Quarterly investment update

Market review

Despite a strong start in January for both domestic and overseas equities, February and March brought rising uncertainty around the potential impacts of tariffs, deregulation, fiscal policy and immigration under President Trump’s administration. The MSCI World ex-Australia Index (Hedged into AUD) returned -2.5% for the March quarter.

Uncertainty peaked in March, with equity markets generally weaker on continuing concerns around any potential tariffs and their consequences. Volatility increased materially after quarter end once the US announced the official tariffs on a range of trading partners.

In the US, the S&P 500 was weaker over the March quarter, returning -4.3%. European equities outperformed the US market throughout the quarter as expectations grew for a more expansionary fiscal outlook and higher defence-related spending. The US Federal Reserve held interest rates steady at 4.5%. At its March meeting, the Reserve’s board highlighted the recent increase in uncertainty around the economic outlook, and marginally lowered its expectation for economic growth for the year.

Australian equities were weaker over the March quarter, returning -2.9%. The information technology sector underperformed the broader index, returning -18.2%. Utilities and telecommunication services were two of the strongest performing sectors. Following CPI figures in January that suggested inflation was gradually returning to target, the Reserve Bank of Australia (RBA) cut interest rates at its February meeting. However the RBA flagged that it would maintain a cautious stance on the potential for further rate cuts. Gross Domestic Product (GDP) data to December 2024 released during March showed improving GDP growth and an end to the ‘per capita recession’.

Both Australian and overseas bonds delivered positive returns for the quarter of 1.3% and 1.1% respectively. Falls in US bond yields over the quarter likely reflected a marginal rise in uncertainty for the US economic outlook and geopolitical environment.

Looking ahead

After an initial post-election surge, share markets have been jolted by the Trump administration’s unconventional approach and determination to upend long-held global norms. The US economy, which remained resilient through most of last year, is also showing signs of turning. Consumer and business confidence has declined, no doubt impacted by Trump’s approach, and may forewarn of a more general economic slowdown. The fear of a recession that never eventuated last year is now back on the agenda.  

Financial markets don’t respond well to uncertainty, yet this is currently the environment we’re in. Many of last year’s winners, such as US domiciled growth companies like the “Magnificent 7”, have fallen sharply back to earth. There are also concerns that Trump’s approach may have heralded an end to “US exceptionalism”, and in turn a generalised flight from US assets.   

Despite that, there are pockets of optimism. European share markets have, so far, been a beneficiary. The prospect of a more isolationist approach from the US, and an aggressive Russia, has led to a rethink of self-imposed fiscal restraints and an energised defense posture, which could boost growth and benefit local industry and companies. The economic outlook in China also seems to have stabilised; the property market remains weak but may have troughed, and industrial output has strengthened recently. However, the sustainability of any recovery in China is questionable without broader fiscal measures to assist households and consumption. Relations with the US have also taken a turn lower.   

President Trump’s brash and unconventional approach will continue to see volatility in markets for some time yet. His domination of the daily news cycle and willingness to, at times, abruptly change course, creates noise and leads to confusion, and the impact on the real economy is significant. Now more than ever it’s vital to abide by long-held investment principles – namely diversification and investing for the long term.