The past six months have been a headline writer’s dream. Between wars, tariffs and volatility in financial markets, many investors won’t know which way to turn.
From another perspective, not that much has really changed over the first half of 2025. While equity markets dropped significantly around Trump’s initial tariff announcements, they’ve now recovered, and are actually slightly up on the start of the year. The price of oil hasn’t really changed, and in terms of the Treasury yield, nor has the piece of money.
Everything’s really quite calm on a point-to-point six-month view. Now, is that sanguine because all of this is a storm in a teacup and headline grabbing, but not much else? Or is the market complacent? We don’t know.
There are two important things that are slowly changing, and that’s the attitude towards the dollar and the broadening out of equity market leadership. Arguably, these are the two most important characteristics year to date to emphasise, and maybe give us a clue to what happens next.
Weaponisation of the dollar
Taking these in turn, it’s very unusual for the dollar to weaken in a risk-off environment, which is what’s happened at various points during H1. Now you can dramatise that. You can maybe overdramatise that in terms of loss of foreign confidence in dollar assets.
The weaponisation of the dollar, and the confiscation of assets since the Ukraine war, has put foreigners off owning treasuries. Central banks are reorienting their holdings.
Gold is going up a lot, maybe as a consequence. But again, the reality is the dollar is at the low end of a high trading range rather than seriously weak … so far. It’s a situation to be continued in terms of the analysis and assessing what’s going on.
Broadening out of market leadership
Equally important is the broadening out of market leadership – so moving away from that American exceptionalism idea that if America is going to make itself great again, then everyone else has to lose. That was clearly the dominant trade in Q4 last year.
But we’ve now moved quite far from that, partly because of the response we’ve seen in places like Germany and Japan, where fiscal stimulation is evolving their economic models away from pure export dependence towards domestic demand.
We’ve seen infrastructure and defence spending grow, a very important development over the last six months. But we also see the multiplier effects in terms of consumer behaviour and the same in Japan with positive interest rates and positive inflation. The impact of this on corporate behaviour will be an interesting longer-term dynamic, but has already had an impact in driving share prices and broadening our market leadership in the year to date.
All investors, including US investors, can make pretty good returns now from non-US, non-technology companies. That’s something that’s been happening for two or three years now, but it stretches quite far into the future. For global equity investors, this is the most important thing to bear in mind as we go through what will no doubt continue to be a very volatile period of headlines, tariff re-negotiations, geopolitical uncertainties – reactions and counter-reactions.
Sector specific beneficiaries of market rotation
European infrastructure-related companies – defence companies particularly – but also sectors like industrials, materials or utilities, have been very good performers for us. The other pillar of good performance has come out of Japan, again domestically-facing inflation beneficiaries who are benefiting from the fact that they now have pricing power that they didn’t really have for maybe two or three decades.
US tech vs the rest of the world
We’ve come out of a period where the only place to find earnings growth was Californian technology companies. We don’t need to make an argument that DeepSeek means those companies are going to stop growing, or they’ve got deteriorating returns on capital because AI is so expensive to build.
For a long time, the only argument in favour of alternative assets was valuation. They had low P/E multiples and they had high dividend yields, but they didn’t grow their earnings. If you can inject some earnings growth into that latter group, then all of a sudden you start to reconsider.
How much California tech should I have versus other things? Is there room in my portfolio for an international strategy as well as a US equity strategy? Those sorts of conversations are definitely happening more and more. And I think it’s underpinned by this acceleration of earnings growth, which is a key component of equity returns.
Comment provided by Ben Leyland, Senior Fund Manager, JOHCM Global Opportunities Fund
