Investment Update - June 2025

*All returns in local currency terms. Past performance is not a guide to future returns.

Overview

Strong returns were seen across equity markets globally, continuing the trend from mid-April, as President Trump conceded on the level of tariffs applicable to China. These were put on hold for 90 days while negotiations continued. The waters were muddied towards the end of the month, as the US Court of International Trade ruled that the majority of the tariffs were outside the President’s power to apply, although they remain in place while the administration appeals.

Early in the month, a trade deal with the UK was trumpeted by the US administration as an example of a positive impact from the tariff policy. The UK is one of the few countries that has a trade deficit with the US, so how much importance should be placed on this is debatable and a late May decision by Trump to increase global tariffs on Steel to 50%, brought into question how genuine it might be.

Although the changes in yield on the bonds in the table above suggest only minimal activity in the bond market, the opposite was true in terms of media coverage and larger upward moves in longer-term government borrowing rates in many major economies.

As an example, the US 30yr bond yield climbed from 4.68% to over 5% at one point during May. This was attributed to concerns over many governments’ ability to fund fiscal deficits, particularly in the US, and the fact that interest payments are becoming an increasingly higher proportion of those governments’ spending. It can also be ascribed to the current high level of uncertainty surrounding the global economy and, thus, interest rate backdrop. Governments are having to rely less on selling long term (20yr+) debt due to lack of investor appetite, as those investors are reluctant to lock in rates during this period of uncertainty. This is also going on when many governments are increasing the supply in the market by unwinding quantitative easing (selling or not rolling over expired bonds), which means they are no longer the buyer of last resort. This should be kept in perspective, as US rates were this high as recently as 2023.

United States

The bounce back in the S&P 500 was led by those stocks that have been hit hardest. The Magnificent 7 were helped by some strong earnings numbers from Nvidia. Whilst the highest returns were seen in the broad index, both Mid and Small cap indices delivered returns of over 5% percent.

The Federal Reserve continued its policy of pausing on interest rate cuts while they sought more clarity on any inflationary impacts of tariffs - much to the ire of the President - but two cuts are still being priced in by the market for some point this year. Unsurprisingly, consumer sentiment has reflected both the shock and relief over tariffs; the Conference Board Consumer Confidence Index increased in May to 98.0, up from 85.7, having declined sharply in April.

Consumer Confidence Index

*Shaded areas represent periods of recession. Sources: The Conference Board; NBER

US GDP declined by 0.2% in Q1, and perhaps to reaffirm the whipsaw effect in sentiment caused by the tariff announcements since April and their potential impact on the US economy, a US Economic Uncertainty Index (comprised of media coverage, tax provisions and economists’ forecasts), reflected similar volatility as that evidenced in markets in April:

US Economic Policy Uncertainty Index

Source: Baker-Bloom-Davis. Monthly data 1/1900-4/2025

The US Tax and Spending Bill managed to pass through Congress, before passing to the Senate. It was perhaps the perceived imbalance between tax cuts and spending and the impact on the US fiscal deficit that helped to contribute to US bond market volatility.

United Kingdom

The Bank of England cut interest rates by 0.25%, bringing them down to 4.25%. Following that, the April headline core inflation figures showed a steep increase to 3.53%, from 2.6% in March, which might suggest limited further progress on rate cuts.

The figures include the significant increases in water, gas and electricity bills, which were widely expected to adversely impact the overall level. The level of inflation for Services was 5.4%, which could well reflect price rises as a result of the increase in employers’ national insurance contributions. Core Goods inflation, in contrast, was only 1%. It is, therefore, likely that the BOE will discount the exceptions and monitor the underlying level of inflation moving forward in relation to their target level of 2%.

At an index level, the FTSE mid 250 index rose by over 6%. This has now returned around 3 times the level of the large cap 100 index over the last couple of months, reflecting the strength in sterling, which reduces imported input costs.

Europe

European markets responded to movements on tariffs in a similar vein to elsewhere. This was despite a threat by President Trump to apply an almost immediate blanket tariff rate of 50% on EU goods, as he became frustrated with the slow progress on tariff negotiations. The announcement initially caused a sharp sell off in equity markets, but this soon reversed.

Regardless, it was enough to stimulate immediate action from European Commission president Ursula von der Leyen, who managed to delay the threat to July 9th following a call with Trump. Despite the threat from tariffs, unlike the US, the EU area seems to be stabilising, with some growth forecasts for the region back to where they were prior to the US election.

Japan

As a significant exporter to the US, Japan’s equity market rallied as with elsewhere. However, it was the country’s government bond market that was the centre of attention globally. Long dated bond yields have risen significantly recently and there has been low take up of new long dated bond issuance.

This causes a problem for the Bank of Japan, since government debt is over 200% of GDP, following decades of supporting the domestic bond market in order to suppress yields to combat deflation. Now, this is being reversed; they are faced with the dilemma of stimulating a weak economy while inflation rises. Raising interest rates to slow inflation will weaken demand further and, at the same time, further increase the already increasing interest payments for the country.

One side effect of the higher bond yields is that it makes Japanese assets more attractive to domestic investors and there is speculation that there will be further repatriation of overseas assets, most notably the US. This would be stimulatory for Japanese asset prices.

Asia and Emerging Markets

Hong Kong, Taiwan and Korea were among the strongest performers during the month. Taiwan and Korea are both linked to the rebound in technology related stocks and have also allowed their currencies to appreciate against the dollar in an attempt to deflect any criticism from the US about abusing weak currencies to flood the US market (and thus help their case in negotiating tariffs).

China, it should be remembered, is still susceptible to weaker overseas demand for its products, with a weak property market overhanging domestic demand. The key issue for the authorities here is to see if they can stimulate the domestic economy to the extent that it can pick up some of the slack. Latin American markets were more subdued than elsewhere, as they had previously escaped much of the volatility associated with tariffs in April.

Summary

The continual flip-flopping over tariff levels is leading investors to be increasingly sanguine over the potential impact of any headline statements made by the US President: note the subdued market reaction to the imposition of a ‘non-negotiable’ 50% tariff on EU goods at the end of the month.

Nonetheless, the fact remains that with higher tariffs in place, we have a lower probability of company earnings expectations that were in place pre-‘Liberation Day’ being met, and a US market that is at a higher level with an equally high valuation.

We need to remain cautious over prospects. Fortunately, markets outside the US seem to be latching on to new dynamics that may reduce their reliance on the US. Additionally, whilst bond markets may seem volatile at times, it is important to remember that higher yields mean that there will be higher returns in the future; and to be mindful of navigating that volatility.

Rockhold Asset Management, with contribution from 7IM, Marlborough and LGT, June 2025

Disclaimer: This document is issued by Journey Invest Limited. Its content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.