James Klempster discusses how the extraordinary newsflow in the first half of 2025 has impacted investment markets, how should investors react to political events and announcements, what changes have the Liontrust Multi-Asset team made to their funds and portfolios, and what does he expect for the second half of the year.
Simon [00:01:32] Welcome to this video in which James Klepmpster is going to look back at the first six months of 2025 and what the rest of the year will provide. James, can you start? How would you summarise the first six months of the year?
James [00:01:45] Well, Simon, I mean, it's been pretty extraordinary in many ways. We obviously, at the start of the year, got a new president in the United States or a return of President Trump in the United States. And evidently, you know, he was a man in a hurry. A lot of presidential activity very early on, a lot of executive orders. We saw some potential redrawing of old alliances and lines, whether it be with the European Union, whether it be with respect to the Russia and Ukraine conflict. The one that really has knocked markets was on the second of April, so-called 'Liberation Day' where we had tariffs which had been widely telegraphed during the electoral cycle and indeed you know we have precedent as well because obviously during the original Trump presidency we had the start of the the sort of tariff moves but what surprised markets at the start of April was the scale and indeed the sort of the some of the vagueness some of the strangeness of the tariff policy and so we went from having a relatively benign start to the year, albeit with some shocks on the way with things like the DeepSeek AI surprise and all the rest of it, but generally markets behaving themselves, and then a big surprise in the form of the scale of these tariffs, and a substantial sell-off which really had the US at its epicentre. So the US stock market in fairly short order sold off nearly 20% in US dollar terms. Since then, we've had various sort of pauses and potentially some reciprocal deals and indeed some moratoriums in what's been going. And we don't really know exactly where it's all going to land, but since then certainly there's been a period of return to some degree of comfort in markets, and we've seen a pretty decent bounce back from the US over the course of April, well certainly May into June. So if you just take a step back and look at the US stock market today compared to where it started the year, it looks roughly where it was. You don't really see the scale of the sell-off on the way, but if you follow markets closely and if you follow the news headlines which no doubt people have at home, you've seen a very dramatic fall-off in markets and a significant recovery in the US. Elsewhere has been relatively unscathed compared to that.
Simon [00:04:26] You and your team have talked about 'all change', referring to the first six months, which that answer kind of illustrated. How has that played out?
James [00:04:34] Well, I mean, it's been many different layers to that, clearly. The first element is when we look at the global opportunity set as multi-asset investors, the US wasn't a particularly compelling region to us for various reasons, valuation most notably. It felt like it was priced to perfection in the tail end of last year, and as a consequence of that, the sell-off was substantial. We've suffered less perhaps than people who had a greater weight in the US and in fact areas like the UK and Europe have actually been beneficiaries as well over this period and we think what's happened in many ways is over the last few years this notion of US supremacy has become almost self-fulfilling. The market's done very well, the economy is in good shape and it's arguably the strongest developed market economy in the world and it is of course the largest too, and all of these factors combined with strong dollar and a benign interest rate environment has led everyone to sort of really wash money into the US and push that market up. What seems to have happened over the course of the first half of this year, there's just been some sort of question marks over that sort of supremacy really bubbling up. And at the margin, what it seems to done is led investors around the world to say look, the US remains obviously an important part in everyone's portfolio, but it might well be worth just expressing a view elsewhere as well. We've seen flow heading into Europe, flow coming into the UK, and year-to-date it's sort of washed these markets up. So in sterling terms, the US is down around about 5% in sterling terms. Emerging markets are up about 5% in sterling terms. The UK is up about 7.5%, and Germany is up best part of 20%. So it's been an interesting period where if you read the headlines, they are all focused on MAGA, 'Making America Great Again', but in a strange way, many of the consequences of it so far has been actually to boost other stock markets and we've heard the acronym MEGA, 'Make Europe Great Again'. So MAGA maybe made MEGA over this period.
Simon [00:06:43] So, presumably, given all this change and flux, you've been making quite a lot of changes to your portfolios and Funds then?
James [00:06:49] Well, that's a great question and it's a fair assumption given we are unashamedly active investment managers, but I think the process we have in the Liontrust Multi-Asset team is long-term, it's disciplined and it is designed really to prepare rather than to react. And so when we think about the positioning in the Funds and the portfolios, how we've been allocated going into this year, really is a position that we want to maintain through this period of volatility. So we have a neutral position when it comes to the US. We score it a 3 out of 5 in our scoring methodology. We have the UK at a 4 out of a 5. We have emerging markets likewise at a 4 out of 5. So it's more that the markets really sort of come to us, rather than us running to catch these moves in markets, which is always a sort of pleasing position to be in.
Simon [00:07:37] We're in an age where you hang on political leaders' every word or every sentence on your choice of social media platform, and we've seen so much volatility in politics. How do you as investors it must be tempting to react to events? What's your feelings about that?
James [00:07:58] Yes, it's very hard. For anybody who consumes media in any form, and as you rightly say, the relentless pace of it and the volume of it these days is extraordinary. I think what we've got to always remember what we're trying to do as investors is take advantage of long-term compounding of businesses through arguably many cycles. As much as we get a lot of news-flow, a lot of sort of emotional impact as human beings, one of the things that we have a process designed to do is try and minimise the impact of that in terms of our investment decision making. So looking at fundamentals; what's actually going on beneath the bonnet rather than the noise, which is often short-term, news-flow based, creates a lot of volatility, a lot of price moves as we sort of refer to it, but it doesn't necessarily change the fundamental characteristics of the investments underneath. And so what that can create is periods where the fundamental reality of a business doesn't change very much or an index collection of stocks doesn't change very much, but the price of them can gyrate quite materially, which means they can go from either being overvalued to undervalued, which is attractive to us, or undervalued to overvalued, which hopefully we're already in and we can take advantage of. So we don't want to move around too quickly and chase our tails. We really want to let the markets come to us in those times.
Simon [00:09:15] And finally, what do you expect for the next six months?
James [00:09:18] I mean, that's forever the perennial question, is an impossible one to answer in many ways. The point about six months, of course, is it's a relatively short time period in investment management sort of speak, and so the vagaries of guesswork really sort of risk coming into the mix. So it's not a time horizon you want to sort of make strong pronouncements over. Having said that of of course, we've come through a challenging period of news-flow relatively unscathed. In terms of market performance, and certainly markets outside the US have done fairly well. We haven't even mentioned fixed income markets over this period. Again, yields have moved around a bit, but they've really been anchored to base rates, and ultimately base rates don't seem likely to move very much over the course of the rest of the year. There's a bit of a downward sort of gravity pulling them down slightly, but that's arguably mitigated by the amount of uncertainty that's come through from tariffs and also you know, potentially conflict in the Middle East which could cause oil prices to spike again. So I think central bankers as always, are in an unenviable position. They have a lot of different difficulties to navigate through, a lot challenges to navigate through. But overall it seems to us likely interest rates will drift down over the course of the year. That's broadly consensus, broadly in the price. Equity markets, they don't look challenging from a valuation perspective. The fly in the ointment there is the US, which does look expensive on any sort of historical measure and relative to other markets. Outside of the US valuations look fairly attractive and the corporate landscape is not too bad. At the moment you've got still revenues coming through, businesses are spending, consumers are spending. The background music to operations for businesses is all right. I suppose the risk to that comes through when we start to see the uncertainty that might have been caused by tariffs start to come through in terms of business performance, consumer performance, and ultimately the economic picture. So far, indications are that it hasn't had a big impact, but there is a risk that that does come through later in the year.
Simon [00:11:20] Great. Thank you, James. And thank you for watching. We'll see you next time.
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