‘Events, dear boy, events’

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This reported quip by Harold Macmillan to a journalist in the late 1950s, when asked what was most likely to blow his government off course, seems a particularly apt way to describe the current market environment.

Indeed, one of the challenges of writing a note today, is that by the time it’s edited and distributed, it could be out of date. This fact alone should caution us from focusing too much on daily noise.

The question we must ask though is whether there’s any signal in the noise. Have things changed since our last commentary and should we make changes to portfolios?

To answer the first part of that question –yes, some things have changed since the start of the new year.

The Trump administration’s tone has changed. Trade tariffs threats and imposition are not new, but the apparent willingness of the administration to accept the near-term negative economic impact is a new development in our minds. The administration has been making the case that a period of ‘transition’ is required before the great American boom it envisages. 

In addition to the activities of the Department of Government Efficiency, current policy has the ‘feeling’ of austerity about it, As a result, the market has become more concerned about the economic outlook for the U.S., with Google searches for the term ‘recession’ heading towards the highest levels since 2022.

European fiscal policy also seems on the cusp of significant change; the incoming German government is now an advocate for greater budget flexibility for European Union member states to boost defence and infrastructure spending. This is a seismic change that was almost unimaginable in the days of the Eurozone crisis.  

The war in Ukraine may also be closer to ending. We’ve all witnessed the extraordinary events in recent weeks, and I’m sure many of you have strong views on how these events are unfolding—and perhaps some unease about the potential outcome. 

So, what have these events meant for markets? Thus far, we’ve seen a standard correction, with global markets down 11% in euro terms from its peak. 

There’s really nothing too unusual about this recent setback, and it’s not surprising that the stocks that exhibited the greatest strength and momentum last year have fallen the most.  In fact, we would contend that it’s helpful to see some of the more speculative parts of the market correct.

However, what’s somewhat different to the trend of recent years is the significant outperformance of European markets, which have started to discount higher growth as a result of fiscal stimulus.

This has also led quite a jump higher in Eurozone bond yields, with the ten-year German yield now approaching 3%. This is a remarkable move when you consider that the same bond had a negative yield only a few short years ago.

For the most part, U.S., UK and Eurozone bond yields have now retraced the decline since the great financial crisis years. This move make sense when you consider the extent of deleveraging that has taken place since 2009, as well as the shift in policy in recent years – but it has been a painful re-adjustment for fixed income-like assets.  

As we noted in our 2025 outlook, the good news is that government bonds are now a decent investment option, and we’ve been increasing our allocations.

The euro has also appreciated meaningfully in recent weeks, which is consistent with the move higher in Eurozone bond yields and the euro’s relatively ‘cheap’ starting point at the start of the year. 

It’s worth considering that whilst a stronger euro is a headwind to translated performance, your euros have more global purchasing power today than they did in January.

Many will ask what we think the currency will do from here and unfortunately, we have no idea, other than say if you’re a euro investor, it’s important to consider what risks you are taking with non-euro fixed income and cash assets.

This perhaps brings us to the most important question: should we make changes to our portfolios considering today’s policy shifts?

Right now, we don’t believe any major changes are warranted, even if we’re slightly more cautious than at the start of the year.

In our outlook for 2025, we noted that the equity market had become a little more expensive, and as a result, some additional caution may be warranted. We also noted that a positive outlook for this year was predicated on earnings growth, whilst being positive on the potential for productivity gains to support growth and corporate margins.

The good news is that earnings have been robust and the recession probability models we review continue to suggest a low probability of recession. The recent decline in markets has also improved valuations, with the global equity market forward-earnings yield rising to 5.7% in March from 5.5% in January. 

The valuations for many of the large technology companies have also come down rapidly, as they continue to grow earnings at a time of share price decline. This is an important consideration given their weighting in the market.

Investor sentiment, based on numerous surveys, also looks very pessimistic today, which has often been a good contrarian indicator. There’s also little sign of stress in credit markets.

We must, however, acknowledge that the geopolitical landscape is shifting. and whilst the U.S. equity market may cheer on ultimate de-regulation and tax cuts, the uncertainty introduced by ‘whipsaw’ policy announcements has the potential to impact investment and slow the economy further.

Whilst we note that we are not getting a warning sign from recession indicators today, equity markets have historically experienced their biggest declines when the U.S. economy contracts, so this is an increased risk today.

To our minds, this means that more than ever, our focus needs to be on resilience and durability, whilst we remain mindful of the changing nature of the economy, as we have discussed before in our thoughts on artificial intelligence.

Volatility is a part of investing and if we want to achieve good returns above inflation, we must accept it—embrace it, even. We can’t control market volatility, and short-term market prediction today seems folly.

We can, however, control what we invest in. We can focus on higher-quality assets, and we can avoid speculative, ephemeral and lower-quality assets.

This is always at the core of what we do, building long term portfolios for clients, and in an uncertain world, it’s our key message today.

As ever, please do not hesitate to contact us if you have any questions.

Ian Quigley
T: +353 1 2600080
E: ian.quigley@brewin.ie

www.brewin.ie

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