Donald Trump 2.0 has grabbed the headlines in the first couple of months of 2025 and has now had the biggest impact on global equity markets so far this year. While the Chinese AI announcement about DeepSeek was a surprise to most people and impacted markets in the short term, Trump has once again been consistent in his inconsistency and plays into themes that we believe are likely to be important for the rest of this year.
For the last few years, we have witnessed the fragmentation of globalisation and the move to a multi-polar world in both politics and economics, through different forms of isolationism, new trading blocs and nearshoring. This trend is being entrenched further through the new Trump administration, including the threatened and real imposition of tariffs and its approach to international relations. This will have consequences for growth, inflation and central bank policies as economic cycles will be less in sync across the major economies.
We are seeing this play out at the moment in countries’ different approaches to their interest rate policies. The European Central Bank has been cutting rates the fastest while the UK has said it will reduce them slowly even though two members of the Monetary Policy Committee voted for a 50 basis points cut in February. In contrast, Japan is raising rates, and the US is somewhere in the middle as they carefully watch the pace of rising inflation. There are suggestions that the next move in US rates could even be up.
Going forward, it is clear there will not be a one-size fits all when it comes to central bank policies and inflation globally will be higher than we were used to between the Global Financial Crisis (GFC) and Covid. As a result, interest rates have not been reduced as quickly as was expected 12 to 18 months ago.
Another theme for the year ahead is what do the extreme valuations for mega cap US tech-centric stocks mean for portfolio management. The AI frenzy in markets was given another boost after Trump’s election in early November 2024 and ensured a positive year for global markets dominated by the few mega caps. These stocks started 2025 at valuations that looked stretched, being almost priced to perfection. This is especially the case given the share prices of the Magnificent 7 stocks soared at a pace that has been unprecedented in history, even compared to the rise of the Nifty Fifty, the Japanese stock market or the tech bubble of the late 1990s. There were certainly reasons for investors to be cautious at the start of this year and we have seen heightened volatility recently.
It is not entirely surprising, therefore, that in the first couple of months of 2025, some of the best performers have been regions unloved over the past few years, including the UK, Europe and emerging markets. There has been no specific catalyst, but these markets are attractively valued especially compared to US large caps. It is always risky to presume that those investments which have been the star performers will continue to be so and important to remember that we have not always had US exceptionalism.
What do these trends mean for portfolio management? We believe there will be a broadening out of winners in global stock markets given the fragmentation, divergence in policies and valuation differentials. This means it will be important to be meaningfully diversified across asset classes, regions and investment styles, especially as the US now accounts for around 70% of global equity markets.
We believe it is beneficial to build portfolios which blend active and passive vehicles depending on the appropriateness of each asset class and market but that are actively managed in terms of the decisions of where and how to invest. The divergence in valuations and policies is certainly opening up opportunities for active investment management. Variations in interest rate policies, for example, make it more beneficial to actively manage exposure to bonds and duration. Whether we use active or passive vehicles, we manage the funds and portfolios using the same active Multi-Asset investment process.
The divergence also makes it more beneficial to rebalance portfolios actively. Regularly trimming or adding to particular asset and sub-asset classes according to pre-set targets enables the strategic asset allocation of the portfolio to be maintained.
Active management must be part of rebalancing. There is a decision to be made over whether to reallocate investments only to bring the portfolio back into line with the strategic asset allocation or also focus on seeking to enhance returns by making changes to reflect your tactical view of growth and valuation opportunities.
Finally, we stand by the importance of long-term investing focused on fundamentals rather than short-term political or market noise. The turning points for markets often come when news flow is negative. And remember that popular investments are rarely cheap and cheap investments can offer excellent long-term return prospects.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments
The single strategy funds managed by the Multi-Asset Team:
Consider environmental, social and governance (""ESG"") characteristics of issuers when selecting investments for the Funds. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. Hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the funds over the short term. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of single strategy funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
