MPS May Newsletter

Key events

The impact of “Liberation Day” on financial markets proved to be both seismic and immediate, with the announcement of far-reaching, and more stringent than expected, reciprocal trade tariffs raising recession fears and sending stock markets sharply lower. China, which had been singled out for higher tariff rates, retaliated with its own higher tariffs on US imports.

US stocks slid close to bear market territory – defined by a 20% drop from a previous peak – with other indices also declining sharply. After a rapid spike in volatility, a 2-day decline of over 10% from US stocks, and growing fears of dislocation in the US Treasury market amid an inferred general loss of confidence in the US, sentiment stabilised following the announcement of a 90-day pause in the implementation of many of the tariffs – with China a notable exception. This was followed days later by a temporary exemption for electrical products. Markets were further calmed by a de-escalation in the White House rhetoric towards Fed chair Jay Powell, after pointed attacks had raised concerns that President Trump would interfere with central bank independence. More positive comments towards China also helped bolster the market rally into the month-end.

Strategy returns mirrored these trends – higher risk strategies recovered from their intra-month lows to finish down low single digits for the month. Positive returns from the European equity, Japanese equity and alternative investment allocations were offset by the negative returns seen from US and emerging markets equities, with a small fall from the UK market as well. Returns were positive from the strategies’ fixed interest allocations, led by conventional gilt holdings, ensuring strategies toward the lower end of the risk spectrum saw either a broadly flat or slightly positive return over the month.

Activity

• Starting in the UK equity allocation, we initiated new positions in Tesco and Next. These ideas were funded by trimming the holding in international equipment rental company Ashtead, as well as the dedicated allocation to UK smaller companies. These moves reflect our decision to realign the strategies’ equity allocations to a marginally more defensive footing at the stock level, acknowledging the uncertainty inherent within a post “Liberation Day” world, while still seeing attractive individual stock opportunities. Given the backdrop of a cautious UK consumer, our preference lies with higher-quality names demonstrating economic moats, and both Next and Tesco fit this profile in their respective areas. While the long-term outlook for Ashtead remains positive, current policy uncertainty has started to weigh on investment decision-making, with leading indicators pointing to a worsening non-residential construction backdrop and equipment rental environment. We have therefore dialled down the position while retaining exposure.
• Turning to Europe, and during the period we exited our residual position in auto maker Stellantis, again with the intention of tilting the exposure profile towards a more cautious stance. We also added to global pharmaceutical company Novartis.
• One theme previously discussed, and which has come sharply into focus in recent times, is the need for Europe to spend more on defence, with the political winds of change blowing aggressively in 2025. A clear consensus is emerging, with Germany, the EU and the UK emphasising this renewed commitment to increasing defence spending through a range of initiatives. Given this evolving picture, we have introduced the Swedish defence company Saab within the strategies’ European equity allocation, moving the allocation to the defence industry to a broadly neutral position within the region. While we would be remiss not to acknowledge that the sector has significantly rerated over the last few years – and indeed have had exposure through other existing strategy positions including BAE – this has occurred from a low base, and we continue to see further momentum. Saab, in particular, is heavily geared to the European market, with this highly innovative business possessing an attractive product portfolio aligned to Europe capability gaps. We see several catalysts for further share price appreciation.
• Across the US allocation we added to Apple, one of the strategies’ underweight positions within the so-called “Mag 7”. Given the share price weakness exhibited so far in 2025, this underweight allocation has been beneficial, and even after this move, the holding remains at a lower level than the equivalent index weight. Despite ongoing tariff concerns, we perceive the stock to be better placed than the market’s pessimism would suggest. This move was funded by the sale of Nike, another weak performer year-to-date. While we remain appreciative of Nike’s brand strength and the secular tailwind driving the sportswear market, we believe the reset of the business will now take longer to play out than had been anticipated. We have therefore chosen to redeploy the capital, while still retaining exposure to the so-called casualisation trend and move towards healthy living via the strategies’ position in Adidas.

Outlook

We anticipate market volatility to remain elevated, with many policy questions still unresolved and the risk of continued uncertainty permeating into the global economy. Recession risk has increased, with the current landscape weighing on capital expenditure decisions by businesses, and tariffs will also weaken consumer demand. At the same time, while the latest earnings season has been mixed, with forecasts for earnings growth lowered, it has nevertheless reinforced the persistence of longer-term investment opportunities offered by investment in quality businesses. Furthermore, the sharp fall, and subsequent recovery in global markets over April demonstrate the risk of trying to be too cute in timing entry and exit points, while also highlighting the benefit of being able to adjust exposures without the need for a wholesale rebalance. As we emphasised in last month’s update, maintaining an analytical approach is crucial in this environment – we continue to adhere to this principle on behalf of clients.