A changing environment for investors
The Trump administration has only been in power for a matter of months, but it’s clear that the world has just changed, with important implications for trade, spending, international relations…and lots more besides. Amongst the most prominent changes are US import tariffs on almost all its trading partners, plus retaliatory counter-tariffs from China and Canada. A new security order is being shaped in Europe; the USA is disengaging from multi-lateral institutions such as the World Health Organization; and there is an ongoing ‘purge’ within the US federal bureaucracy. There are also important cultural, societal and business changes taking place in the USA, not least with respect to climate change and hiring policies.
We normally associate economic success with free trade, high trust and stable policies. Today, we have new constraints on free trade, declining trust between nations, and frequent policy swings. This has implications for business sentiment and economic activity. It has also, very clearly, hurt share prices, as the optimism of some investors is replaced with worry, and in some cases fear
As well as greater uncertainty, an important economic rotation is underway. After years of huge deficits, the US is now attempting to slash Federal government spending. If spending is indeed cut, then this should have an impact on total employment and economic growth, at least in the short-term. And on cue, a measure of economic growth from the Atlanta Fed known as ‘GDPNow’ suggests a sudden, sharp drop in US growth expectations for this year. In Europe, by contrast, Germany has just approved a huge borrow-and-spend programme. The money is to be spent on defence and infrastructure, and this should boost economic activity after two years without GDP growth there. From the point of view of government spending, a huge economic rotation is occurring: from the USA to Germany. The stock market is recognising this rotation, with German shares out-performing US shares. The first quarter of this year produced the largest relative shift between these markets since the bursting of the ‘dot.com bubble’ over twenty years ago.
An ‘artificial intelligence’ shock
January saw the launch of DeepSeek-R1 – a Large Language Model developed in China that competes effectively with Open AI GPT-4 while reportedly only needing a fraction of the training costs to develop. Furthermore, the model is open-weight (akin to open-source) and this challenges some existing artificial intelligence (AI) business models. The ‘narrative’ around AI has now changed: scale alone seems unlikely to determine success in building an AI business, and so the largest US technology stocks are not guaranteed to win this battle. As the markets absorbed first the implications of DeepSeek-R1’s launch, and then Trump’s tariffs, an index of large AI stocks has fallen by over a third since early February – a dramatic reversal of trend.
Risky assets down; haven assets steady
During the first quarter of the year, US shares performed poorly compared to the rest of the world. After Trump’s ‘Liberation Day’ tariff announcement, this weakness in US shares accelerated and broadened out to all stock markets. And while investors discount the rising probability of a global recession, riskier shares have generally been under-performing more defensive shares.
Gold has been a haven asset. During the first quarter of this year, the yellow metal powered ahead to an all-time high. This strength likely came from foreign central bank buying, prompted by growing geo-political risks. And since Trump’s tariffs announcement, gold has been resilient.
Government bonds, where interest is guaranteed by government, have generally held steady or strengthened while shares fell. Thus, government bonds have also been a haven asset.
Outlook
With growing constraints on free trade combined with declining trust and high policy uncertainty, caution is warranted. Forecasting the next specific move in politics or markets, though, is almost impossible.
Assets such as government bonds, gold and cash helped make investors’ portfolios more resilient during the initial tariff shock. And although sharp drops in share prices are always disconcerting, falling share prices eventually attract new investors who find valuations attractive over some time horizon. In the meantime, diversification across asset types remains a sensible approach to investing in this new environment.
While this all may seem unsettling, here at Elevation we are in regular talks with the many investment houses that run client portfolios. What you may have heard us say before, is that it is time in the markets; not timing the markets that matters. It is for this reason that most investors who use managed portfolios benefit in times of uncertainty, as the portfolio managers are scrutinizing these events and market movements often on a minute-by-minute basis, and can make changes swiftly if needed. At this time, we do not recommend any reactive changes to any portfolios or the overall levels of risk that any investor takes, as to come out of a fallen investment does not allow successful recovery; nor do we know where the bottom of the market may be. Diversification in a portfolio can help cushion these falls and make the journey less unsettling.
If you have any concerns about the markets, do get in touch with your advisor who will be happy to talk these challenges through with you. If you do not currently have any investments managed at Elevation, we would welcome the conversation if you would like to discuss any of this with one of our advisors.