Overview
March saw Trump continue to give mixed Signals to the market on tariffs and news that sensitive military operations had been leaked to the press through the equivalent of a WhatsApp group chat raised further questions over the competence of his cabinet. Tariff might be Trump’s favourite word, but there are plenty of market participants, governments and corporates that would argue it is becoming a candidate for their least favourite. The subsequent uncertainty and deterioration in economic data from Trump’s alternating rhetoric ahead of so called ‘Liberation Day’ (April 2nd) saw US markets underperform other developed markets. The S&P 500 shed 5.63% in March, contributing to the worst quarter of performance in three years and the worst since 2009 relative to other major markets.
Among the more concerning of the US data points, The Atlanta Fed GDPNow tracker for economic growth has trended down to -2.8% for Q1, consumer confidence hit a 12 year low and inflation was higher than anticipated. Alongside the negative growth or inflationary impacts associated with tariffs, the data is hinting at the possibility for stagflation to rear its ugly head. This is an economic phenomenon in which inflation and stagnating growth combine and would make the Federal Reserve’s job nigh on impossible.
It might all seem doom and gloom for US equities, but these market corrections are a common occurrence and the S&P 500 has still averaged a 10% annual return. We are positioned to benefit from the broadening out in performance that we are seeing and the greater clarity around policy could be a sufficient catalyst for US equities to drive higher going forward.
Germany’s end to decades of fiscal conservatism has provided a strong boost to European markets this year with the German DAX up over 11% so far this year despite a correction on tariff concerns at the back end of March. The German 10-year bund yields also recorded the sharpest spike since the fall of the Berlin Wall on the back of German Chancellor Friedrich Merz’ announcement.
In the UK, Rachel Reeves’ Spring Budget announced greater defence spending and various cuts including to welfare spending which has for now at least restored the £10bn fiscal headroom. The spike in bond yields associated with the US inflation data was enough to temporary erase half of this headroom which demonstrates its fragility and the Office for Budget Responsibility (OBR) cut forecasts for 2025 Gross Domestic Product (GDP) after a contraction in economic growth was confirmed for January.
Gold continued its strong run and as we guided to in earlier commentaries, the precious metal has easily surpassed $3,000 an ounce after gaining 19% in the first quarter and could have further to run amidst the geopolitical uncertainty and dollar weakness.
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Our weightings are based on sterling as a base currency.
United Kingdom (UK)
March marked a difficult month for UK equities, with both the domestic and international narratives creating headwinds and conspiring to create a ‘risk off’ environment throughout the month. The FTSE 100 slipped just over 2%, and the FTSE 250 a shade below 4%. In the US, Trump’s so-called ‘Liberation Day’ approached with no progress yet to be made on avoiding costly tariffs. This heightened concerns of higher inflation, higher for longer interest rates and the possibility of a global recession. Domestically, the underlying picture remained mixed, with the impact of the Autumn Budget continuing to affect sentiment, albeit the spring statement offered some relief as no new tax rises were announced.
For the economy, GDP growth for 2024 was upgraded from 0.9% to 1.1%, but in the final quarter, things grinded to a halt with just 0.1% expansion due to the impact of the Budget. The Spring Statement brought us revised forecasts from the OBR with growth halved for 2025 to 1% but with brighter projections and upgrades in the following years.
Inflation data offered some relief falling to 2.8% in February, easing back from 3% in January and slightly below forecast. Women’s clothing was the biggest driver of the fall but analysts are still forecasting higher inflation for the months ahead. Interest rates were kept on hold in March but given the slowing economy, expectations lean towards a further rate cut in May.
Elsewhere we saw signs the housing market was beginning to stall with prices remaining flat month-on-month in March as demand waned in the lead up to the stamp duty holiday ending. In construction, the sector suffered its biggest downturn since May 2020 with housebuilding seeing its fifth consecutive monthly decline. There was better news for retailers as data showed sales unexpectedly rising 1% in February compared to the 0.4% decline anticipated.
United States (US)
March was a challenging month for the US stock market, as growing concerns over tariffs weighed heavily on consumer confidence and the broader growth outlook. The correction was driven by fears that escalating tariffs could result in stagflation, a scenario where corporate margins are squeezed by a combination of rising input costs and weakening demand. President Trump’s decision to double tariffs on Chinese imports and impose a 25% tariff on auto, steel, and aluminium imports signals that the administration is fully committed to its trade rhetoric, with no clear indication of when the escalation might ease.
The economic impact of these tariffs is becoming increasingly evident. Manufacturing activity has contracted, with the ISM Manufacturing Index dipping into negative territory. Job market data, including softer job openings and weaker hire and quit rates, indicate underlying softness in labour conditions. March retail sales came in weaker than expected, reflecting declining consumer spending, a trend further mirrored by a sharp drop in consumer confidence, which hit a 12-year low. If the risks outlined by the Fed, namely the upside risks to inflation and unemployment alongside the downside risks to growth materialise, this negative trend in confidence is likely to persist. At the same time, elevated interest rates are compounding economic strain. The Fed’s decision to hold rates steady highlights its struggle to balance inflationary pressures with the risk of slower growth. Core PCE inflation rose more than expected, even before the effects of tariffs are reflected in pricing.
Looking ahead, the focus will be on upcoming job data and the ongoing evolution of tariff policy, both of which will significantly influence the Fed’s decisions in May. The outcomes will be crucial in determining whether the recent correction in US stocks is a temporary setback or the beginning of a larger sell-off.
Europe
In recent months, EU stock performance has notably decoupled from the US market, until the surprise announcement of a 25% tariff on autos, which led to a 4.2% decline in euro terms in March. The positive momentum in EU equities had largely been driven by Germany’s landmark fiscal shift, including a significant €1 trillion investment in defence and infrastructure over the next 12 years. This fiscal policy change, which allows for greater government spending and the possibility of running a small deficit, has fuelled optimism about the region’s growth prospects.
The Europe Central Bank (ECB) further supported this positive backdrop by cutting interest rates by 25 basis points. ECB President Christine Lagarde’s dovish stance, indicating that the deposit rate could end 2025 at 1.25% or 1.5%, reinforced expectations that accommodative policies would continue to support growth. Additionally, the EU continues to make progress on disinflation, with annual inflation easing to 2.2% in March. This disinflationary trend provides the ECB with more flexibility to respond to external pressures, including the headwinds from US tariffs. Early signs of cyclical recovery are also emerging, with manufacturing Purchasing Managers Index (PMI) data surprising to the upside.
Looking forward, in the short term, the negative impact of US tariffs may outweigh the benefits of Germany’s fiscal U-turn. However, the long-term outlook for the EU remains optimistic, particularly with the expected acceleration in spending on infrastructure and defence. We could see an accelerating rotation of capital away from the US, driven by the volatility of US trade policy and fiscal tightening, while growth prospects improve in the EU due to the region’s notable policy shift.
Emerging Markets
Emerging Markets (EM) outperformed the world index, closing the month in positive territory up 1% in dollar terms. This performance highlights the diversification benefits of investing in EM, a trend that could continue as global shifts take shape. With a strained government budget in the US, weakening dollar and China’s efforts to boost domestic demand, the stage is set for growing interest in EM stocks.
China’s economic data has shown resilience year-to-date, with industrial production, retail sales, and fixed asset investment all exceeding expectations in February. Manufacturing and Non-manufacturing PMI beat expectations in March. China’s Two Sessions meeting set a GDP growth target of around 5%, a 2% inflation target, and an increase in the fiscal deficit to 4%. Stronger stimulus is expected to support these targets.
Latin America is also showing positive momentum. Mexico’s inflation continues to ease, while retail sales are improving, and the Bank of Mexico delivered its second consecutive 0.50% rate cut. In Brazil, despite inflation reaching a two-year high, there are signs of peaking. Job creation numbers are also at record levels, reflecting a more resilient economy than feared amidst elevated real interest rates.
Turning to Japan, the stock market dropped by 3.3% over the month. This was largely attributed to President Trump’s tough rhetoric on tariffs and the announcement of a 25% tariff on autos. Looking at the bigger picture, Japan is emerging from an era of deflation, with spring wage increases surpassing last year’s strong levels.
Fixed Income
With the exception of the ECB’s interest rate cut, central banks in developed markets largely adopted a wait-and-see approach in this month’s monetary policy meetings. While further cuts are expected, Germany’s fiscal easing may limit the pace of reductions. Consequently, Germany’s 10-year bund yields rose by 0.34%, reflecting expectations for higher inflation and growth. However, this outlook may be tempered by weaker US economic data and the increasing threat of US tariffs.
The Bank of England held rates at 4.5% and maintained a “gradual and careful” approach to easing. UK gilt yields rose by 0.21%, with speculation that the government may need to take more substantial measures to address the budget deficit in the upcoming Autumn Budget. Inflation undershot forecasts, largely due to volatile clothing prices, but services inflation remains persistent. Inflation is expected to rise in Q2 2025, driven by price resets, higher Office of Gas and Electricity Markets (Ofgem) price caps, and the pass-through effects of higher national insurance contributions and minimum wage increases.
The Fed also kept rates steady despite an uncertain economic outlook. US 10-year Treasury yields fell by 0.09%, initially rising on fears of a trade war-driven stagflationary shock, but later dipping due to weaker domestic consumption and growth concerns. While the full impact of US tariffs hasn’t been fully priced in, their inflationary effects are expected to materialize in Q2 2025. The Fed is likely to keep rates steady unless further deterioration in economic data occurs.
Lastly, the Bank of Japan maintained its current policy stance. Japanese 10-year government bond yields rose by 0.11%, driven by expectations of wage increases for the third consecutive year. However, the yen weakened as the market anticipates a delay in the Bank of Japan’s next rate hike due to the economic impact of US tariffs.
Alternatives
This month gold rose to a new high of $3,128 an ounce marking three consecutive sessions registering record highs off the back of a weakening dollar, tariff speculation and enduring geopolitical concerns. Bullion buying interest remains unabated with markets looking towards safe haven assets amid speculations surrounding President Donald Trump’s tariff plans on so-called ‘Liberation Day’. Inflationary pressures are likely to intensify and widespread worry of future stagflation has weighed heavily on the dollar along with Treasury bond yields allowing gold to clinch record highs. Looking ahead, gold remains at the mercy of broad market sentiment and tariffs. Trump’s plans to bring in copper tariffs earlier than expected triggered a surge in US copper imports last month, with copper futures hitting an all-time high of $5.11. Shipments also ticked up last month to 500,000 tons far exceeding the monthly 70,000 ton average as traders looked to secure supply before new the new tariffs come into force.
Brent crude oil rose towards $75 per barrel towards the end of the month after Trump stated that he could impose secondary tariffs of 25-50% on buyers of Russian oil if he feels that Moscow is obstructing his efforts to end the Ukraine war. The ongoing ceasefire between Ukraine and Russia remains tenuous with the Russian government demanding sanctions relief in exchange for compliance. Furthermore, Trump has threatened additional tariffs along with military strikes on Iran if Tehran cannot agree on its nuclear program with the US. OPEC+ (Organization of the Petroleum Exporting Countries) is set to begin a gradual output hike next month with reports indicating that OPEC+ will continue to raise output in May.
Property
This month, the Nationwide House Price Index in the UK increased by almost 4% year-on-year, matching last month’s pace. Nationwide’s chief economist noted that the market may remain soft in the coming months due to activity being brought forward to avoid extra tax obligations (a pattern observed after stamp duty holidays). The initial rush for mortgages has already begun to slow as the April deadline nears, easing first-time buyer price growth to 2.4%. The Halifax House Price index remained unchanged at 2.9% from the previous month and below the expected 3.1%. Rising real wages, low unemployment, strong household finances and the continued moderation of borrowing costs should all benefit UK homebuyers and boost housing market activity through the summer. The S&P Global Construction PMI data for February missed expectations, falling by the steepest margin since May 2020. This contraction in construction activity was driven by weak demand, increased borrowing costs and a shortage of new projects. Residential building contracted the most since 2009 (excluding the COVID period) whilst inflows of new orders fell the most in nearly five years. Furthermore, the UK construction output rose for the sixth consecutive month by just 0.2% year-on-year. However it missed expectations of 0.4% and reflecting subdued numbers in new work and repair and maintenance activity
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 March 2025, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.