Client Update - 14th March 2025

Financial markets have witnessed a dramatic change in leadership, as US equities continue to struggle in the face of President Trump’s tariffs and view from the White House that they are willing to accept more capital fluctuations than many expected to get them into a better economic landscape, where America relies a lot less on global imports.

Falls in US stocks and their under-performance relative to other countries reflects a remarkable turnaround in investors’ views about the economic outlook for America and Europe — and to a lesser extent China. What is less clear is whether this is favourable or unfavourable over the longer term. Is it a bump in the road for US equities, or a more meaningful shift? This matters a lot for our clients’ portfolios, global inflation, and financial stability.

Three key factors underpin the recent 180-degree turn in consensus views on stocks, bonds and currency: growing worries over the US economy; a potential “do whatever it takes” (to defend ourselves) in Europe driven by a possible change in Germany on fiscal policy and European funding; and hints of a more determined policy response from China.

Belief in American exceptionalism has been eroded with not only US shares dropping but bond yields falling on growth concerns and the dollar weakening. Only last Sunday did we hear President Trump explaining that there would be a transition period for the US economy, acknowledging short term pain, for long term gain.

Having dealt with a whiff of stagflation (low growth coupled with higher inflation), markets are suffering a good old-fashioned growth scare due to this current bout of US policy volatility. The uncertainties associated with the on-again/off-again tariffs on America’s major trading partners and allies such as Canada and Mexico are compounded by concern about the impact on employment and income of the ongoing public sector cuts. US government officials argue that these “disturbances” are small and should be seen as part of a bumpy journey to a much better destination. Indeed, according to them, it is only a matter of time before the journey itself improves due to lower energy prices, tax cuts and significant deregulation.

US policy is also responsible for the markets’ sudden change of view about Europe that now sees the potential at long last for a dramatic economic policy shift. Jolted by America’s treatment of long-standing security alliances and the change in its Ukraine policy, Germany is suddenly contemplating a relaxation of its long-held fiscal constraints, despite currently being denied the support required from the Green party. If successful, this could translate into increased defence spending, larger infrastructure investments and greater regional funding. Meanwhile, China is signalling a move towards a more potent mix of stimulus and reforms.

Having taken various new positions in European equities at the end of 2024, at the expense of US holdings, we remain hopeful of an upward convergence of global growth with Europe and China accelerating to get closer to the hitherto exceptional performance of the US economy. This would result in a higher overall level of global growth as a short-term US deceleration is more than compensated by the pick-up in China and Germany.

This implies a belief in Europe’s ability to overcome its fiscal inertia, China’s capacity to navigate its policy challenges and the resilience of the US economy despite its current disturbances. It still appears likely that the global economy will escape the clutches of stagflation and achieve a more balanced and sustainable growth trajectory. That sounds pretty good to me. Do have a good weekend.