Market outlook Q2 2025
Though we manage funds for the long term, here are our thoughts on markets as we look forward over the coming quarters.
Global equity markets weakened during the first calendar quarter of 2025, led lower by the US, amid a fallback in growth and large technology shares. The UK was one of the market leaders as it saw robust equity market gains overall. We continue to hold a balanced view on equities and will monitor what opportunities and challenges emerge from current economic uncertainty given ongoing tariff announcements and the change in market leadership globally, for example. US tariff announcements in early April added to market uncertainty and volatility. We will continue to monitor this situation for further opportunities and risks. In our view, despite a recent bounce in inflation levels in the UK, US and Europe, the driver this time round is from potential tariffs, rather than supply shortage. Therefore, we believe there will not be a return to the elevated, persistent inflation seen in recent years and rate cuts may continue in 2025 to support economic growth. We believe in having a spread of global equity market exposure.
In fixed income, credit still lacks an outperformance catalyst, in our view. Among government bonds, if rate cuts continue, shorter-term bonds could adjust towards more conventional positioning on the yield curve, as long as inflation is contained, and we see modest growth. However, if inflation persists and pushes higher, and there is a delay in rate cuts, then there could be further volatility in bond markets. We believe government bonds and credit should continue to provide income-generation and diversification benefits.
UK equities
Despite the recent relative strength of the UK equity market, in our view, it remains undervalued compared with some global peers. There are no clear catalysts that point to the potential for extended outperformance, however, but the market could still perform well on a relative basis. UK economic growth looks likely to remain broadly lacklustre in the near term, manufacturing data is weak, and the Bank of England (BoE) does not expect inflation to return towards its target level this year.
US equities
We continue to monitor trade tariff announcements from the new US president, which could negatively impact US economic growth and push inflation higher. Economic growth has been robust, and Federal Reserve policymakers are still expected to cut rates twice this year. However, market participants are now expecting a greater number of rate cuts in order to support growth, following the announcement of sweeping US trade tariffs globally in early April. This will be balanced by the Federal Reserve against the potential for higher inflation in the shorter term. Valuations remain elevated despite the recent pullback, yet long-term prospects are superior to many other developed markets.
Europe equities
The European Central Bank’s (ECB) rate-cut programme could help boost economic conditions in the currency bloc, but trade tariff uncertainty as well as defence and infrastructure spending, particularly in Germany, could have an inflationary impact. Valuation levels remain attractive but, like the UK, there are no apparent catalysts.
We continue to monitor trade tariff announcements from the new US president, which could negatively impact US economic growth and push inflation higher.
Japan equities
The Bank of Japan has been increasing interest rates to normalise its monetary policy. These adjustments led to notable volatility during August 2024 as carry trades unwound. There are near-term uncertainties amid the introduction of US trade tariffs that could hit Japan’s export-heavy economy, including new tariffs on the automotive industry and the announcement by the US of increased tariffs on Japanese goods. Further out, Japan may continue to see benefits from corporate governance reforms and other structural tailwinds.
Asia/Emerging markets
The emerging market and Asia regions, led by economies such as China and India, play key roles in terms of index composition. Support measures in the second half of 2024 boosted the Chinese market but worries about real estate and global trade tariffs persist, particularly following the April announcements from the US administration of higher tariffs on China’s exports to the US. Meanwhile, India’s equity market has continued to retreat from last year’s record highs, partly due to softening economic growth. The emerging market and Asia regions are attractively valued, and long-term growth potential remains, but we remain watchful for the impact of US trade tariffs and any reciprocal moves.
Developed Market Government Bonds
Interest rate reductions continued over the first quarter of 2025, with cuts from the BoE and ECB. There were notes of caution from policymakers, however, on economic uncertainty globally and the recent bounce in inflation. European government bonds have been impacted by concerns about the debt pressures from a pickup in defence spending. Further out, we think that the short end of the yield curve offers the best risk and return trade-off. Government bond yields fell (and therefore prices rose) in early April as investors sought defensive assets in the wake of US tariff announcements. We believe that this underlines the benefits of having a spread of assets in different geographies and with different characteristics.
Credit
Spreads remain narrow, continuing to constrain the potential for near-term outperformance, in our view. However, if there is short-term volatility, this may present credit opportunities.
Emerging Market Debt
Emerging market debt (EMD) valuations are broadly attractive and EMD could benefit from further US interest rate cuts. If recent US-dollar weakness continues, it is likely to benefit the asset class. Additionally, several key emerging economies have demonstrated pragmatic fiscal policy initiatives and have managed to tame inflation. We remain watchful for idiosyncratic risks from, for example, local politics.
