Monthly Commentary - March 2025

Increased uncertainty fuelled stock market volatility in March. Concerns about US economic growth and recent reversals in the shares of technology giants meant that more attractively valued markets in Europe and Asia performed better than the US in relative terms. With a cautious US Federal Reserve, inflation risks stemming from uncertain trade policy and concerns about high levels of government debt, we believe broadly diversified portfolios are likely to prove their worth during an uncertain period. 

In our multi-asset portfolios, we have maintained a positive stance on government bonds for some time, primarily expressing this through long-duration* UK government bonds. One of the key unknowns surrounding US President Donald Trump’s new tariffs is the impact they will have on US inflation, which in turn leaves the Federal Reserve’s next move open to debate. Given this uncertainty, we have chosen to hold our long-duration position in UK government bonds rather than their US counterparts.

United Kingdom

During March the UK faced several headwinds. The Office for Budget Responsibility reduced its 2025 growth forecast for the UK from 2% to 1%. In her Spring Statement, Chancellor Rachel Reeves announced welfare cuts of £4.8 billion, and she has not ruled out the possibility of tax increases, as she seeks to balance the books. Adding to the challenging picture was continuing uncertainty about US trade tariffs. All this weighed on sentiment, and the FTSE 100 and the FTSE 250 were down 2.0% and 3.9% respectively. On a more positive note, Consumer Price Index (CPI) inflation came in 0.1% lower than expected at 2.8% for the month of February.

“On a more positive note, Consumer Price Index (CPI) inflation came in 0.1% lower than expected at 2.8% for the month of February.”

United States

Growing concerns about the economic impact of tariffs weighed on US equities (company shares) during the month. February’s annual inflation data showed a fall to 2.8%, below forecasts and lower than January’s reading of 3%. However, despite mounting concerns about growth, interest rates were left unchanged. The Federal Reserve’s rate-setting committee expressed caution regarding the uncertain economic outlook, with slower growth and higher inflation likely to be the consequences of new tariffs.

Europe

In a widely anticipated move, the European Central Bank (ECB) cut interest rates by 0.25% in March. However, after the bank’s sixth rate cut since June, ECB President Christine Lagarde indicated a possible slowdown in the pace of rate reductions, noting that monetary policy has become “meaningfully less restrictive”. In Germany, the CDU/CSU and SPD parties reached a historic agreement on changes to the ‘debt brake’ – which strictly limits government borrowing – to enable increased defence spending. They also agreed to create a €500 billion infrastructure fund. European defence stocks have surged in anticipation of increased spending, as nations in the region prepare to take a greater role in ensuring its security.

Japan

Japanese equities are navigating choppy waters and continued to fall in March. The Nikkei 225 index fell over 5% during the month, meaning it is now down over 10% since the beginning of the year. Prime Minister Shigeru Ishiba warned that Donald Trump’s 25% tariff on imported cars would be a significant blow for Japan’s vital vehicle manufacturing sector and the broader economy. With cars accounting for about a third of Japan’s exports to the US, he stressed the need for a strong response, keeping all possibilities on the table. The Bank of Japan decided to keep interest rates unchanged at 0.5%, although surging rice costs pushed core consumer inflation up to 2.4% year-on-year, which was higher than expected and up from February’s 2.2% figure. Bank of Japan Governor Kazuo Ueda highlighted these persistent food price increases and stated that rate hikes remain on the horizon

Asia and Emerging Markets

Chinese technology stocks rallied in March following the release of Deep Seek’s artificial intelligence-powered chatbot. This lifted the Hang Seng Tech Index and caught off-guard many investors with a negative view on Chinese stocks. Despite the rebound, many investors remain cautious because of unresolved real estate issues and weak consumer confidence, and further measures to stimulate the economy are keenly awaited. In other emerging markets, returns for the month differed significantly. Brazil and Hong Kong performed strongly, while Taiwan and India declined amid tech stock sell-offs and growth concerns. Overall, the MSCI Emerging Markets index remained narrowly in positive territory for the month, in contrast to a sharp fall by the US S&P 500. Emerging markets were helped by factors including a weaker dollar and optimism around China’s artificial intelligence potential. Eastern Europe, Brazil and Mexico stood out, while Southeast Asia and Taiwan lagged due to economic uncertainty and trade tensions.

Fixed Income

The German government’s plans to massively increase borrowing to finance increased investment in infrastructure and defence left investors unsettled and resulted in European government bond yields** moving higher.

As March wore on, and Trump’s ‘Liberation Day’ tariff announcement on 2nd April loomed, the uncertainty meant many bond markets found it difficult to do anything but tread water. As a result, US government bond yields finished the month pretty much where they started.