CIO's Market Watch – March 2025

It was all about the US, again.

It’s hard to believe the meeting between the Presidents of the US and Ukraine in the White House was just over a month ago. So much has happened since then.

It’s difficult to know how much progress has been made towards a ceasefire in Ukraine. There is certainly little prospect of an agreed end to the conflict. The rhetoric emanating from the Russian leadership more widely has also been less than conciliatory.

The ramifications in Europe have been profound. Last month we saw the EU and individual countries, particularly Germany, tear up their fiscal rule books to allow for huge amounts of spending on infrastructure and defence. It is a rapidly changing world in which the speed of change feels like it is accelerating. The US administration has continued to openly discuss its desire to take control of Greenland from a fellow NATO member country. Whether this is sabre rattling or reality, it is yet another challenge to the established world order of defence and sovereignty.

Meanwhile, as we approach the implementation of the trade tariffs by the US, it is still very unclear what they will be, with the targeted goods, regions and rates seemingly changing by the day. It is difficult for companies and industries to plan for the short, medium and long term with such uncertainty prevailing.

While it is hard to know what the exact impact of tariffs will be, I think it is fair to say that trade tariffs will probably lead to higher prices for goods and services, lower economic growth, higher unemployment and lower company profits. Furthermore, the countries and industries on which they are imposed will seek retaliatory measures which will exacerbate those factors. It’s a complicated and worrying backdrop to world events at present.

When the US sneezes, the rest of the world catches a cold.

This phrase originated from the aftermath of the Wall Street Crash of 1929, which was followed by the Great Depression which spread around the world. Given the importance of the US economy and wider financial system, it applies nicely today.

I’ve noted what trade tariffs can do for an economy and there is little doubt that it is weighing on the thoughts of the US population. The University of Michigan conducts a well-regarded consumer sentiment survey, which has shown a substantial fall in how the US consumer feels about their prospects, much of which will be driven by tariff fears.

The scale of the fall is reminiscent of the COVID period. Consumers are anticipating inflation at 4.1%, the highest since 1993 and, across all demographics and political persuasions, are anticipating worsening personal finances,

job prospects and business conditions. On top of that, economic growth forecasts are being pared back. Growth prospects are worsening and inflation remains an issue.

US consumer sentiment falls

Source: University of Michigan Consumer Sentiment Index; 31.03.2019 – 31.03.2025 and Bloomberg.

With economic growth under pressure globally, there is a risk that a slowdown in the US pulls the world into recession.

On this side of the pond….

…. it is not much better news. The economy is not far off stagnant. The Office for Budget Responsibility (OBR) has noted that company profits as a percentage of national income are about to hit their lowest level since the global financial crisis of 2008/2009. This is a function of lower economic growth and the impact of higher wage growth and impending National Insurance contributions resulting in lower company profits.

In economic terms: it’s tough out there, pretty much everywhere.

Equity markets took fright.

When looking at the global equity market, it has been difficult to call it cheap for some time. Indeed, that has been the case at a regional and sector level as well. However, that does not mean that it is not possible to find attractive individual investments within the market. We have many, many examples of those.

However, when there is a combination of equity markets having performed well, not looking cheap and a difficult economic outlook, as we had in March, then the chances are share prices head lower, which is exactly what happened.

Unsurprisingly the US was weak, as it had done very well, particularly the giant technology companies that have led the way. Europe did a little better, particularly Germany, falling less on the anticipated government spending, whilst China and related markets, such as Hong Kong, benefited from the stimulus being provided to the economy by the government.

Given the backdrop, I think ongoing volatility in market moves should be anticipated and, as ever, it is important to focus on the long term rather than the short term, although opportunities do get thrown up which it is worth taking advantage of.

There is some good news, though.

The central banks of the US and UK have been reticent to cut interest rates as inflation has remained higher than would be preferred. In the Eurozone, however, inflation has been better behaved, and interest rates have fallen a bit faster.

Therefore, if economic conditions do deteriorate, there is plenty of scope for rate cuts here and in the US to provide support and stimulus, and that would be taken well by investors. My view, for what it’s worth, is that this likelihood is increasing, and we will see more interest rate cuts than are currently expected this year and next. A case of bad news, good news.