Investment Market Commentary – Q2 2025

Overview

This quarter has been dominated by the impact of “Liberation Day” at the beginning of April, where US President Donald Trump announced a wave of increased tariffs against America’s trading partners. The initial speculation and subsequent implementation had huge ramifications on equity and bond markets, causing a particularly turbulent and volatile period in the immediate aftermath. In the following weeks, we saw an amnesty put in place and trade deals being announced from countries across the globe with the US. Several other events, including the war in Ukraine and recent tensions between Iran and Israel have also fuelled market reactions.

However the initial volatility has begun to subside, and we are seeing a clearer picture of the future of economic trade and opportunity for prudent investors.

Equities

The equity markets in 2025 have proven particularly sensitive to changes in the geopolitical landscape. At the beginning of the quarter the US tariffs dominated the headlines and market sentiment was very low. The US administration quickly back-peddled following the initial, incredibly poor market reception and an amnesty was introduced to give time for deals to be made between the US and its trade partners. Investor confidence has returned, buoyed by the feeling that President Trump’s strategy would not lead to an all-out trade war, and there has been a significant recovery in the markets.

UK

After a strong performance in the first quarter, economic data indicated that the UK economy contracted sharply following Trump’s announcement of the global tariffs. Property and real estate activities, and car manufacturing and exporting were all identified to have been affected in the aftermath.

Despite these challenges, the UK equity market has recovered well, particularly in comparison to the recovery of the US market. Valuations of “large cap” shares have improved, though smaller companies continue to struggle somewhat. As investors looked to the US and didn’t quite like the picture in front of them, this has resulted in assets being redirected into undervalued markets, such as the UK, particularly into the relative safety of larger companies.

US

The strength of the US economy in recent years lead to what was termed ‘US exceptionalism’ – a belief that the US could continue to prosper even if the rest of the world was struggling, but that narrative may be changing. This strength was primarily driven by the performance of the “Magnificent Seven”; a group of large-cap technology companies that have shown exceptional performance. Analysts have speculated that US exceptionalism is coming to an end, however, the rebound following the initial tariff backlash would appear to indicate otherwise.

In the wake of the amnesty, individual negotiations have been taking place and a number of trade deals were announced; with the UK being one of the first. The longer-term impact on global growth of these deals remains to be seen, but in the short term, rising inflation is likely in many regions. As mentioned, following the initial market fall in April, the US stock market has recovered well, likely attributed to investors “buying the dip”; fuelling the market when it is low.

The Federal Reserve has maintained interest rates since December, much to the chagrin of President Trump, who has passionately campaigned to lower rates. The turbulence and uncertainty caused by the tariffs (US economic data overall is down, but employment and spending remain consistent) and the recent tensions in the Middel East have resulted in the chances of rate cuts getting slimmer and slimmer in the short term as a picture of future events is decidedly murky and hard to predict.

Europe

At the beginning of the year, sentiment was improving for investment in Europe, with low interest rates and key political outcomes improving the outlook for investors. Throughout the second quarter of the year, this outlook has continued to grow, but there are signs that investors may be turning back to the exceptionalism of the US, despite the level of volatility still present. As of 1^st July 2025, the European stock market was identified to be the best performing region (in sterling terms) in the year to date, returning 12% compared to negative returns from the US markets. Since then, the US has recovered quite significantly, and Europe is beginning to lag.

Despite this, the European economy is still expected to expand. Germany, which suffered a technical recession in 2024, is proving a detriment to this, and it remains to be seen what impact the fiscal stimulus package approved by the German government will have.

In terms of inflation, across Europe the figure has fallen below 2%, leading to a looser monetary policy; aimed at stimulating the economy, which if successful will keep Europe as an attractive option for investors.

Asia & Emerging Markets

The Asian markets are beginning to emerge as a strong global contender; propelled by industrialisation and advancements in technology. The news in recent months was dominated by the rapid prominence of DeepSeek, a Chinese company developing Artificial Intelligence (AI), rivalling the larger American names.

The US tariffs levelled on the Asian countries were by far the harshest. The degree to which these emerging market economies have been impacted has been varied, dependent on each country’s imports and exports with the US. As anticipated, manufacturing and trade-sensitive sectors have been the most affected but strong internal trade has resulted in some good returns for funds that focus on domestic-trade based companies.

The overall economic situation across the region is quite mixed. Reports are indicating that recent growth in China lost momentum in quarter two whereas India was Asia’s standout performer as its factory activity accelerated to a 14-month high, fuelled by a surge in export orders which also drove record hiring. South Korea’s markets have also shown some promise, being one of the best regional performing markets over the quarter.

Japan

Since the early 1990s, Japan has experienced a deflationary economic environment (where the general price of goods and services decreases over time). However, following the COVID crisis, Japan has seen strong economic growth, buoyed by foreign investments into the capital markets. As a result of persistent deflation over many years, Japan actually benefited from the high inflation we saw in 2022, in stark contrast to many developed markets which struggled during this period. Increased wages, improved corporate governance and a combination of monetary and fiscal policies have also contributed to an increase in economic productivity, thereby creating a stronger environment for growth for investors.

This change in economic circumstances has come with its own problems, despite initially benefiting from higher inflation, the country must now balance rising inflation alongside more cultural issues like an aging population, declining birthrates and the changing lifestyles of the population.

Tariff negotiations with the US have also proved another variable, with the initial uncertainty contributing to negative investor sentiment. A deal was recently announced of a 15% tariff on the country’s exports to the US, which should at least reduce the market uncertainty around this issue.

Bonds

As with equities, the global bond markets have been subject to significant volatility this year, as investor behaviour has been dominated by geopolitical issues. This has created several opportunities for investors, as global tensions caused the spread (the difference in rates offered between bonds of different risk levels) to widen, however the markets have been quick to adjust.

Holding a broad range of fixed-interest strategies looks to be the “common sense” approach at the moment. The demand for government bonds appears to be healthy, however, US treasuries have become less popular in the wake of Liberation Day, making other nation’s sovereign bonds more attractive.

It is expected that throughout the year, market trends and volatility will follow a similar pattern to what has already come.

Alternative Investments

Alternative investments can offer investors the opportunity for diversification where the economic conditions are looking volatile.

Infrastructure and property were both notable for strong returns over the quarter, buoyed by the opportunity for investors to receive stable cashflows and growth, amid a backdrop of uncertainty.

Market outlook

As the global markets continue to feel the impact of President Trump’s trade policies, managing inflation and interest rates will be a key concern for nearly all economic regions. The balancing act of supporting growth without fuelling inflation will prove to be challenging and it will remain to be seen how the market reacts to further events.

In our view, the remainder of the year presents an opportunity for investors  and we maintain our stance that focusing on diversification is the key to riding out volatility over the longer term.

We believe that our proposed changes will continue to assist with the future growth potential of our portfolios, whilst maintaining the level of volatility experienced within a range that is deemed suitable for each Investor. We can also confirm that the fund charges being incurred within the Defensive model will decrease slightly and in the Cautious, Balanced, Moderately Adventurous and Adventurous portfolios charges will marginally increase.

The following documents provide more detail around the recent performance, updated new fund selections recommended for each of our Model Portfolios: