MONTHLY ECONOMIC & INVESTMENT REVIEW – MARCH 2025 REVIEW
Global equity markets faced broad pressure in March 2025, with most major indices finishing the month in the red. The downturn was driven by escalating geopolitical tensions, especially around renewed U.S. trade disputes, which reintroduced tariffs and sparked fears of a global slowdown. Investors reacted to these developments with caution, shifting capital into safer assets like bonds and gold.
We have been writing for some time about the potential disruption that may occur on financial markets from the imposition of US trade tariffs. However, the magnitude of the recent announcements by the Trump administration of a universal 10% tariff plus reciprocal tariffs on many of America’s trading partners has surprised many, including us.
Clearly the Trump administration is using this blunt instrument as leverage for future trade negotiations, and we have already witnessed some walk backs in early April for those countries that did not retaliate. However, the situation between China and the US is starkly different. An all-out trade war has erupted with both countries escalating tariffs on multiple occasions over a matter of days. At the time of writing, US imports into China will incur 84% tariffs, while Chinese imports into the US will incur a whopping 145% tariff, the highest since the 1930’s.
Financial markets have been well and truly shocked by the tariff announcements and have negatively reacted and were approaching bear market territory prior to the recently announced 90 day pause to reciprocal tariffs. The S&P 500 finished March 2025 with a significant loss, sliding nearly 6% for the month. This marked the index’s worst monthly drop since late 2022. The All Country World Index excluding Australia (ACWI) was down 4.7% on unhedged currency terms. Australian shares outperformed, falling relatively less (-3.3%). Global small cap stocks also outperformed, falling only 3.9%, while Emerging market shares were the best performers managing a modest positive gain of 0.4% for the month of March.
International sovereign bonds were down -0.5% in March. While US government bond yields were flat, Government bonds in the EU saw yields rise significantly after the announcement of Germany’s new fiscal spending package on defense and infrastructure. This saw German government bond yield move 33bps higher in March, finishing the month at 2.74%. Australian sovereign bonds were up 0.1% in March, as Australian bond yields were largely flat.
The performance of interest rate sensitive assets was mixed in March. International listed property performed poorly, down -2.6%, due to rising bond yields; while International listed infrastructure performed better, up 1.6% in March. Australian listed property fell over the month, due to the continuing impacts of capital raising in the sector.
The AUD was largely unchanged against the USD in March, but dropped significantly against the GBP and EUR after the announcement of the German fiscal spending package. It fell below $0.60 USD in early April but has since retraced back to $0.63. The Japanese Yen was one of the best performing currencies as investors moved out of USD and into the perceived safety of the Yen.
OUTLOOK
- In our last monthly Economic review, we expressed concern over Trump tariff policies and there likely impact on inflation expectations and the subsequent impact on financial markets. The breadth and magnitude of these tariffs has the potential to not only raise inflation but to also push the US and many of its trading partners into recession. Therefore, we have become more bearish and believe that barring a dramatic de-escalation of the trade war, the US and its major trading partners are headed for an economic recession.
- It is our opinion that Equity markets have not yet fully priced in a recession and remain vulnerable to further downside risk. Therefore, we believe it is too early to overweight into Equities.
- Similarly, Corporate credits have fallen in price (risen in yields) but are nowhere near recessionary levels and again we believe it is too early to overweight into this asset class. Consequently, we prefer Global Sovereign bonds over corporate credits.
- Although many commodity prices have also dropped post the Trump tariff anouncements, we feel there is further downside risk to most commodities apart from Gold which we regard as a defensive asset and inflation hedge.
- Given our recessionary view, we have changed our view on the US dollar and now believe that it will not be the stalwart we were expecting. We think the Japanese Yen will usurp the USD and consequently investors are likely to roll into Yen as a safe haven.
- Given the negative correlation of the $USD to Emerging share markets we have also become more bullish on Emerging equities and are subsequently recommending a modest overweight.
- The Australian Dollar is prone to weakness in the face of a global recession. Although we believe maintaining an unhedged currency exposure is warranted, we also are prepared to call out covering some of this position should the Australian dollar fall below $0.60 USD.
- Domestically, we continue to expect growth to remain weak, as higher interest rates and cost-of-living pressures are likely to keep consumption suppressed. Consequently, we are cautious on Australian cyclical stocks and prefer defensive stocks with relative earnings certainty. In addition, we favour Australian sovereign bonds over cash, with interest rates likely to have peaked this cycle.
Lastly, Japanese equities (unhedged) offer an interesting play on corporate restructure. Shareholder activism and a range of reforms are encouraging Japanese corporates to increase their focus on greater capital efficiency and liberate cash idly sitting on balance sheets. Japanese equity prices remain relatively inexpensive and are likely to re-rate higher if these reforms are successfully adopted.