CIM Market Update April 2025

Tariff Troubles

• President Trump's tariff threats on EU and Chinese imports heightened global trade tensions, impacting market sentiment.

• The idea of US exceptionalism remains under pressure as rotation from large US stocks to other markets continued.

•  UK inflation fell to 2.6% in March, its lowest since October, driven by declining fuel prices and stable food costs.

•  The Bank of England held interest rates at 4.5%, with markets anticipating potential cuts later in the year amid easing inflation.

• Chancellor Rachel Reeves announced £14bn in fiscal tightening during the Spring Statement.

• The European Commission unveiled a proposal for nearly €800bn in defence spending. Germany also announced a €500bn infrastructure plan.

March was a challenging month for most asset markets, with concerns over trade tariffs weighing heavily on investor sentiment. The recent weakness in large U.S. technology stocks continued, as the narrative of U.S. economic exceptionalism came under increasing pressure. Within our client portfolios, our emphasis on defensive, attractively valued assets helped navigate the volatility. Limited exposure to expensive U.S. tech and consumer stocks also helped shield performance from the sharpest declines.

Both the Bank of England and the U.S. Federal Reserve kept interest rates unchanged during the month. However, Fed Chair Jerome Powell struck a notably dovish tone, highlighting growing concerns over downside risks to economic growth. The Fed also revised its U.S. growth forecast for 2025 down to 1.7% from 2.1%. In response, markets began to price in a greater likelihood of interest rate cuts, which provided some support to government bonds. Nonetheless, inflation concerns—particularly those stemming from tariff-related pressures—meant that most bond markets ended the month slightly lower. Corporate bonds proved more resilient, with tight credit spreads suggesting limited default risk at this stage.

In the UK, Chancellor Rachel Reeves delivered her first Spring Statement, aimed at rebuilding fiscal credibility amid rising borrowing costs and sluggish economic growth. The government announced a £14 billion package of welfare and departmental spending cuts, alongside tougher tax enforcement, to restore the UK’s fiscal “headroom.” The Office for Budget Responsibility (OBR) reduced its 2025 growth forecast from 2.0% to 1.0%, highlighting the fragility of the fiscal outlook. While the Chancellor now meets her fiscal rule to balance the current budget by 2029–30, the margin for error is extremely slim. The OBR warned that external risks—such as higher global tariffs, a weaker productivity outlook, or further rises in interest costs—could quickly erase this headroom.

Public sector net debt is still expected to rise, reaching 95% of GDP by the end of the parliament, despite spending restraint and a projected rise in the tax burden to a post-war high of 37.7% of GDP by 2027–28. While the Chancellor struck a pragmatic tone and sought to reassure markets, some questioned whether the policy adjustments went far enough given the shifting global economic landscape.

UK equity markets were relatively resilient against this backdrop. Although the FTSE All-Share Index declined by 2.4% in March, it outperformed many international peers, supported by strong performance from defensive sectors and commodity-linked names. Domestically focused companies faced headwinds from the downbeat growth forecast, but valuations across the UK market remain undemanding in a global context.

Emerging market and Asian equities held up better than most, benefiting from relatively stronger economic momentum and more attractive valuations. U.S. equities were the weakest major market, with the S&P 500 Index falling 8.1% over the month.

While it is too early to say whether the recent market pullback has run its course, history shows that periods of volatility are often short-lived. Importantly, market corrections can create compelling opportunities for long-term, active investors. As ever, staying calm, disciplined, and focused on long-term objectives remains key to achieving strong investment outcomes.