Q1 2025 Investment Commentary

Welcome to our latest investment commentary. We trust you and your family are keeping well.

This edition will cover the first quarter of 2025 and the associated volatility, as well as the outlook for the remainder of the year.

Over the past few weeks, you may have noticed some falls in markets. Donald Trump has been instigating these falls via his international trade policies which are deemed to be disruptive for global trade and growth.

We have set out below our positioning coming into the year but we are pleased to report that we were prepared for the events seen so far. Our portfolios have delivered robust returns relative to our peer group and the broader markets.

We would like to reassure you that despite the news flow, we have seen market falls like this many times before and they tend to be short lived before normal market trends resume. If you have any questions or concerns, we are here to help.

Q1 REVIEW

We are pleased to report that the strong returns of 2024 have carried into the first quarter of 2025. Despite headlines about US stocks tumbling and posting their worst quarter since Q3 of 2022, all Carrington portfolios delivered positive returns, reinforcing the benefits of diversification and a multi-asset approach. The S&P 500 declined 7.4% in GBP during Q1 following the extreme euphoria that markets experienced after the initial US election result.

Optimism ran high around President Trump’s pro-business stance and promises to restore American economic dominance. From the election through to inauguration, the S&P 500 rallied sharply, led by the Magnificent 7. However, since inauguration, Trump’s aggressive policy changes have created widespread uncertainty, prompting investors to reallocate capital out of the US into other regions. Doubts have also emerged over the Magnificent 7’s role in the AI boom following the rise of Chinese-based AI company Deepseek. US exceptionalism is being questioned, with inflationary pressures rising due to tariffs and economic growth slowing as a result of reduced international trade. This has put US investors in a difficult position, yet Trump remains committed to protectionist policies aimed at encouraging Americans to buy domestically produced goods. Carrington’s underweight exposure to the US helped limit losses from this market decline.

This quarter highlighted the strength of the Carrington portfolios, as we were well positioned for a correction in the US stock market following the frothy sentiment that built up after the US election. One the top contributors to performance was our overweight position in China. The Chinese stock market had struggled in recent years due to issues in the property sector, but reforms and restructuring have placed it in a stronger position as it emerges from these challenges. The Hang Seng Index outperformed the S&P 500 in 2024 and continued its strong run this quarter, returning 12.5% in GBP. China is entering a new economic cycle, supported by large-scale monetary and fiscal stimulus, and is now a key contender in the AI race. This has created attractive investment opportunities in the region. As capital flows out of the US, China has become a popular destination for investors seeking AI exposure, which has helped drive strong market performance. Our Growth portfolio currently holds a 6.5% allocation to Chinese equities, and we anticipate increasing this exposure in the future when the right entry point arises.

Our overweight position in the UK also contributed to portfolio performance. The UK stock market had previously suffered from capital outflows driven by US exceptionalism. However, as investors shift their focus elsewhere, the UK has become a key destination for those seeking better value outside the expensive US market. As a result, the FTSE 100 delivered a 6.1% return in Q1. Across the models, we maintain roughly 17% exposure to UK equities. A similar trend played out in Europe, but the catalyst there was large-scale government spending. The STOXX 600 index returned 7.2% in GBP during the quarter, supported by the European Union’s decision to increase defence spending by an additional 1.5% of GDP, which could generate an estimated EUR 650 billion over the next four years. The market has responded positively to these plans, fuelling the rally and sparking renewed optimism in European equities. Currently, the Carrington Growth models hold 9% exposure to European stocks.

Gold was the standout performer of the quarter, delivering its best quarterly performance since 1986. Physical gold returned 19.9%, while gold miners surged 31.1% in GBP. When tariff rhetoric intensifies, gold tends to outperform due to its safe-haven status and role as a store of value during periods of uncertainty. At the beginning of 2024, we doubled our position in gold and gold miners, a decision that has proven highly beneficial, as both have generated returns more than three times that of the S&P 500. Depending on the model, combined exposure to gold was 8%. However, we did halve our physical Gold exposure recently to take some profits.

OUTLOOK

Geopolitics

Geopolitical tensions have been dominated by Trump’s aggressive tariff policies, despite ongoing conflicts in Europe and the Middle East. He has been using tariffs as leverage to pressure other countries, such as Mexico to deploy troops along the southern border and has taken a similar approach with Canada. His tendency to reverse tariff decisions as part of negotiations adds uncertainty for investors, as policy remains unpredictable.

Trump has also become heavily involved in the Russia-Ukraine war, attempting to broker a deal. There are signs that a resolution could be on the horizon, but the situation remains fluid. A peace agreement would be a positive development for Europe, helping to stabilise supply chains and potentially unlocking frozen Russian assets.

In the Middle East, Trump has further inserted himself into the region’s affairs, even floating plans for a “Trump Gaza” project, which has done little to ease tensions. In March Isreal resumed military operations in Gaza further igniting hostilities. Oil prices have been rising as a result but remain at reasonable levels for now.

UK

The outlook for the UK remains mixed. While the stock market has been performing well, pressure remains on the Labour Party. Uncertainty lingers over whether Rachel Reeves’ budget can be sustained through government tax revenue. The government has ambitious plans to reduce the budget deficit while promoting growth, but the Gilt market has yet to fully support this vision. As tax increases take effect, inflation is likely to rise, which could further constrain the Bank of England’s ability to cut rates. However, with capital moving out of the US, the UK has become an attractive destination, and it is these capital flows that ultimately drive stock market returns. Additionally, as US capital outflows increase, currency risk becomes a greater factor. Holding sterling-denominated assets helps mitigate this risk.

USA

The US remains at the centre of market discussions due to its 73% weighting in global equity indices. Tariffs are a key concern for many investors as they contribute to domestic inflation while limiting economic growth. Trump aims to bring manufacturing back to the US, but his incentives for businesses to relocate are minimal. Even if companies were to move production, the process would take years, and once Trump is out of office, these protectionist policies could be reversed.

Inflation is a major issue, as persistent price increases driven by tariffs could limit the Federal Reserve’s ability to cut interest rates. This has significant implications for national debt interest payments. Despite DOGE efforts to reduce government spending, annual interest payments on US national debt are projected to be $950 billion in 2025. Historically, governments have inflated their way out of debt, but with interest rates at 4.25%, higher for longer could be damaging to smaller companies.

The US focus on efficiency has also led to rising unemployment, and when combined with high inflation, this creates the potential for economic problems such as stagflation or even a recession. Markets have started pricing in these risks, which is why US equities have struggled. However, because this uncertainty is driven by tariff policies, sentiment can shift quickly, and we remain prepared to act as conditions change.

Asia

In Asia, returns were mixed. China performed strongly, with government reforms proving effective as manufacturing data surged to its highest levels in several years. China is now viewed as a leader in the AI market, attracting significant investment. AI companies in China are trading at much lower price-to-earnings multiples compared to their US counterparts, making them an appealing opportunity for investors.

The main concern for China remains its trade war with Trump. He has been vocal about imposing tariffs on Chinese goods, but his approach suggests these are often used as negotiation tactics. In reality, China holds more leverage in this battle, primarily due to its ownership of $780 billion in US Treasuries. If China becomes frustrated with Trump’s tariffs, it could retaliate by halting US oil purchases or even start selling off large amounts of US Treasuries. A sudden flood of US treasuries into the market would push yields higher, significantly increasing the US government’s borrowing costs, which already amount to $1.2 trillion in annual interest payments in 2024.

India continued to struggle in Q1 after a poor end to 2024, with the MSCI India Index falling 6.23% in GBP. In the Carrington models, we have an underweight position in India, with exposure at just 1%. This positioning helped protect performance, as valuations in India had become stretched, and much of the hype was already priced into a market where infrastructure challenges limit growth. Additionally, China has been reclaiming market share, further weighing on sentiment. Japan faced similar difficulties, with the Nikkei 225 Index declining 9% in GBP for the quarter. However, our exposure to Japan in the models was limited to just 2%, minimising the impact on overall portfolio performance.

Strategy

Some points to note around our thinking moving forwards, which generally follow the comments in our previous updates:

• With US equity prices going down, our current underweight means we may look to lock in the outperformance by adding to US exposure if we feel we have reached a better valuation point.
• Our largest equity exposure remains in the US, but the areas we have exposure outside the US are key. The unloved areas from the last couple of years have provided the best returns this quarter, so we may look to reallocate between these regions.
• The pace of Fed interest rate cuts has slowed, but the amount of interest rate cuts being priced in is increasing slightly as recession fears grow. If we experience a faster pace of rate cutting, we may look to reduce US Treasury exposure and replace it with corporate credit.
• We continue to hold shorter-term investment-grade bonds, which offer attractive high yields in the current high-rate environment, while default rates remain low. This is beneficial when rate cut expectations are continuously swinging.
• Commodities historically have a negative correlation to equities, providing diversification in our portfolio. We continue to hold strategies involving precious metals miners that are highly correlated to the physical commodities.
• We continue to hold no direct exposure to Europe due to the Russia/Ukraine war. However, we do have indirect exposure through our global equity funds that select high-quality companies based in the Euro area.
• Our UK exposure continues to focus on large international FTSE businesses that perform well in a high-rate environment, coupled with a UK small-cap fund that targets niche companies to enhance returns.
• We continue to hold a significant amount of Asian equities, where valuations remain attractive and the regions generally do not face the same inflation and interest rate policy challenges. While sentiment towards China has been weak, it continues to improve, and we look to gradually add to the region as valuations remain relatively cheap.

Summary

We are pleased with the ongoing performance across all portfolios and continue to monitor the rapidly changing environment. The recent US volatility has proven the robustness of the portfolios and are happy with our current positioning.

We will keep seeking new opportunities for our portfolios while navigating the current environment as best we can. We hope you find this review informative and welcome any questions you may have.

CHANGES MADE

We made some changes during the quarter. A full account of the changes can be found below:

MARKET INSIGHTS REMINDER

Lastly, this is a reminder that this quarter we are being joined by Sandy Pei, CFA – Deputy Portfolio Manager for the Asia ex-Japan Equity strategy and Lead Portfolio Manager for the China Equity strategy at Federated Hermes Limited.

In addition to our regular investment review and update, we’ll be exploring the latest developments in global markets with a specific focus on China.

Date: Monday, 14th April 2025
Time: 12h30 – 13h15

To register for the webinar please click HERE.

We hope you find this review informative and I look forward to hearing from you if you have any questions.

 

IMPORTANT: This publication has been prepared for information purposes only by Carrington Investment Consultants Ltd. The value of investments, and any income generated from them, will be affected by interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. Investors should be aware that the value of units may well fall as well as rise, is not guaranteed and that past performance is not a guide to future performance. Different funds carry different levels of risk and investors may not get back the full amount invested. Carrington Wealth Management is a trading style of Carrington Investment Consultants Limited which is authorised and regulated by the Financial Conduct Authority. Registered office: One Chapel Place, London W1G 0BG. Registered in England, number 3193939. This email and any accompanying documents contain confidential information intended for a specific individual which is private and protected by law. If you are not the intended recipient, any disclosure, copying, distribution or other use of this information is strictly prohibited. You are also requested to advise us immediately if you receive information which is not addressed to you.  Data Source: Financial Express. Copyright © Carrington Wealth Management. All rights reserved.