Market Activity
Global stock markets continued to move higher in May, supported by a further de-escalation in international trade tensions. There have now been a series of steps taken to reduce trade tariffs and there is a growing sense that the worst-case scenario has been avoided. The UK was the first nation to announce a deal with the US, setting a hopeful precedent for future agreements. This was followed by an agreed 90-day pause between the US and China and a reduction of tariffs from 145% to 30%, lifting the effective embargo on US-China trade and alleviating concerns of a full-blown trade war. The MSCI All Country World Index posted a 4.9% return in sterling terms to the end of May, with US stocks outperforming.
We also saw US yields move higher as concerns around the fiscal situation of the US intensified following the narrow passing of Trump's tax bill through the House of Representatives, which is expected to increase the budget deficit to the tune of trillions. This development occurred shortly after Moody's decision to downgrade the United States' credit rating from triple-A, due to concerns over rising debt levels and high interest payment ratios. Despite being the last of the rating agencies to implement this downgrade, Moody's decision has nonetheless contributed to some reputational damage to the narrative of U.S. stability and exceptionalism.
Despite the weakness in bond markets, we were pleased to see that our highest risk strategy achieved returns of around 5%, capitalising on the rally in equities. Medium risk portfolios saw returns of 2-3% in comparison to what was a flat month for our lowest-risk strategy. Our low duration profile in the conservative fixed interest fund helped shield against rising yields that pose a larger impact at the longer end of the curve.
Activity
We implemented another rebalance, reflecting a gradual shift towards a more defensive positioning - a theme consistent throughout 2025 within both our rebalance and underlying security selection activity. As part of the rebalance, we made the following changes:
- Increased our alternative investment exposure, including real estate investments primarily in the UK, as well as hedge and absolute return fund holdings for diversification.
- Trimmed our US equity exposure mid-month following the recovery rally, in favour of European equities. While we remain positive on the individual companies owned within the strategies’ US equity allocation, we see growth opportunities within Europe as government spending rises, particularly in areas such as defence.
The recent rally has been welcome, providing the opportunity to reduce equity exposure in a period of strength, as we tilted the strategies to a marginally more cautious profile.
Within the Building Blocks:
- In fixed interest, to manage risk, we exited the Wellington Global Credit ESG Fund due to its significant exposure to US corporate credit. We decided to reduce our exposure given rising concerns about the deficit and debt ceiling issues, which could have substantial consequences if they occur. The proceeds were rotated into an existing Sterling-based corporate bond strategy, which subsequently reduced the duration profile while increasing the overall yield.
Outlook
April’s ‘Liberation Day’ and the introduction of tariffs by the Trump administration has introduced significant uncertainty into markets. Despite positive news from early trade deals being announced with the UK and the roll back of the 145% China tariffs, there are still erratic policy announcements from the White House being threatened and withdrawn on an almost daily basis. Whilst we believe the 10% baseline tariff is reasonable and one that markets and businesses can adapt to (and even a 30% tariff on China should not significantly harm international trade), the current uncertainty is not helpful: it is likely that businesses will be tightening their belts, potentially holding back on investments or workforce hires while they wait to see the lay of the land.
Inactivity and caution hinder short-term economic growth, so assessing the impact of US tariff policies is still uncertain. Despite the risk and uncertainty, there are several areas where we see opportunities for companies to grow profits both in the US and across the rest of the world. Inflation remains a risk but hopefully we will see rates coming down in the UK and US soon which should help support any weakness in the economy and provide a boost to many of the investments held in our portfolios, particularly versus cash.
Authors
Antony Webb
Head of MPS Investment Funds