Our investment experts explore three of May’s key market trends: escalating tariff tensions, the resilient fundamentals of tech companies and the US budget.
Top 3 investment themes – May 2025
1. Tariff uncertainty persists despite major breakthrough
Investor concerns about an imminent US and potentially global recession began to ease in May, following a series of conciliatory moves and successful trade negotiations. Early in the month, the UK reached a preliminary deal with President Trump, raising hopes for further progress.
The most notable development came on May 12, when the US and China announced an agreement to significantly reduce tariffs following talks in Geneva. This marked a major step towards de-escalation and led to a sharp rally in global equities. However, uncertainty remains. President Trump’s 90-day pause on tariffs is due to end on July 7 and we saw a fresh escalation at the end of May with his announcement of a potential doubling of levies on steel and aluminium imports to 50 per cent. In this context, short- to medium-term market volatility is likely to continue.
2. Resilient fundamentals despite economic contraction
US GDP shrank by 0.2 per cent in Q1, ending an 11-quarter growth streak and contrasting sharply with the 2.4 per cent expansion seen in Q4 last year. The contraction was largely attributed to a surge in imports ahead of the early April tariff announcement. Despite this setback, key indicators such as growth, income, and employment remained robust. Most notably, the US economy added 177,000 jobs in April, well above the 135,000 forecast by economists polled by Bloomberg.1 Corporate earnings also exceeded expectations, with strong results helping to buoy sentiment despite broader concerns.
Given ongoing fears about the impact of tariffs on supply chains (particularly within the technology sector) results were closely watched and generally well received. Big tech led the way, with Microsoft, Meta Platforms, and Nvidia all beating expectations. Nvidia’s data centre revenue rose an impressive 73 per cent year-on-year. The energy, banking, healthcare, and utilities sectors also performed strongly, helping maintain investor confidence.
3. A big, beautiful...budget deficit?
Net interest payments on government debt are expected to soar in the US in the coming decades
Government debt continues to rise and is becoming increasingly expensive to service in the higher interest rate environment that has persisted since 2022. President Trump’s unveiling of a ‘big, beautiful bill' at the end of May came against the backdrop of record deficits worldwide, which has dominated bond markets, overshadowing a softer inflation print in the US. His proposed 2026 budget outlined deep cuts to non-defence spending, a boost in defence funding, and reduced support for climate and sustainability programmes.
In the US, net interest payments on government debt are expected to soar in the coming decades – a trend mirrored across other developed economies with increased spending plans expected within Europe too. This has undermined confidence in the safe haven status of US Treasuries in particular. In response, Moody’s downgraded the US credit rating from AAA to Aa in May.
How did we position MAF Core and Plus portfolios?2
Growth assets
After a volatile start to the year, May saw a notable recovery for risk assets driven by positive macro data and progress in US trade negotiations. The positive shift in investor sentiment led to a rally by the S&P 500, as well as UK and Emerging Market (EM) equities (as the UK and China settled on better trading terms with the US). Despite some new tariff uncertainty towards the end of May, all key equity regions delivered positive performance overall for the month which was reflected in the portfolios.
In terms of active positioning, while our USD-yen position detracted, our tactical overweight positions in European and EM equities (versus an underweight in US) were additive to performance.
We added to overall equity positions in three ways.
We opened an overweight position in EM equities versus an underweight in US equities
We opened an overweight position in EM equities versus an underweight in US equities, given the continued investor caution towards the US market. Hence, we closed our outright overweight position within US equities mid-month.
Within the UK, we also opened an overweight position in Russell 150 versus an underweight in FTSE 100. The UK’s progress towards trade deals with both the EU and US could lead to upward growth expectations which should benefit UK mid-cap companies versus the broader market.
Lastly, we opened an overweight position within European equities as positive sentiment, giving the anticipation of fiscal plans, continues to drive momentum within the region.
Defensive assets
Global fixed income, notably sovereign bonds, struggled in May as investors’ fiscal concerns resurfaced. This was triggered by Moody’s downgrading the US credit rating, which was then followed by President Trump’s tax bill announcement. Given this, long-end US bond yields trended beyond the key five per cent milestone and delivered their first negative monthly performance this year.
Yields, and hence bond prices, also came under pressure in the UK following a higher-than-expected inflation reading. With global yields moving higher, and bond prices lower, our global fixed income holdings generally posted negative performance over the month. For MAF Plus, our tactical overweight duration positions in UK gilts, US Treasuries and European bonds detracted over the month.
Alternative assets
Alternative assets posted weaker performance over May, following a strong rally since the start of the year. While gold is still close to all-time highs, the commodity delivered negative returns over the month. Given this, our holdings in both gold and in the Aviva Investors Multi-Strategy Target Return Fund ended in negative territory for May, with the latter driven by weakness in the UK rates position.
We further reduced our dollar exposure within the portfolios via FX forwards, given continued pressure on the currency given the President Trump's administration policy decisions.
Market outlook and positioning: What do we believe happens next?
Over the last month, positive progress on trade deal negotiations has allowed for a cautiously positive outlook for equities, despite potential challenges to the growth outlook. Given this, we are now overweight EM, European and UK equities to provide diversification within our equity allocation. We expect EM equities to outperform US equities, while in Europe equities should continue to benefit from positive investor sentiment about fiscal plans. In the UK we have focused our exposure on mid-cap companies which are more domestically focused and should benefit more from improved growth prospects for the UK economy.
In the case of a growth slowdown, global fixed income should be better positioned to protect portfolios
Regarding our fixed-income allocation, we maintain overweight positions in US Treasuries, German bunds and gilts, with the latter also vs an underweight in French OATs. This reflects our view that, in the case of a growth slowdown, global fixed income should be better positioned to protect portfolios. Within the US, we have also focused our duration exposure in shorter-term bonds which are less exposed to long-term bond sell-offs driven by fiscal concerns.
For France, we have opened an underweight position as we see specific fiscal risks where higher increases in spending, compared to the rest of Europe, are likely to put downwards pressure on bond prices.
