In a seismic period for markets around the world, US tariffs changed the calculus for many investors. In this update, Charles Younes, Deputy Chief Investment Officer at FE fundinfo, analyses how markets have shifted in the last two months, how FE fundinfo’s investment strategy has shifted, and forecasts the future direction for investors in 2025.
Fund Allocation for FE Investments
In light of events in the US, we have shifted our house view to be positive on Bonds and Cash, relative to Equities.
Equities, especially US, have been a fairly calm and low-risk target for investors for the better part of a decade. The Trump administration’s actions mean that the risk on US equities is going up. We are modelling now for a 50/50 likelihood of recession in the US.
Our investment philosophy has shifted firmly to be more conservative on equities for the next 6-9 months, as the risk of recession increases relative to inflation. This is a catalyst to be more positive on the Eurozone and negative on US equities.
Editor’s Note: FE Investments, part of FE fundinfo, has a Managed Portfolio Service with more than £3.8 billion Assets Under Management.
Market Trends
- A body blow to US Exceptionalism
- Across all asset classes (equities, bonds, and currencies) investors have stayed away from US assets. Typically in an equity sell-off, investors will buy dollars. It is a 1/20 scenario when investors sell off US equities and don’t hedge risk by buying US dollars.
- This comes down to a crisis of trust. Market investors don’t like uncertainty. Trump, and the actions of his administration, is an uncertainty. This creates an additional risk premium, making the US no longer the default safe haven.
- The Eurozone rides the wave of outflows from America
- The crisis in trust in the US drove a surge in outflows from US funds to Europe as firms look to diversify their holdings.
- The Eurozone has been a big winner in the crisis. With the pullback from US government bonds, outflows moved towards alternative safe havens like the German bund. Despite German Chancellor Merz changing the country’s fiscal rules on spending, there was some sense amongst investors that the German economy had solid, low risk foundations.
- Gold burnished its status as a safe haven asset, hitting record highs of $3500.
- There was limited movement in emerging markets, with sell-offs fairly restrained.
- Diversification or bust
- Diversification, long a core principle of investors, has gone into overdrive in the last few months, as firms ratcheted up their rebalancing of bonds vs. equities to deal with new realities in the market. Nowhere was that more true than bonds. US government bonds are a well-established asset to protect from the downside. Post-Liberation Day, everything flipped, with bond holdings suddenly seeing positive correlation to losses.
- The Great Unwind: Tech loses its lustre
- Given the market sell-off was triggered by tariffs, past experience would suggest that small caps would benefit as they are typically linked to domestic economies. That has not happened.
- The winners have been value funds, cyclicals, with low allocation to tech and small caps. This has prompted an unwinding of the tech trade that has dominated markets for a decade, as concerns have mounted over Magnificent 7 stocks like NVIDIA and Apple’s exposure to tariffs. Investors have responded, and are rebalancing some funds to other markets and assets.
- Volatility is the new normal in the US market
- The last two months have been a trial by fire for investors, but there are several crucial lessons that should guide investment strategy going forwards:
- Trump is not completely insensitive to what is happening in markets. We saw that he is very sensitive about US treasuries and the cost of borrowing; if his actions increase the yields on treasures he will backtrack.
- The stock market, and the fate of US equities, are less relevant in guiding the decision-making of Trump’s second administration – compared to his first.
- He is committed to pushing the dollar lower and costs of borrowing to go down. Many investors will be closely monitoring how Trump’s team interacts with Jay Powell and the Federal Reserve over the next few months.
- Stability will be what reassures investors. But the road is paved with dangers for the next 4 years, whether it is the end of Powell’s tenure in September or various deadlines on tariffs, meaning that volatility is incorporated now into investing in the USA.
All commentary is attributable to Charles Younes, Deputy Chief Investment Officer at FE fundinfo
