Escalating geopolitical tensions and the implementation of tariffs from the US on imports from China, Canada and Mexico weighed on financial markets last month. The continued uncertainty around how far tariffs will go also extended into the global economy, as we saw downward revisions to GDP in the US, along with weaker sentiment from businesses and consumers.
Despite this, the Federal Reserve looked beyond the potential inflationary pressures from tariffs and maintained its policy stance in March, keeping its policy rate at 4.25-4.5% and reiterated that it expected two rate cuts this year.
Against this backdrop, US equities saw a sharp decline, with the S&P 500 falling 8% (in sterling terms) as investors assessed the risks of a global trade war. European equities, which initially rallied on news of Germany’s planned €500bn spending package, ended the month down 1.6%. UK and Japanese equities also declined, though they outperformed the US in relative terms, finishing down 2% and 1.6%, respectively.
Although major equity indices fell, our allocation to defensive sectors—such as Healthcare, Utilities, and Consumer Staples—helped offset some losses. The iShares Edge MSCI World Value fund also performed relatively well, benefiting from the market rotation away from economically sensitive and overvalued sectors.
It was a volatile month for fixed income markets. While corporate bond spreads remain tight, we did see some modest widening last month. Our holding in the iShares Ultrashort Bond fund, which is less sensitive to changes in interest rates, was flat on the month.
Diversifying assets once again provided returns uncorrelated to traditional asset classes. The allocation was a positive contributor to performance last month, with the AQR Style Premia fund, which goes long and short based on market factors such as valuations, momentum and carry, was up 2.5%. We also saw gains from our position in a US 2s10s Steepener strategy, as longer-term yields rose, along with our FX Value position, which was up 5.4% in a period where we saw elevated volatility in currency markets.
