Portfolio Perspectives, May 2025

Stay ahead of the curve with our experts’ breakdown of this month’s market shifts and the insights shaping our portfolio positioning.

Fast reading:

It’s been a bumpy journey for markets so far in 2025 given extreme tariff announcements. A tentative de-escalation has seen markets recover.

• At the closing lows of April, global equities were down 12% in 2025, and euro denominated returns were -15%; the S&P 500 declined about 20% from its February high. Equities have largely recovered the April sell off. Our outlook is broadly back to where we started the year and for continued economic expansion with near trend growth. Market movements have changed the relative attractiveness of some sectors and regions. Hence, we shifted some equity exposure back to the US from Europe at the start of May.

• April saw fears of combined global growth and inflation shocks and a global market sell-off. Long-dated US Treasury yields reached highs not seen since prior to the Great Financial Crisis. We continue to favour the short and intermediate part of the euro yield curve and remain comfortable being overweight relatively short-maturity investment grade credit.

• Portfolio construction aims to blend different assets together with the aim of reducing risk in the form of volatility or drawdowns. However, diversifying among assets does not typically do as much to reduce portfolio risk as one might hope. Bonds are most-often used as the risk-reducing counterpart to equity portfolios but bonds’ reactions to economic or macro news is not always predictable. One potential antidote in uncertain times is reduce risk even further within the bond portfolio, sticking to relatively short- or mid-maturity bonds.

April’s volatility has turned to May’s recovery

April was a difficult month for global equity markets as the US administration opened with extreme tariff announcements. These were met with rounds of retaliatory tariffs from several trading partners. At the closing lows of April, global equities were down 12% in 2025, and euro denominated returns were -15%; the S&P 500 declined about 20% from its February high. Since then, the trade and tariff situation has significantly de-escalated, first quarter earnings season was strong and macro-economic data suggests slower but steady growth continues.

Of course, trade and tariff related volatility could return but at the time of writing global equities are up 3% year-to-date (ytd) in local currency terms; euro strength means that euro-based investors have a -2% ytd return. The recovery that has occurred so far in May has been led by the regions and sectors that fell the most earlier in the year – the US and cyclical or growth sectors such as Information Technology, Consumer Discretionary, Communications Services and Industrials. This is not surprising in a recovery from a ‘growth scare’. While the range of potential outcomes is wide, updated consensus estimates for US real Gross Domestic Product (GDP) growth shifted lower by ~0.4% for 2025 and 2026 to reflect the impacts of tariffs and uncertainty, to ~1.5% growth. Given the likely tariff outcomes now seem less bad than embedded in forecasts, there could be upgrades to the growth outlook from here.

It’s been a bumpy journey for markets so far in 2025, but our outlook is broadly back to where we started the year. Our outlook is for continued economic expansion with near trend growth, albeit in a mature cycle phase and with slowing but higher than target inflation levels. Despite some cuts to growth forecasts, consensus still anticipates over 8% Earnings per Share (EPS) growth in 2025. Not surprisingly, the growth is biased to secular growth sectors or those coming off weak 2024 earnings. Market movements have changed the relative attractiveness of some sectors and regions. Hence, we shifted some equity exposure back to the US from Europe at the start of May, although this was primarily an intra-sector move.

Sebastian Orsi CFA, Senior Research Analyst

Turbulent times as markets react to US led volatility

Since our last edition of portfolio perspectives, markets have had a turbulent time due to US-led policy uncertainty. US reciprocal tariff announcements led to fears of global growth and inflation shocks and a global market sell-off. Long-dated US Treasury yields reached highs not seen since prior to the Great Financial Crisis.

Announcement of a 90-day delay to reciprocal tariffs later in the month meant investors could breathe a sigh of relief as US officials began to negotiate deals with other countries. With all the activity in the US heightening uncertainty, euro area bonds significantly outperformed other regions’ bonds in April. April saw the biggest weekly widening in the 10-year US Treasury-German Bund yield spread since German reunification in 1990. Euro area sovereign bonds significantly outperformed corporate bonds, returning near 2%, while the benchmark Bloomberg Euro Aggregate Index posted a 1.6% total return on the month.

Another 25-basis point rate cut from the European Central Bank on the 19th of April brought the policy rate to 2.25%. The theme of divergence in monetary policy action remains apparent between the ECB and the Federal Reserve, which has yet to initiate the next phase of its rate-cutting cycle. We continue to favour the short and intermediate part of the euro yield curve, as reflected in portfolio durations moderately below that of the benchmark index. We also remain comfortable being overweight relatively short-maturity investment grade credit as corporate fundamentals in our view remain strong despite volatility, suggesting default rates should stay low by historical standards.

Moyah Flanagan, Fixed Income Strategist

Portfolio construction – reducing risk can be a risky business

Portfolio construction aims to blend different assets together with the aim of reducing risk in the form of volatility or drawdowns. In an ideal world, different assets would promise healthy returns over time, and if they were to be volatile they would move up and down at different times, thereby keeping the overall portfolio volatility relatively low as its value grows. In practice, this does not happen: assets with higher expected returns tend to move simultaneously and so diversifying among them does not typically do as much to reduce portfolio risk as one would hope. The main reason for this is that risky assets like equities and credits tend to have similar macro factors driving much of their movement. Interest rate movements, economic shocks, geopolitics can all have a very wide influence. It’s still worth diversifying of course, to reduce idiosyncratic risks from any single risky asset, but portfolio construction needs to go further to materially reduce risk.

To counteract this problem, lower risk assets are used to reduce overall portfolio risk. The assets don’t necessarily need to move at different times – it can be enough to start that they just typically move less. Bonds are most-often used as the risk-reducing counterpart to equity portfolios. Much of the time this works and the ballast provided by bonds keeps portfolio risk relatively contained. Bonds’ reactions to economic or macro news is not always predictable however, and sometimes they correlate in a significantly positive manner with equities. And then the risk-reducing impact is far less. Adding other assets, such as precious metals can also help, but they can be highly volatile and so can only reasonably be added in modest amounts.

One potential approach in uncertain times is to reduce risk even further within the bond portfolio, sticking to relatively short- or mid-maturity bonds, i.e. closer to cash, whose prices typically move less to macro news than longer-dated benchmark bonds. These shorter-dated bonds don’t provide the ultimate risk-reduction of a negatively-correlated asset, but they can consistently provide ballast for risk reduction.

Joe Prendergast, Head of Investment Strategy