What happened in Q1

Top 3 investment themes – Q1 2025         

Policy uncertainty

The first quarter of 2025 was marked by significant policy uncertainty, driven largely by the US, where new domestic and foreign policies were announced. President Trump’s main area of focus was on tariffs. These included a 25 per cent tariff on imports from Canada and Mexico, a global 25 per cent tariff on steel and aluminium, a 25 per cent tariff on autos and auto parts, and an increase in tariffs on Chinese goods from 10 to 20 per cent – before a slew of further announcements in early Q2.

Other areas of uncertainty include fiscal and geopolitical policies. Questions remain about the potential impact of cost-cutting measures by the Department of Government Efficiency, led by Elon Musk, and the future of income tax. Additionally, the significant shift in policy towards Ukraine and NATO means Europe can no longer rely on the US to play an outsized role in maintaining its security.

This policy uncertainty has impacted the US economic outlook. Investors are increasingly concerned about inflation, with the US one-year inflation swap rising to its highest level in two years at 3.25 per cent, and the latest three-month annualised Core PCE data reaching 3.6 per cent, its highest level since March 2024 (both as of March 31, 2025). Major banks revised 2025 US growth expectations downward, and in March consumer confidence and expectations fell to their lowest levels since January 2021 and March 2013, respectively. This contributed to a significant risk-off move in markets, with gold, a perceived safe-haven asset, achieving its best quarter since 1986 with a gain of 16.3 per cent over the period.

Doubts over US exceptionalism?

The first quarter of 2025 saw a notable shift in the performance of US equities relative to other regions, raising potential questions on US exceptionalism. The release of DeepSeek’s AI model in January first raised significant concerns about the sustainability of US tech valuations, with Nasdaq dropping 3.1 and Nvidia 17 per cent in one day. Although this initial move was quickly unwound, increased investor concerns about growth and inflation stemming from tariffs led to the S&P 500 falling 4.3 per cent in Q1, its biggest quarterly decline since 2022, and the ‘Magnificent Seven’ tech giants falling 16 per cent, shedding nearly $2 trillion in market value over the same period. The US dollar also struggled, with the dollar index down 3.9 per cent over the quarter.

In contrast, European equities saw significant gains, with the STOXX 600 up 5.9 per cent and the FTSE 100 rising by 12.3 per cent in Q1 2025, marking the biggest performance gap between the STOXX 600 and the S&P 500 in a decade. This outperformance was partly driven by significant fiscal stimulus announcements, including Germany amending its constitutional “debt brake” to allow higher defence spending and allocating €500 billion for infrastructure spending. This helped European defence stocks to surge, with the STOXX Aerospace and Defence Index up 28.9 per cent from January to the end of March.

Central bank divergence

In the US, the Federal Reserve (Fed) kept interest rates unchanged in Q1 2025, continuing to signal two cuts for the year in its March dot plot. It also slowed the pace of quantitative tightening, reducing the runoff in Treasury holdings from $25 billion to $5 billion starting April 1. However, the inflation and growth impact of tariffs has increased uncertainty regarding the path of US rates. While the risk-off move and mounting speculation of a recession helped support US Treasuries in Q1, with a total return of 2.9 per cent, potential stagflation introduces competing narratives on interest rate policy.

Meanwhile, the European Central Bank (ECB) delivered further 25 basis points (bp) rate cuts in both January and March, taking its deposit rate down to 2.5 per cent. The prospect of higher spending led to a selloff among European sovereign bonds, with bunds down 1.8 per cent in total return terms and the 10-year yield rising 37 bps to 2.7 per cent. Meanwhile, the Bank of Japan (BoJ) delivered another hike in January, taking its policy rate up to 0.5 per cent and signalling further hikes ahead. Japan's ten-year JGB yields surged to their highest since 2008, up almost 50 bps, in their biggest quarterly jump since 2003.

How did we position MAF Core and Plus portfolios?

Past performance is not a reliable indicator of future performance.

Growth assets

Q1 was eventful for risk assets, with uncertainty over US tariffs, and potential retaliation, leading to negative performance across most equity regions despite a strong start in January. Market sentiment soured over the quarter as Trump implemented tariffs on key trading partners (Canada, Mexico and China) and threatened to expand them to other countries (this was confirmed on April 2). European and UK equities were the exception, delivering positive returns over the quarter. Both markets continued to benefit from a shift in fiscal policy towards more defence spending, and the UK remained relatively untouched by tariff concerns in Q1.

Given this backdrop, within our MAF Plus, our overweight position in US equities, held against underweight positions in European and emerging market equities, detracted over Q1 (We have now closed all these positions). However, our overweight US financials position, versus US equities, was additive due to the market rotation.

Given continued uncertainty around US tariff policy, and in anticipation of volatility leading up to “Liberation Day”, we closed our overweight positions in US equities. We have also closed our overweight US financials versus underweight US equities position to take profit.

We are now underweight US equities given the challenges that tariff-related threats pose to US growth, as they are expected to impact consumer and corporate sentiment. We have also opened an underweight US healthcare relative-value trade, as the sector is likely to be particularly impacted by US tariffs on Europe, due to the volume of pharmaceutical exports between the US and Ireland.

In terms of European equities, we have opened an underweight position given signs of investor complacency on tariff risks to European companies, as investors focus on expansionary fiscal plans. 

Defensive assets

Global fixed income generally delivered a positive, although muted, performance over the quarter, given the risk-off tone. However, it was a mixed picture across specific bond markets. In particular, German Bunds saw their yields trend significantly higher (driving prices lower), given a focus on increased defence spending, and UK Gilts yields also ticked up slightly, following the Spring Budget announcement. In Japan, where the BoJ continued to hike rates amidst signs of building inflationary pressures, Japanese bonds were down 2.4 per cent. In contrast, US Treasuries benefitted from their status as a safe-haven asset, which saw US Treasury bonds outperform over the quarter, delivering a return of 1.8 per cent.

In terms of active positions in MAF Plus, this meant our overweight position in Gilts versus an underweight to US Treasuries detracted, as did our overweight to Bunds versus French government bonds (now all closed positions). However, this was partially offset by our underweight position in Japanese government bonds earlier in the quarter, and our outright overweight Gilts position.

We continue to maintain an overweight to Gilts, as continued macro weakness presents the potential for more rate cuts by the BoE than currently priced by the market. Similarly, we have opened an overweight to US Treasuries, as downside growth risks may lead to a need for further monetary easing by the Fed.

We have closed our overweight Bund v underweight French government bonds (OATs) relative-value position, given changes to Germany’s debt brake. However, we retain an outright underweight to French OATs, given the threat of additional fiscal risks in France and continued political uncertainty.

Alternative assets

Within MAF Plus, alternative assets performed well in Q1 as both AIMS and our synthetic gold position delivered positive performance, helping to cushion some of the equity weakness. Gold, which is seen as a safe-haven asset, continued to outperform given the uncertainty of US tariff policy, and its broader global repercussions. AIMS also benefitted from its exposure to the gold rally over the quarter, as well as its overweight position in European equities.  

Given the more cautious outlook on the US, we have closed our long USD versus GBP position. Instead, we have opened a long EUR versus USD position, reflecting the relative differences in economic and fiscal outlooks for the two economies. 

Market outlook and positioning: what do we believe happens next?

From an active asset allocation perspective, the outlook for equities has changed as a result of President Trump’s broad-based tariff policy. While corporate earnings have remained strong, growth risks are now generally tilted to the downside, and we have derisked our portfolios to reflect this. In contrast, global fixed income is better positioned in a risk-off market environment, where the negative skew of economic and monetary policy risk could place a ceiling on bond yields. We now also hold an FX position in which we are overweight EUR versus underweight USD as an additional expression of a weaker US macroeconomic outlook relative to Europe, due to the latter’s expansionary fiscal plans.

In terms of equity regions, we are now underweight both US and European equities. Regarding US equities, US tariff policy poses challenges to the growth outlook, and thereby to consumer and corporate sentiment. We are also underweighting the US healthcare sector through a relative-value position. Whilst the sector has been a key beneficiary of the defensive market rotation this year, it is particularly exposed to tariffs on Europe due to trade with Ireland. In terms of European equities, we are underweight as we hold the view that markets are overly focused on fiscal stimulus in the region, and have overlooked the risk that tariff threats, and a global growth slowdown, pose to European companies.

Regarding our fixed-income allocation, we have increased our overweight position in Gilts and opened an overweight in US Treasuries. Fixed income is positioned well in a risk-off environment and, in both the US and UK, downside growth risks could lead to continued central bank easing, above that currently expected by investors. 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 downward pressure on bond prices