By Mike Lea, Head of Investments, FPC
Over the past month we have seen a significant amount of uncertainty and volatility introduced into financial markets due largely to the economic policies of President Trump. The pace of news and market reaction has increased this week following the US ‘liberation day’ and is causing some anxiety with investors, but presently the weakness in performance year to date is mainly impacting the US market.
Performance Jan 1st to April 3rd (in £)
US: S&P 500 -12.5%
Europe: Euro STOXX 50 +6.2%
UK: FTSE All-Share +3.2%
UK Gilts: Bloomberg Sterling Gilts +1.7%
Corporate Bonds: Bloomberg Sterling Aggregate Corporate +1%
$/£: -4.5%
FPC investors have diversified portfolios, with their US exposure typically limited to a third of their total equity position, with two thirds in other world markets. This is considerably lower than the US weighting in commonly quoted indices like the FTSE World ex UK index, where it is heavily weighted at 65% of total value. Diversification respects the fact that we can’t predict the future, and we don’t know which market is going to lead the way.
Throughout 2024 and in recent years the US was thought of as the only market worthy of investment as the technology sector soared, but concerns about market valuations had been increasing. The value of the S&P 500 is back at levels seen in Summer 2024, only a couple of months before President Trump was elected. Investors have enjoyed significant returns from the US market but clearly sentiment has changed, and equity investment allocations are moving elsewhere, for example into Europe. Unsurprisingly, the value of the US dollar has fallen as US assets have been sold.
President Trump’s economic approach, upon which he was elected, is to bring back manufacturing to the US and/or to raise significant revenue from tariffs to cut other taxes. Despite his assurance that everything is going beautifully, and the US economy will boom, his announcements have upset global trade relationships established for decades. The US has potentially put itself in a precarious position but, as everything with President Trump, all might not appear to be real, and negotiations are surely there to be had.
The behavioural effect and consequences of this disruption are unknown, but in the short-term it can surely only lead to less trade and higher prices for US consumers, reducing economic growth.
Consider all the goods imported into the US from China, which will see their base cost increase by 34%, the cost of which can only be expected to be passed on to the consumer (not to mention how likely it is for the Chinese to retaliate). Any substitution of supply chains through fresh US manufacturing will take many years to come online, and/or benefit other trade partners. Disruption often creates opportunity.
The impact on the UK currently appears modest and has been spun as a late ‘Brexit dividend’. According to the Office for National Statistics (ONS) the UK imports £58bn and exports £60bn of goods to the US, primarily machinery, transport (of which £6bn cars) and chemicals, accounting for 15% of all UK goods exports.
All goods exports to the US will now suffer a 10% base tariff, which in certain specialist sectors will have little impact other than raising the cost for US buyers, but in the case of cars a 25% tariff will have a more significant behavioural impact i.e. leading to substitution of products, which is where it may hurt exporters. The UK has a greater surplus of trade when it comes to services, such as professional and financial services, exporting £126bn of value as compared to imports of £57bn.
The EU is in a different position. Whilst the EU commission talks of an overall balanced trade relationship amounting to €1.6trn, the EU runs a goods surplus of €157bn. The impact is potentially greater here, hence why EU President Von Der Leyen is talking tough with reciprocal tariffs. Separately, the recent economic driver of the EU is increased budget spending on defence (particularly in Germany) because of the US withdrawing from other long-standing commitments.
What is clear, is that the breaks on economic growth have been applied suddenly, though not without warning. To support the global economy, it is likely that interest rates will fall lower than expected as growth concerns outweigh inflation pressure, benefiting fixed interest values and those companies (and nations) with high debt burdens. The US equity market may drift lower as earning expectations are reduced due to higher costs, but it remains one of the most entrepreneurial and dynamic markets over the long-term. Further falls in prices will attract investors once clarity emerges, but expect volatility for now.
We’ll do a deeper dive within our investment review later this month, by which time much will have changed. Meanwhile if you have any concerns, please contact your FPC adviser.
This article is for informational purposes only and does not constitute financial advice.
