Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.
2025 has been full of surprises so far. But if you only looked at how the financial markets have finished at the halfway point, you might think nothing big had happened at all.
On the other hand, if you’ve had your news alerts activated on your phone then you’ll likely be aware of the major events that shaped the investment landscape this year. A lot of attention has been on the US following President Trump’s rollout of tariffs on goods from America’s key trading partners. This caused stock markets to drop to their lowest levels in 12 months.
These sweeping tariffs were bigger and more drastic than most investors first thought. As a result, markets moved dramatically with the outlook on the global economy looking more clouded.
Wary of the negative impact these tariffs could have on their exports, many countries were quick off the mark to begin trade negotiations. Trump ended up cutting or pausing many of the tariffs as discussion began. This pleased investors as stock markets recovered all their losses – but they remain tentative about what the future holds.
The US dollar has also been falling for the last six months. While this may be good news if you’re planning a trip to the States soon, it’s not so good news for investors. Despite US stocks recovering after Trump’s ‘Liberation Day’, because the dollar is still weakened, this means investments are worth less once converted into pounds.
We still wait to see exactly how these tariffs will impact the economy. For now, it’s still a relatively good picture with unemployment low, wages growing, people are still spending their money and the outlook for company performances is positive – particularly in the US and Japan.
The investment team at Coutts, the asset managers behind NatWest Invest, held their nerve as markets fell. The team have preferred global stocks since 2023, holding more in our funds compared to their benchmark. This meant that it was an uncomfortable few weeks as market volatility unfolded.
But it was a smart move to stay invested during the uncertainty. Selling out when markets were trending down would’ve meant cementing those losses and missing out when markets recovered.
It’s hard to ignore the fact that economic risks have risen and the possibility of a recession has edged higher. However, we don’t think this will become a reality given how strong the economy was before tariffs pressured markets.
This is why the team reduced their investments in global equities in May, but still remain modestly overweight. Should the political trade story evolve, they’re ready to take action within our funds.
The investment strategy behind our funds is guided by two processes: Anchor and Cycle. They focus on two different time horizons, complementing each other to determine which investment options could offer the best future returns depending on the amount of risk that comes with it.
This is the long-term strategic model (up to five years). Looking at the universe of potential investments, the process calculates each investable option’s potential return while taking into consideration if its initial price appears cheap or expensive, and other factors such as economic growth and inflation.
Focusing more on the shorter term, this is our tactical engine. Over the next 12-18 months, the team finds that asset performance is driven by shifts in the business cycle, and their impact on investor sentiment and company earnings.
Our investments lean into risky assets like stocks when the economic environment is supportive. And turn to more defensive positions when conditions appear more challenging.
We know that the rest of the year is unlikely to be smooth sailing. While we still see a lot of potential, there could be some bumps in the road. That is why we trust the experts at Coutts to manage the risk which we’re leaning into within our funds.
Their analysis shows that the economy is in a slowdown phase – this means slowing growth, not shrinking. Because of the fundamentals that have buoyed the economy to where it is today – like employment, wages and consumer spending – this is still a good time to lean into risk. Just less than before.
Artificial intelligence (AI)
Each quarter, companies announce how their business performed for the last three months and what they expect for the future. The buzzword that remains in these messages for many is AI. More and more companies are adopting it into their business strategies to become more efficient in an attempt to boost profits. This ranges from coding to customer service to marketing and so could be a dominant driver of stock market performance from all sectors.
Japan
Share buybacks in Japan’s stock markets grew by 70% year-on-year in 2024. A share buyback is when a company buys its own shares to return excess cash to its investors. Since last year, the amount companies have been buying back has been growing significantly – roughly £35 billion for the first four months of this year (source: NikkeiAsia).
Government bonds
In the past, government bonds helped investors during recessions: Economy contracts. Stocks go down. Central banks cut interest rates. Bond prices go up. While factors such as inflation mean rates might not be able to come down as freely, government bonds may still offer some protection.
Liquid alternatives
Unusually, stocks and bonds have been more positively correlated – moving in the same direction. This has increased the need for other diversifiers in some of our funds. The team has included a liquid alternatives fund which uses strategies that move independently from stock and bond markets.
Pound sterling
We have a positive outlook on the pound compared to the US dollar which has been declining so far this year. We still see the dollar as overvalued, so we’ve hedged some of US investments in pounds. This helped mitigate some of the losses when stock markets recovered in April but the weak dollar meant returns were still down.
We don’t expect the tariff story to go away any time soon. It’s likely the economy slows down and inflation will pick up pace. But it’s worth highlighting that tariffs aren’t the only thing on President Trump’s agenda while in the White House.
A bill is currently in the works for personal and corporate tax cuts which would be a boost for the economy. The bill would mean the US government potentially takes on more debt, though it could also encourage consumer and corporate spending.
So we see a more balanced picture ahead. This is only the beginning of Trump’s administration and so we expect more new policies alongside the refining of existing ones.
Big world events can make markets shift but this can sometimes be reactive and irrational, and markets usually return to focusing on the fundamentals.
Instead of reacting to every headline, we focus on our proven process. We look at things like company profits, economic growth, and central bank policies to guide our choices. That’s not to say we won’t face similar periods of discomfort in the near future, but we believe that those too could likely pass.
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