What a week.

It’s been tough to watch the re-pricing action on the global markets recently. In one sweeping move, the new US administration—more wrecking ball than diplomat—upended the fragile ecosystem that is global trade. It ripped through agreements, alienated partners, and shook investor confidence to the core. The result? Heightened awareness, volatility and uncertainty across the board. So, let’s take a look at where things stand so far this year for investments made across the world in Euro currency.

• US Equities: down 17%,
• EU Equities: down 3.2%,
• Japanese Equities: down 8.2%,
• Emerging Market Equities: down 10.7%,
• Global Equities: down 14.2%,

Other key indicators:

• Volatility in global bond markets: 42%
• US 10-Year Treasury Yield: 4.43%
• Brent Crude Oil: down 14.8%
• Gold: up 20.4%

 The Big Moves

The most important reaction to the Trump Administration’s new Era, was actually what happened in the US bond market. As equities corrected, capital flowed into US Treasuries, briefly pushing the 10-year yield to around 3.9%. Then came a fresh US 10 year $39 billion bond auction, before which bond yields crept back up to around 4.4%—meaning higher borrowing costs for a country already running a $1.2 trillion trade deficit on a $37 Tn debt. There are signs some major bondholders exited their positions just ahead of the auction. Strategic? Maybe. Smart policy? Debatable.

Another major shift observed of recent past is the outflow of capital out of the US. Despite tech’s strong presence, US stocks are trading at a forward earnings yield of 4.5%—almost level with the 10-year Treasury yield. By contrast, European equities look relatively undervalued, and with rising concerns about US reliability, EU markets have quietly outperformed so far this year.

So, after offending allies and disrupting markets, President Trump may now face an unlikely adversary to keep him in check: the bond market. And as we all know from Liz Truss, that’s not a force to take lightly.

Our View

We continue to view volatility as a natural part of long term investing and remain committed to globally diversified portfolios. Today’s interest rate environment is more balanced than it has been in recent years. While global equity valuations are not necessarily cheap, they still sit at what we would consider fair value. However, we’re increasingly positive on European equities, given their more attractive fundamentals on
valuations and across business sectors.

Of course, as the year unfolds and central bank policies alter to check inflation, it is likely that new trade agreements will take shape. We expect more volatility throughout the year and as long term investors, it remains important to focus on the long-term objectives, not the short-term noise.

What This Means for You

For long-term, regular investors: We continue to recommend steady investment into global markets, diversified by sector, geography, and currency.
For lump sum investors: A staged approach to equity allocation may make sense, while moving more quickly on the conservative side of portfolios.
On bonds: Short-duration bonds offer a useful ballast. The US 2-year Treasury is yielding 3.96%, higher than the average 2.0% dividend yield on equities, and slightly more attractive than money market funds at 2.71%. With interest rates likely plateaued, this part of the market is looking better than it has in years.
For lower-volatility portfolios: We’re using money market funds and selective hedge fund positions to manage risk and seek opportunities.
As always: if you have any queries, please do feel free to contact me direct on 085 866 9813

Sources: Federal Reserve, ECB, CBOI, Treasuries, Sharepad®, Vanguard, Bloomberg, Ruffer, Davy Select. Euro Inflation measured by Harmonised Indices of Consumer Prices (HICP). Image created by ChatGPT.
Important: This note is for information purposes only and should not be taken as advice. Markets and data are subject to change.
Please seek personalised financial guidance. Lifetime Financial Planning is not responsible for any loss arising from reliance on the content above.