Market review
- Markets deliver muted response to Middle East crisis
- Global equities and fixed income higher over June and year to date
- Tactical high yield, UK and US positions deliver
As the conclusion to a first half of the year that saw elevated volatility spurred by an extraordinary news flow, perhaps the most notable aspect of global financial markets in June was their relatively muted response to a major Middle East crisis.
Such were the geopolitical tensions in June that the ‘Pentagon Pizza Index’, which gauges overtime activity at the US’ military HQ by monitoring the sales of takeaway pizzas around the area, went viral as sales surged.
But, while events were clearly disturbing from a humanitarian perspective and a geopolitical one, markets were largely unresponsive. Equities gyrated a bit but finished the month in positive territory, while bond markets also ended higher. Oil was understandably the most significant mover before it settled down.
After several months of profound uncertainty stemming from aggressive policy changes out of the US, investors seemed to adopt the belief that events in the Middle East would not be particularly impactful on the global economy, consumer demand and business revenues.
This pragmatic composure contrasts with the jitters seen in April and has helped to drive the risk-on recovery since then. The Liontrust Multi-Asset team believes the overall environment remains generally positive but there are also still significant risks, including the fact that tariffs are higher than when Trump became President.
Markets in June
June was a solid month for global equities, which delivered 2.4% in sterling terms, while fixed income was positive across the board. Emerging markets led the pack, delivering 4.2% in sterling terms, closely followed by Asia Pacific ex-Japan and the US with returns of 3.8% and 3.1% respectively, also in sterling terms. Emerging markets and Asia have benefited significantly from the weakening US dollar, which has plumbed a three-year low against other major currencies. President Trump has been vociferous in his calls for interest rate cuts – which, on balance, should weaken the attractiveness of holding dollars – and his wish to replace Jerome Powell as Federal Reserve Chair with a more compliant candidate. A weaker greenback eases the extensive dollar-denominated debt burden for emerging markets and Asia. If we are entering a period of a weaker dollar, because of US policy uncertainty and potentially lower interest rates, this could continue to support a run of strength in our positive tilts toward emerging markets and Asia.
The UK and Japan were the only moderately negative equity sub-sectors over June, although Japan was positive in yen terms. Over the half-year to the end of June, however, the UK has been a leading performer, returning 9.0%, and second only to Europe ex-UK and its 14.4% return in sterling terms. Our tactical overweight to the UK has been a positive contributor to our fund and portfolio performance. Germany has been the key driver of Europe’s performance since it loosened its fiscal rules earlier this year to spend more on defence and infrastructure.
Our tactical underweight to the US has also been a leading contributor to performance over the first half of 2025, during which North American equities returned -2.6% in sterling terms. A combination of high valuations entering the year and the impact of tariff maelstrom on the country led to the underperformance.
Global fixed income markets were strong over both June and the half-year, despite concerns over rising US government debt. Global high yield has delivered 11.2% over the first six months of the year. Although we are broadly neutral on fixed income, we give a four out of five TAA rating to high yield bonds, which have been a significant contributor to our fund and portfolio performance. We view their nominal yields to be currently attractive at close to 8.0%, which is indicative of long-term returns and analogous to those of equities, even though spreads versus government bonds are only moderately attractive. These slim spreads on high benchmark yields result in attractive total yields.
Managing risks
President Trump’s tariffs were the biggest source of volatility in global markets in the first half of 2025, and they are likely to continue to be a contentious issue in the second half. Despite many of the more extreme tariffs still being on hold, the revenue from tariffs on imported goods has already spiked up in the US, reaching record levels in April and May of $15.6 billion and $22.2 billion respectively.1 So far there are no major signs of the tariffs impacting US businesses or consumers, but their ultimate impact has yet to be fully felt.
1Source: FactCheck.org, 23 June 2025
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