Brooks Macdonald Investment Bulletin - 2nd May 2025

The Friday Wrap: hopes for US-China trade talks but significant uncertainties ahead

Markets are just hours into receiving a welcome shot-in-the-arm for risk-on sentiment after China said it was evaluating trade talks with the US. Elsewhere, we have had a busy week for company results, led by four of the US megacap tech giants which in aggregate have helped to soothe, a little at least, frayed investor nerves given the remarkable market volatility experienced over the past month. However, despite tariff fears ebbing in recent weeks, we would caution that we are not out of the woods on tariff related risks - the US reciprocal trade levies are in large part only paused not cancelled, and looking further ahead, there are significant uncertainties around the economic and inflation outlook globally, and for the US in particular. It is that caution which framed the thinking in our latest Asset Allocation meeting held earlier this week, and which saw our US equity holdings reduced, bringing our overall equity holdings back towards neutral relative to our strategic equity allocation ranges, and removing our previous preference for equities over bonds.

US-China trade talks hope

A China Commerce Ministry statement on Friday morning noted that “the US has recently sent messages to China through relevant parties, hoping to start talks with China” and that “China is currently evaluating this”. In terms of possible next steps, and as a condition to negotiations, the statement asked to the US to “show its sincerity and be prepared to correct its wrong practices” by scrapping the current reciprocal tariffs. The statement signals the strongest indication yet that the trade tariff stalemate between the world’s two-biggest economies could get resolved. For context, the positive reaction in markets comes against US-China tariff rates on both sides that are so high currently that they effectively amount to a trade embargo in all but name. It is still very early days however, and there are thorny trade issues for both sides to address.

100 days of Trump

This week saw US President Trump mark the 100th day of his second presidential term in office. Trump’s first 100 days have arguably bookended two very-different investment backdrops as far as markets are concerned: before Trump’s 2 April “Liberation Day” tariff announcement, and afterwards. All in all, it has been quite the roller coaster ride, with markets dropping sharply in the wake of Trump’s reciprocal tariff announcement, only to go on to stage an impressive rally as Trump has walked back or paused the most extreme parts of his tariff agenda. So far, through to Thursday’s close, the US S&P500 equity index has enjoyed 8 days in a row of gains, its longest winning streak since August last year - it leaves that index “only” -1.18% below its 2 April close. Elsewhere, the pan-European STOXX600 and UK FTSE100 equity indices are also seeing a run of gains, with the pan-European STOXX600 equity index also notching up 8 days in a row of gains, while the UK FTSE100 equity index has notched up a 14th daily gain in a row, a joint record since the index was formed back in 1984 (all in local currency price return terms).

Canada’s election result

Canada’s federal election earlier this week marked a remarkable recovery in fortunes for the incumbent Liberal Party minority government, led by Mark Carney who took over the party leadership in March. Following the vote, the Liberal party clung to power, winning 168 seats, ahead of the Conservative Party’s 144 seats, but shy of the 172 needed for a majority. While the Liberal vote has done much better than had been hoped earlier this year, the prospect of a coalition government leaves on the table a degree of political uncertainty for markets to have to factor in. That said, on a more constructive note however, the results will be seen as a sign that a centrist political party can still succeed electorally even against the backdrop of a more extreme policy-driven US Trump administration.

What does Brooks Macdonald think

Equity markets have staged an impressive recovery over recent weeks, but the outlook remains significantly weaker. While tariff headline rates can change at short-notice, it is likely that business and consumer confidence will have suffered a more enduring blow. We are mindful that the most extreme parts of US President Trump’s tariffs have only been paused, not cancelled, and while trade-levy negotiations are likely progressing, it is highly probable that economic activity has been adversely affected. Trade tariffs not only risk lower economic growth, but also higher inflation which may limit the scope for interest rates to fall, and this will take time to come through in the economic and corporate data over the coming months. It is this narrative view that has framed our more cautious asset allocation positioning taken this week. A challenging market environment reinforces our focus on selective equity allocation - after the broader equity rally from April lows, we have this week reduced our US equity holdings (by reducing smaller more domestically focused companies that are typically more sensitive to economic shifts), in favour of adding to UK fixed income. A cautious outlook now leaves our asset allocation more balanced across equities, bonds and alternative assets, removing our previous preference for equities over bonds.

Source: Brooks Macdonald

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