The quarter could best be summed up as a game of two halves – sharp volatility following the announcement of sweeping US tariffs and Trump’s “Liberation Day” measures, and a swift recovery as tariffs were deferred and negotiations with China recommenced. Some of this recovery can also be put down to the weakening US dollar and some easing in Middle East tensions.
Market Performance
Equities
- Global equities rebounded sharply after the initial volatility following the announcement of US tariffs, with major indices up between 11 & 12% on average (in USD terms). The weakening dollar helped to boost returns for non-US equities, especially in Emerging Markets and the Eurozone.
- In the US, the S&P 500 saw gains of approximately 11% with the Russell 3000 delivering the same. The NASDAQ showed the strongest performance though surging around 18%.
- UK equities showed a more moderate increase of between 4 and 5%.
- Japan’s Nikkei 225 ended up around 13% but Emerging Markets were the star performers over the quarter, with South Korea and Taiwan markets closing approximately 34% and 24% up respectively.
Bonds & Fixed Income
- The 5-year yield on US Bonds fell 16-17 bps to ~3.97%.
- The 10-year yield saw a slight increase of ~2.7 bps ending the quarter around 4.23%.
- The 10-year yield on UK Gilts saw a small rise of ~12 bps, ending near ~4.69%.
Interest Rates
- The Bank of England cut the base rate from 4.50% to 4.25% in May and chose to maintain this rate at the following meeting in June. A rate cut is however expected in August with further cuts possible later in the year.
- Despite pressure from President Trump, the US central bank chose to keep interest rates unchanged with the key rate between 4.25% and 4.50%. US rates have remained at the same level since December 2024.
- Although investors are hoping for a rate cut by September, several US banks are not expecting any changes before the end of 2025 and then a series of cuts starting towards the end of Q1 2026.
- It is still possible rates will be cut to between 3.75% and 4% by December, as predicted by the Fed earlier in the year, however political pressures, persistent inflation and tariffs may lead to these cuts being pushed back.
Key Talking Points
- US tariffs dominated during early April but the decision to defer and for talks with China to continue allowed investors to regain some confidence.
- Tensions between Israel and Iran in the Middle East escalated in June and resulted in the US leading strikes on Iran’s nuclear sites. Despite an initial sharp increase in oil prices, the markets remained relatively unphased by developments as fears of a wider conflict eased.
- Russia’s war with Ukraine continued to drag on with no signs of a peace deal on the horizon and fears of Putin launching a summer offensive.
- Inflation continues to be an issue although nowhere near the highs of 2022/23. UK inflation initially fell from 3.5% to 3.4% in May, before rising again to 3.6% in June, above the Bank of England’s target of 2%. Further interest rate cuts are expected but stubborn inflation may alter the BofE’s approach.
Edgewater's View
- Performance during the quarter once again shows the market’s resilience, and ability to adapt, and highlights the importance of not making snap decisions during a downturn.
- Market volatility is however likely to continue in the short-term.
- A diversified and actively managed portfolio remains a key priority for investors at all levels in the months and years ahead.
- Edgewater’s Product Provider Partner Committee undertakes a review of the funds on the whitelist of approved products and recently concluded that changes are recommended for clients with holdings in the chosen sustainable funds. Switches have now been completed for all affected clients who asked to proceed and the PPPC will continue to monitor the performance of all whitelist funds on a monthly basis.
- Edgewater is not a Discretionary Fund Manager and any changes to investments will always be made with your agreement.
Edgewater are committed to working with you to adjust your portfolios as needed in line with your aims and objectives.
Please do not hesitate to get in touch if you would like to discuss any of the items covered in this summary in more detail, or if Edgewater can be of any assistance with your financial planning needs.
Martin Bannister DipPFS, CertPFS (DM), Certs CII (MP & ER), Senior Financial Consultant
mbannister@edgewater.co.im
