Market performance: A tale of two strategies

If you advocate betting on the previous ‘form’ horse, 2025 hasn’t been rewarding thus far.  US Equities have fallen by over 3% year-to-date*, accelerated by a reversal of more than 8% since their high in late January.  If, on the other hand, you are a wise owl who values the benefits and protections delivered by a diversified portfolio of investments, February was exemplary.

Global market influences and policy shifts

As background, investment markets are focused on the drama of President Trump’s policymaking, with the most glaring aspect being the spectre of a “new world order” as the U.S. seeks to reshape its relationship with the rest of the world.  The Ukraine conflict seems poised to be settled through a territorial (Russia) and resource (U.S.) grab. At the same time, a wave of disapproval greeted the introduction of previously threatened trade tariffs, initially set at 25% on steel and aluminium from their closest neighbours and 20% on imports from China.

The impact of tariffs on the economy

To reiterate my comments from last month’s commentary, tariffs are taxes on consumers. They hinder economic growth, decrease companies’ profits, increase unemployment, and heighten global tensions. Currently, Canada and Mexico intend to impose reciprocal tariffs on imports from the US. Given Canada and Mexico’s dominance in steel and aluminium exports to the US, Americans may have more to worry about than simply removing maple syrup and avocado toast from their breakfast menus. Indeed, as I write, the US car industry (businesses the measure is meant to protect) is pleading for a one-month delay in implementing tariffs for aluminium and steel parts imports from Canada and Mexico.  Their entreaties are due to the chaos it would impose on their supply chains.  A stay of execution of a month has been announced, suggesting the administration may not have thought their policies through.

The curious decline of the US dollar

A curious sideshow has been the decline of the dollar, which is usually considered a haven in times of trouble, given its status as the world’s primary reserve and trading currency. Furthermore, when a country introduces a tariff, it should make its exports more competitive. The currency market compensates for this by strengthening that country’s currency. That hasn’t happened in this case; a significant dollar fall suggests not only that traders believe tariffs are bad for the economy but that the US may no longer serve as a sanctuary, at least for the time being. The weakening US dollar has also supported Emerging Markets’ equity performance. To reiterate, because most trade and borrowing are transacted in dollars, less local currency is required to pay a dollar invoice.

European markets and the shift in global influence

Perhaps the most significant outcome of America’s foreign policy transformation thus far has been its impact on European equity markets.  The “you’re on your own” message from our former ally across the pond has led the EU (and UK) to recognise the need to increase defence spending to strengthen any peacekeeping role in Ukraine while acknowledging the US intent to withdraw from its position as a global police force.  Germany’s Rheinmetall AG is Europe’s largest producer of artillery, while Sweden’s Saab is a leading fighter aircraft manufacturer.  Their share prices have already risen by 92% and 67%, respectively, since the start of the year.  The urgency created by US policy has also prompted the outgoing German coalition government to expedite an amendment to the constitution that will allow it to borrow close to a trillion euros to fund defence and infrastructure spending.  This is a dramatic development.  Germany has an almost pathological fear of inflation and uncontrolled borrowing, traced back to the hyperinflation under the Weimar Republic a century ago. The Euro and the German stock market indices have already experienced breathtaking rises relative to their US counterparts, shares having already increased by about 10% this year before the announcement. In comparison, the UK’s FTSE 100 has climbed by 8%.

Bonds and the recession question

Furthermore, and perhaps counterintuitively (given the inflation and interest rate fears stoked by tariff threats), most portfolios benefited from exposure to global bonds.  Their performance was influenced by weakening economic growth expectations in the US, and poll data showed declining consumer and business sentiment.  Together these factors can imply recession outcomes, and the ‘r’ word reappears in several economic commentaries.

Unpredictable times call for diversified strategies

Until now, it has been assumed that Mr. Trump cares too much about the stock market to maintain a policy that significantly reverses market sentiment. The apparent climbdown in Canada and Mexico might be taken as proof that the market retains its ability to proscribe economic policy.  We shall see.

There are no certainties in stock markets, but there are generally guardrails that investors rely on and limited scenarios to analyse.  This attempt to create a new world order is tearing up that playbook, and speculators will likely suffer.  Our philosophy of diversification and matching portfolio design to investors’ risk preferences, rather than ‘betting’ on perceived winners, is even more critical in these unpredictable times.

Graham Bentley
Chief Investment Officer
 

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*as at 6^th March

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