in Europe and parts of Asia. Nevertheless, Europe is pivoting toward stimulus. Germany announced a €500bn infrastructure plan, constructed in a way to sidestep its constitutional debt brake. In addition, it approved an unconstrained military spending plan. Combined, these could jumpstart wider EU spending. This shift may help offset weak global demand and support regional growth.
In our view, China still offers opportunity in selective sectors. Tech and green energy present options for growth investors looking to hedge against trade disruption. However, although China offers cheap exposure to fast-growing technology companies it has yet to resolve rapidly growing tensions with the US.
Despite the new protectionist-induced volatility in equities and currencies, the US equity market remains the deepest and most stable pool of equities globally. The dollar remains the only reserve currency of choice for most nations. However, European equities – especially beneficiaries of new German spending – are cheaper than those in the US, and opportunities are presenting themselves.
Within fixed income, continued longer-term inflation risks persist and make shorter duration portfolios more attractive.
Important Information
Past performance is not a guide to future performance.
The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.
Currency fluctuations can also affect performance.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
The fund may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
