Global equities last week were broadly unchanged in sterling terms for the third week running. This eerie calm inevitably leads one to thoughts of ‘calm before the storm’ and such like. We certainly believe market volatility will pick up again but our expectation is more for the occasional squall rather than a full blown storm. Indeed, markets were up 1.4% in local currency terms last week, providing some comfort.
Tariffs were yet again a major focus with President Trump outlining his plans for ‘reciprocal’ tariffs. The good news was that these willl not be imposed for a few months yet. Policy recommendations are to be made to the President on 1 April, on the basis of which a ‘fair and reciprocal’ plan for trade will be formulated by mid- August. The hope is that this four-month window will allow for negotiations to take place with the ‘offenders’ and limit the extent of the eventual tariffs.
The bad news was that the basis for setting the reciprocal tariffs will be broad and aim to match not only other countries’ tariffs but also other taxes and non-tariff barriers. The elephant in the room here is VAT. If this is included, this would boost reciprocal tariff rates considerably for the likes of the EU and the UK.
The US consumer price numbers and Fed Chair Powell’s testimony to Congress were also centre-stage last week. Inflation came in higher than expected in January, with the headline and core rates both edging up to 3.0% and 3.3% respectively. Still, the bond market’s reaction was limited and both US Treasury and UK gilt yields ended the week little changed.
Meanwhile, Powell did his best not to change his tune, reiterating that the Fed was in no hurry to change its policy stance. The market now expects no further reduction in US rates before September.
While equities overall have been becalmed recently, there has been some notable divergence in performance between regions which continued last week.
Most notably, the US has risen only 1% over the last month, underperforming the rest of the world by around 3% in sterling terms and reversing some of its earlier Trump-related outperformance. The dollar has weakened recently, as fears of immediate wide-ranging tariff hikes have eased, and the Magnificent Seven have lost a bit of their allure following the DeepSeek news.
The star performer over this period has been China which is up as much as 14%. Just as DeepSeek has undermined the Magnificent Seven, it has bolstered hopes that Chinese tech companies can do just fine despite the US restrictions on exports of semiconductor chips. There is also relief that Trump’s ire has so far been more focused on US allies than China. Finally, the recent rise just goes to show that when a market is very cheap as is China, it doesn’t take much to trigger a bounce.
China is the largest country within the emerging markets index with a weight of close to 30%. But as ever, the performance of countries within the index has differed significantly. Falls in India and Taiwan, the next two largest constituents, have limited the gain in emerging markets overall to 3% over the last month.
Cheap valuations have also partly been behind a recovery in European markets, which are up 8% and have now recovered around half of last year’s underperformance. The good news, for the markets at least, is the start of negotiations for a ceasefire in Ukraine. However, hopes that any such deal will lead to a quick and substantial fall in European energy prices seem optimistic. Although gas prices may have fallen 10% over the last week, they are still up 100% from their low point a year ago.
UK equities have also perked up recently, gaining 6.5% over the last month. Here too, lowly valuations have been a support. Last Friday’s fourth quarter GDP numbers also suggested the pessimism over the prospects for the economy had become somewhat overdone. Rather than posting a small decline as had been feared, activity saw a small gain on the back of a rise in government spending.
This latest outperformance by regions outside the US highlights the potential for the US market to underperform as a result of its excessively high valuation, even while belief in US exceptionalism remains intact. We continue to believe a well-diversified regional exposure is essential, both for valuation reasons and the risks posed by the dominance of the Magnificent Seven.
This coming week, the UK labour market and inflation data out on Tuesday and Wednesday will be centre stage for UK investors. As for global markets, aside from the inevitable new policy announcement from President Trump, it should be a relatively quiet week – with the US, EU and UK business confidence numbers on Friday the only data out of any note.
Rupert Thompson – Chief Economist