Q2 2025 Investment Commentary
Welcome to our latest investment commentary. We trust you and your family are keeping well.
This edition will cover the second quarter of 2025 as well as the outlook for the remainder of the year.
Q2 REVIEW
We are pleased to report that the strong portfolio returns seen at the start of the year have continued into the second quarter, resulting in very good relative performance in 2025. The quarter got off to a tough start for global markets as Trump implemented his Liberation Day reciprocal tariffs. This led to the S&P 500 experiencing one of its largest 2-day declines since WW2. However, despite this adversity, the Carrington portfolios held up rather well due to a few key themes. We entered Q2 with a value bias, and during the recent drawdown, value outperformed growth. We also had a large allocation to gold and gold mining companies, which became a strong contributor and one of the few effective hedges during the market stress. Gold’s safe haven status, alongside its role as an inflation hedge amid the tariffs, provided a strong fundamental opportunity for the price to appreciate. Following its strong run, we took some profits by trimming the position and expect to reallocate in the short to medium term when the opportunity presents itself, alongside other precious metals which often move in tandem with gold. For clients in the lower risk core portfolios, hedge funds performed well, profiting from the volatility and taking short term tactical positions.
With market stress comes opportunity, and although it can be uncomfortable, we were able to lean into it and capture the upside from the rebound. When Trump announced his 90-day pause on the reciprocal tariffs, markets rallied sharply, with the Nasdaq climbing over 10% (USD) in a single day, its best daily performance since 2001. This dramatic reversal led to the coining of the acronym TACO (Trump Always Chickens Out). This signalled to investors that a form of Trump Put was in place, where he would not let conditions deteriorate too far in the bond market. Once this initial rally cooled off, we used the opportunity to lean into areas that had been hit hardest during the Liberation Day sell off, increasing our exposure to small caps, S&P 500 and Hang Seng Tech Index. Since then, small caps have been among the best performers, the S&P 500 has gone on to reach a new all-time high and Hang Seng Tech rebounded after being hit hard by US import tariffs. By limiting drawdowns and capturing the upside, we delivered strong Q2 performance and maintained the outperformance we saw in Q1.
Our strongest performer during the quarter came from our UK small cap exposure, which returned 15.5%, followed closely by our global small cap allocation, up 13% (in GBP) since we entered during the market stress. Small caps tend to rally the most during rebounds, and it was encouraging to see this play out. Precious metals also performed well, and a metals-focused fund we added in March has delivered very strong performance, driven by its exposure to gold, platinum and uranium mining companies, which have seen prices rally. Kopernik Global All Cap Fund was up 11.6% (in GBP) over the quarter.
The tariff narrative is still ongoing, as the relief was only granted for a 90-day pause. So far, it appears that the US is trying to broker deals with trading partners to finalise a more permanent tariff policy, which may provide companies with greater clarity on future guidance. Global companies have found it difficult to issue shareholder guidance due to this uncertainty, which has weighed on markets. At Carrington, we remain cautious about the risks tariffs can bring, as even a single headline can spark a sell off. Having exposure outside the US has been beneficial, as the US remains the epicentre of the issue while Trump continues to push his protectionist agenda. The full extent of the impact of tariffs remains unknown, but we remain nimble and active as more data comes through, with much of the current outlook still driven by speculation around the continuation of US exceptionalism.
OUTLOOK
Geopolitics
Geopolitical tensions were stealing headlines from tariffs as conflict erupted in the Middle East. When Israel struck Iran’s nuclear facilities with support from the US, it sparked fears that shipping routes could be at risk. There has been a lot of speculation over the last 2 years about the potential closure of the Strait of Hormuz, which accounts for 20% of the global oil supply. As a result, the oil price spiked but later calmed as no oil supply was impacted and a ceasefire has now been agreed.
We currently have limited oil exposure in the portfolios and believe the outlook for oil remains weak. We know that one of Trump’s goals is to lower oil prices and so he is incentivized to broker peace in the parts of the world that can have an impact.
UK
The UK has been a beneficiary of capital outflows from the US. UK small caps were one of the best performing areas over the quarter despite the mixed economic agenda coming from the Labour party. The gilt market saw some volatility during the quarter but ended fairly flat. Rachel Reeves continues to face criticism over government spending and higher taxes, causing OBR forecasts to be questioned. Despite this, international investors are now looking for global diversification, and the UK is typically a destination with many multinational corporations and very attractive valuations. We will continue to be overweight in the UK while also reducing our currency risk, as tariff movements have led to some additional currency fluctuations.
Europe
Similar to the UK, Europe has been a beneficiary of capital outflows from the US. The EU position on US tariffs still remains unclear, but investors have recognised the EU commitment to higher government spending in areas such as defence following pressure from Trump. As a result, GDP growth is expected and the OECD has upgraded its European growth outlook. In addition, valuations remain cheap across European countries as the US overshadowed them in recent years.
With the improving outlook in the EU, we decided to increase exposure by bringing in a new fund in our core portfolios, Ranmore Global Equity, which has a large allocation to European companies.
USA
The end of US exceptionalism has been making headlines this quarter. Under the new tariffs regime, many investors have started to doubt the US as Trump tries to isolate itself from its trading partners. As a result, the dollar index fell 7% during the quarter, which has magnified losses for investors allocating internationally, especially to US assets.
The US remains a tough market to bet against as it continues to lead in global innovation and business leadership. Policy direction is still unclear and it is difficult to take strong views, so we maintain a neutral weight in US equities and try to be tactical when opportunities present themselves if volatility appears.
Trump has shown he is not immune to the bond market. The 30-year treasury yield went above 5% during the quarter, which has a direct impact on the government’s ability to borrow more. With the One Big Beautiful Bill now passed through the senate, this is expected to increase the US national debt by $3 trillion by 2034, potentially adding more pressure on future debt repayments and therefore future growth.
Trump has been vocal about the need for lower rates and has repeatedly criticised Fed chairman Powell on social media. However, due to the Fed’s independence, they remain cautious and continue to take a wait and see approach as economic data comes through to assess the full impact of the tariffs. Currently, the US has one of the highest interest rates in the world as inflation concerns persist due to the tariffs.
Asia
Performance in Asia was mixed. The standout performer was South Korea, as they established new political leadership which was well received and the KOSPI rallied 21.8% (in KR) during the quarter. We currently have an overweight position in South Korean equities. Our overweight China exposure lagged during the quarter as the trade war scared off investors, although the Hang Seng was still up 5.42% (in HK).
Our outlook remains positive on Asia. This year Asia has been one of our strongest contributors to performance. We continue to see a clear difference between when China performs well versus regions like Taiwan and Japan which are momentum heavy. We remain cautious on momentum regions that can experience sharp drawdowns, like we saw at the start of the quarter. We remain bullish on China as the government still has many policy levers to pull, and total exports rose over the quarter despite a sharp decline in shipments to the US. Furthermore, many Asian central banks, including China, currently have high interest rates but low inflation as they wait for the Fed to cut to avoid large currency fluctuations. Once the Fed begins to slowly lower rates, we anticipate material upside in these Asian regions.
Strategy
Some points to note around our thinking moving forwards, which generally follow the comments in our previous updates:
- We are now neutral weight US equity, having been underweight going into liberation day. We captured the rebound after increasing exposure near the lows. With the S&P 500 hitting new all time highs, valuations are once again looking stretched, and we remain vigilant on economic data.
Our largest equity exposure remains in the US, but the areas we hold outside the US have been key. Overweight positions in the UK, Europe and Asia have benefited performance, and we added further to European exposure.
Government bond yields were volatile over the quarter as inflation expectations rose alongside recession fears, triggering a steepening yield curve. However, when weak labour market data came through, it was encouraging to see treasuries and the dollar rally, offering downside protection via a negative correlation to equity.
We trimmed our investment grade credit exposure during the quarter as spreads tightened and the risk reward outlook deteriorated. We continue to monitor defaults closely, especially as the full impact of tariffs on company balance sheets remains unclear but defaults remain.
Commodities have historically shown a negative correlation to equities, helping diversify the portfolio. We continue to hold strategies with exposure to precious metals miners which have a strong outlook whilst providing a hedge against a potentially worsening tariff sentiment.
While we have no direct fund exposure to Europe, we have been increasing our allocation through global equity funds with meaningful European holdings. Sentiment in the region continues to improve.
Our UK exposure remains focused on large international FTSE businesses that typically perform well in a high rate environment, supported by a UK small cap fund targeting niche opportunities to enhance returns.
We continue to hold a meaningful allocation to Asian equities, where valuations remain attractive and inflation pressures are relatively contained. Many Asian countries have been strengthening regional trade links while the US takes a more protectionist stance.
Summary
We are pleased with the ongoing performance across all portfolios and continue to monitor the rapidly changing environment. The volatility during the quarter has proven the robustness of the portfolios and ability to limit downside and capture meaningful upside.
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 WEBINAR RECORDING
If you missed our latest investment webinar on Monday, 7th July, you can watch it on demand.
We were joined by guest speaker, Olivia Micklem from Artemis, for an interesting and timely discussion on the US and current Geopolitical events.
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.
