Stay ahead of the curve with our experts’ breakdown of this month’s market shifts and the insights shaping our portfolio positioning.
Fast reading:
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March has been a tough month for equity markets but there is a recovery going on. The US administration’s chaotic trade announcements are driving a ‘growth scare’ in the US. Policy-related volatility is likely to continue in the near term. However, economists are now more comfortable making predictions, and we are getting a sense of the cost of the policies and the uncertainty around them.
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The proposed reforms to fiscal policy by newly elected CDU/CSU German government, had significant repercussions in the bond market. The 10-year Bund rose by a remarkable 30 basis point (0.3%). In the US, bond yields rose more modestly.
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Should policy uncertainty concern investors? For those with investment strategy aligned to clear goals and a long-term time horizon, it is most important to stay firmly on course. But regular reviews are important – don’t wait for a panic to check if your goals and portfolio construction are aligned.
A tough month for equity markets
March has been a tough month for equity markets. At the low for the month the world index was down 4.6%. As we write there is a recovery going on and the world index has cut the losses to 2.9%. Equity markets were dominated by the US administration’s chaotic trade announcements and by responses in kind from trade partners. The news flow is driving a ‘growth scare’ in the US. Adding to the worries are statements by US officials to the effect that policy won’t be changed based on market volatility or near-term economic concerns. These comments should be seen less as a guide to future policy than as defences of the credibility of the current approach.
The correction in equity markets has been quite concentrated, the US is the only region that is down this month. In other regions the news-flow has been more supportive. The euro area has got a boost from the newly elected German government’s decision to boost government spending. The Chinese government has also been loosening policy, targeting a larger budget deficit, further cuts to interest rates and lower capital requirements for banks. As a result, the world ex-US is up nearly 2% in March.
Policy-related volatility is likely to continue in the near term, but we did get over some hurdles recently. The 2025 economic growth forecasts have been cut in the US as economists attempt to foresee the impact of tariffs and the related uncertainty on consumer and business confidence. Up to now, they have been loath to make such predictions due to a complete lack of clarity. Now they feel confident enough to make such predictions, and we begin to get a sense of the cost of the policies and the uncertainty around them. The result has been to take the outlook to below-trend growth in 2025, rather than materially increasing the probability of recession. This should help a ‘healing’ process in equity markets.
Bernard Swords, Chief Investment Officer
Dramatic reversal of bond market sentiment
As February drew to a close, market sentiment leaned towards a risk-off stance which positively impacted US and euro sovereign bond markets. However, this sentiment underwent a dramatic reversal in the first week of March. The catalyst for this shift was an announcement from the newly elected CDU/CSU German government, which proposed reforms to fiscal policy aimed at loosening the country’s debt brake and increasing defence spending.
This policy shift had significant repercussions in the bond market, with the 10-year Bund experiencing a remarkable 30 basis point (0.3%) rise—marking the largest single-day yield increase since German reunification in 1990. Sovereign yields surged across Europe, with French and Italian yields closely mirroring this 30 basis point spike. This backdrop set the stage for the European Central Bank’s (ECB) decision regarding interest rates on the March 6. Despite the rising yields, the ECB opted to cut rates, decreasing the policy rate by another 25 basis points to 2.50%. However, the future of the cutting cycle trajectory remains uncertain, as market dynamics and the policy backdrop continue to evolve rapidly.
In the US, bond yields also experienced a rise, albeit more modestly. Ongoing geopolitical concerns and the implications of tariffs continue to weigh heavily on investor sentiment. Recent mixed economic data has only intensified the uncertainty regarding the true resilience of the US economy. At the Federal Reserve’s meeting on March 18, the policy rate was again maintained at 4.50%, with officials refraining from adopting a more hawkish tone.
Given the current landscape, our latest asset allocation discussions focused on confidence in our heavily euro-area-centric positioning. Despite recent volatility, we remain comfortable with our underweight stance on euro sovereign bonds while maintaining an overweight position in euro investment-grade corporate bonds, where fundamentals remain favourable in our view.
Moyah Flanagan, Fixed Income Strategist
Regular reviews are a key part of the investment plan
Policy uncertainty has emerged as a notable threat to global financial markets this year. There have been some big surprises including an aggressive global trade war, a realignment of the world geopolitical order, a US push to fiscal consolidation, including wholesale Federal agency job losses, and a dramatic shift towards German fiscal expansion – possibly the least-anticipated surprise of them all. The burden of this uncertainty is its risk to growth and ultimately the danger of recession, notably in the US. For most investment portfolios, US recession would be a significant threat.
Markets are forward-looking and so typically price in ongoing growth in the economy and earnings. Risk of a meaningful recession would lead optimism to be revised, at least temporarily. Rather than confidently pricing-in earnings growing on a steady trend, markets could shift towards pricing current (trailing) earnings as a possible plateau, much as they did in 2022 (accentuated at that time by rapidly rising interest rates). We don’t see this as very likely, but in those circumstances, deeper portfolio drawdowns would occur, as equities are such a significant share of most portfolios.
Should investors be concerned? For those with investment strategy and portfolio construction aligned to clear goals and a long-term time horizon, it is most important to stay firmly on course. To reduce equity exposure substantially below the amount that is consistent with your long-term goals would beg the question of when to rebuild? Especially of course if recession is avoided, as we suspect, and earnings continue to grow at the strong pace we’ve in the past four quarters. World equities, which are more reasonably priced than the US alone, also provide some comfort, as does the non-trivial level of bond yields, providing income and a high degree of principal protection.
The other point is the importance of regular portfolio reviews, to ensure the chosen strategy continues to match your identified goals and time horizons. Even though we don’t see high risk of an imminent recession, better to think of these questions now rather than if and when we enter the next phase of significant volatility.
