Multi asset quarterly update - Q1 2025

The multi-asset funds we manage are positioned broadly neutral at the asset class level, with a slight overweight in commodities, including gold, and underweight in government bonds. Regionally, we're underweight US equities versus UK. We're also underweight the more expensive growth sectors in America, and we're underweight the dollar. So there's a bit of an anti-US tilt in the internal positioning of each asset class.

The world economy is facing a lot of uncertainty at the moment. There's a chart which I'm going to show now, which looks at the economic policy uncertainty today, compared to the 2020 COVID pandemic.

The turquoise coloured line is this measure of policy uncertainty. And you'll see it's as high now as it was at the worst point of COVID-19.

Now that was a global pandemic, a once in a century global virus with lockdowns and all sorts of uncertainty. And President Trump, off his own bat, has managed to create the same level of chaos and uncertainty as a virus.

Equity market volatility is the other line on the chart as shown in purple. And you can see it spiked when COVID first came along, and it spiked after Trump's Liberation Day tariff announcements. So that's the backdrop we've got, deep uncertainty in the economy.

So with that in mind, we can look at the investment clock diagram, and know the investment clock is not the investment crystal ball. It's looking at growth and inflation indicators. It's not trying to forecast what happens next. It's trying to tell you what's happening now. And you can see that yellow blob, in the top right hand corner, that's the overheat.

So prior to the tariff announcements in March of this year, global growth was slightly above trend. Commodity prices had been rising year-to-date, so inflation was rising. That overheat quadrant is when commodities tend to do well and bonds tend to do badly, and that's how we were positioned. And it's also when central banks actually raise interest rates, if anything.

But the tariff Trump announcement was just so much more severe than anybody expected that you saw a big drop in stock markets, not just America, and in commodity prices. Gold went through the roof, and it created this deep level of uncertainty, a big slump in US stock markets in particular, and in the dollar.

As we speak at the moment, we've seen a bit of a bounce back in sentiment. So we've seen some outperformance by US equities and the technology, or consumer discretionary growth sectors, in America, but the dollar has not participated.

And we're neutrally positioned because when these shocks come along, it's generally a good idea to control risk around the shock and then wait to see what happens next and see how the macro data comes through.

It's quite plausible that we see a recession off the back of a collapse in global trade, but it's also possible that we see a muddle through. So we don't know quite where growth is going. We'll want to see the data. Also with inflation, tariffs on the face of it are inflationary because they're like a VAT. They're an increase in the cost of goods coming into a country. So in America, they ought to be inflationary.

But 85% of global trade is not with America. It's other countries trading with each other. There's no tariff increase there. And if China isn't exporting to America, its exports have to go somewhere, and they could come into Europe and push prices lower. And also if the growth impact is severe enough, commodity prices will drop and that will pull inflation down.

So we really don't know. Uncharted territory, as we were with the virus. Which way growth and inflation are going to go? And that's part of the deep uncertainty markets are currently grappling with.

What we do know, though, is that the US stock market is incredibly expensive. Prior to this sell-off, it was trading at 36 times 10-year average earnings, double the valuation of the UK stock market. The highest valuation we've seen since the backend of 2021, before 2022’s bear market. Prior to that, the dot-com bubble, or 1929.

So a really expensive market, a highly revered stock market with the Mag7 driving very fantastic earnings growth. And I would argue that Trump policy is almost like the world's most expensive stock market, seeking an emerging market valuation multiple, because the policy has been so unpredictable, so chaotic, flipping this way and that.

There's even talk of impounding foreign government holdings of US Treasury bonds to pay for America's defence, that it's been doing for the world. And all of these things could undermine the bond market. And as we saw in 2022, if you undermine the bond market, you undermine America's technology stocks.

So there are some scenarios out there that say it's a muddle through. You can make a comparison with the COVID pandemic and say that you've had this big shock. Aren't you going to see lots of stimulus in the bull market? I'm not really in that camp because I don't think central banks feel like cutting rates as much as they had to in 2020. If it's a deflationary shock in the short term, they will cut rates, but not that much.

Governments won't step in as much as you might like either, because interest rates and debt levels are much higher than they were in 2020. And once you get past this initial shock, I think Trump still wants to do bad stuff with trade. He still wants to have tariffs because he wants the tariff revenue, he thinks, to allow him to make big tax cuts in things like income tax in America.

We're sceptical, actually, he will see that revenue if there's a recession. But it says to us we've still got a long economic workout ahead, and that feels a little bit more like 2007, 8, 9.

You know, so lots of different possibilities out there. I just said one as a two-year bull market, one as a two-year bear market. So as ever, broad diversification, evidence-led investing, including a broad range of asset classes, including inflation hedges, including things like gold, and then being responsive to this economic cycle as it develops through tactical asset allocation.