- Tariff announcements dominate markets
- Europe ex-UK and Japan equities rise but global equities fall
- Fixed income allocation supports performance
April was an extraordinary month for markets. The “Liberation Day” tariff pronouncements surprised market participants and led to significant market falls. The reasoning (it may be misleading to refer to “logic”) behind the falls was a combination of an expectation that tariffs would impact consumers and hamper business revenues. Markets abhor uncertainty and given the incredible complexity of such a simple tax when applied to the realities of a globally inter-related economy, combined with subsequent changes to the policy, it was little surprise to see significant selling off at the start of the month.
While little of what investors deal with day to day can be said to be certain in any literal interpretation of the word, profound uncertainty such as these aggressive policy changes can be deeply unsettling to markets in the short term and can lead to overexuberance on the downside.
April amply demonstrated that sometimes the best course of action, when markets gyrate, is to do nothing. In this specific instance, there were two reasons for inaction being a sensible approach. The first is that the uncertainty had not disappeared as suddenly as it had appeared. While the sell-off we witnessed at the start of the month may, with the benefit of hindsight, be appropriate, it may also, again with hindsight, prove to be overdone. We still don’t know the answer to that question today, but we do know the combination of increased uncertainty, human fear reflexes and a tendency to go with the crowd can lead to markets overdoing it on the way down.
The second, perhaps more pragmatic, reason why it was sensible to sit on your hands at the start of April was that, such was the negativity of the market response, it would have been incredible to have seen no attempt at reframing the decision by the US government and some attempt at rapprochement from governments finding themselves on the other side of the tariff salvo.
A cursory glance at the market returns for the month of April do an adept job at masking all this drama. Global equities finished the month down a relatively modest 2.4% in sterling terms, having had a peak to trough loss of close to 10% in the early days of the month. The US led the pack down with a return of -3.6% over the month.
A combination of higher valuations in the US with the maelstrom from tariffs having a clear and direct impact on the country led to the US underperforming. We have been less constructive on the US than most other equity regions, scoring the large cap stocks as a neutral three out of five in our Tactical Asset Allocation (TAA), although we are positive on its small caps. We have benefited from our bias to active managers with smaller market cap holdings and holding in the L&G S&P 500 US Equal Weight Index in our Dynamic Passive strategies.
Other markets echoed the US at the start of the month but demonstrated better composure over the rest of it, with the UK delivering -0.8% for April and Europe ex-UK gaining 1.4% and Japan 2% up (all in sterling terms). We have had an overweight target to Japanese equities in our TAA since the fourth quarter of 2023. This year’s weaker markets have weighed on 12-month returns, which remain in positive territory with the US returning 5.6% in sterling terms and Europe and the UK up 7% and 8% respectively.
Fixed income proved to be an effective diversifier over April, with US Treasuries up 0.6% in sterling terms and the gilt market returning 1.7%. Although we are broadly neutral on fixed income, we do give a four out of five TAA rating to global high yield bonds. High yield and investment grade credit provided positive returns over the month as the underlying government yield provided a tailwind to these securities. The 12-month returns from fixed income are also firmly positive in the context of the asset class, ranging from 3.5% for gilts to a 10% return from high yield.
Given the strong equity rally in the second half of April, it would be tempting to presume we are through the worst of the tariff news. It is likely that the propensity for news on tariffs to shock the markets has diminished but what remains unclear is the longer-term impact on key economic drivers such as consumer spending, business investment and the impact on inflation. It is possible that the impact proves to be greater than anticipated but it is also worth bearing in mind the resilience of the consumer and the long-term track record of businesses, over many decades, of meeting challenges and, collectively, finding ways to reward shareholders in excess of inflation.
April has again proved that markets are unpredictable over the short term and that diversification through asset classes, sub-asset classes, styles and managers is the most effective way to dampen the market’s short-term excesses, which tend to have a greater linkage to emotional response than fundamental factors. Over the longer term, emotions tend to wane and fundamentals should come to the fore.
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