When new information comes to market unexpectantly, markets have a habit of behaving erratically. As a result of the US tariff announcements our models and markets generally had a challenging quarter. Whilst it can be unnerving, it is important to consider that it is completely normal for markets to behave in this way, and on average we see movements like this every eighteen months.
Even with this volatility, performance for the year to 31 March 2025 for our models and most client portfolios remains positive, and long-term returns are in line with (if not above) expectations.
Our models are diversified across asset classes, investment types and styles, and are built with a consideration for downside protection in volatiles times. Investors have benefited because of our allocations to Australian and global investments with a focus on value, low cost smart beta strategies and fixed income (generally), which softened the losses in the other sectors and demonstrated the value of diversification.
Tariffs and trade have been the primary issues for governments, businesses and investors since the start of the year. The quantum of the proposed tariffs, along with the changes to the rates and dates of implementation have created uncertainty. We do expect that over the next few months, as trade deals are announced, volatility will lessen and could well lead to a rally post the upcoming US budget in the lead up to the midterms.
To recap, whilst the quarter was a challenging one, long term numbers remain in line, or above expectations.
In Q1 2025, global Equity Markets started with a strong January with markets rising to all-time highs, however sentiment quickly turned negative for equities as the Trump administration began implementing aggressive policies against trade partners, seeking to change the balance of global commerce and trade. This has been broadly seen as negative for the global economy and markets, with much uncertainty about the aims and impacts of such an approach.
Developed market equities, benchmarked by the MSCI World index, returned -2.3% for the March quarter, with the largest falls coming in the month of March with a market return of -4.6%. Unusually, the US S&P 500 Index was among the worst performers globally, returning -5.8%, amid speculation that a chaotic policy approach from the Trump Administration could spell the end of ‘US Exceptionalism’. While this seems a hasty conclusion after only a short time in office, it clear that investor sentiment towards US assets has taken a battering; with the US Dollar, US Treasury Bonds and US Equities all being sold down in March.
Conversely, European markets had one of their strongest quarters on record with the FTSE Developed Europe index returning +10.4%. This was driven by a paradigm shift in European politics, with hopes of greater self-sufficiency and expectations of much higher fiscal spending from Germany – long regarded as the engine-room of the European economy. Greater spending on defence and infrastructure are expected to boost economic growth and improve capital utilisation across the continent. The German Dax was up an impressive 11.7% for the quarter, with the French CAC40 up 5.37% and UK’s FTSE100 up 6.1%.
“The stock market is a device for transferring money from the impatient to the patient.”
– Warren Buffet
However, the Chinese market was buoyed by a tech-revival with the release of the DeepSeek AI model. This has caused Chinese investor sentiment to improve dramatically, with confidence returning that Chinese firms can successfully compete with US firms in AI arena. While the Chinese economy remains sluggish, market conditions appear to have improved. Further Government support and stimulus initiatives have also helped the market re-rate higher. The tech and consumer heavy Hang Seng index was up a heady 15.2% for the quarter and is now up 54% over 12 months.
The Australian S&P ASX 200 was weaker during the quarter, falling -2.8%. The ASX reporting season through February was one of the most volatile on record, with companies share prices punished or rewarded for their end of year result and forward guidance. Major banks financial updates were regarded as weak, with rising technology costs causing concerns along with weak outlooks for profit growth. Technology companies, which were richly valued coming into February were sold off aggressively and were the worst performing sector.
Within Fixed Income, the US Federal Reserve kept rates on hold through the quarter at 4.5%, with Fed Chair Jerome Powell striking a relatively hawkish tone, emphasising that despite uncertainty with government policy they wish to see inflation come sustainably closer to the 2% target. In Australia, the RBA did cut rates in the February meeting to a rate of 4.1% as was widely expected, however Michelle Bullock provided guidance that any further cuts were predicated on lower inflation. Bond markets have displayed considerable volatility but have ended the quarter at similar yields to where they started, emphasising the uncertain outlook for economic growth and inflation.
The Australian dollar continued to be under pressure, especially against previously weaker currencies such as the Euro, which was up +3.6% and Pound Sterling up 2.3%. The US Dollar was largely flat against the Aussie, as both currencies weakened during the quarter.
You can download the entire Quarterly Investment Update HERE
Regards,
Marshall Brentnall & the AAN Asset Management Investment Committee
