Q1 2025
This update aims to give you an insight into recent market events and how this may have impacted your investments. Our Multi-Asset Solutions team at Santander Asset Management UK considers the market outlook and the changes they’ve made to position our clients for the road ahead.
Summary of Quarterly Perspectives content:
- Review of the first quarter of 2025
- Investment performance of shares and bonds
- Our expert’s thoughts on the investment outlook
- How have we changed our positioning based on the outlook and our tactical asset allocation
- Summary of the key points
Reviewing the first quarter of the year
The first quarter of 2025 was difficult for stock markets. The MSCI World Index fell by 4.6%1 in sterling terms. President Trump's second term began with hopes for deregulation and tax cuts, but his tariffs and diplomacy strained NATO. However, Europe agreed to increase military spending, boosting defence-related stocks.
US shares were particularly weak due to slowing economic data and recession fears. Major stocks dropped, affecting main indices, and rate cut hopes faded as inflation rose before tapering off.2 Despite the economic gloom, European indices hit new highs but sold off when Trump announced a 25% tariff on car imports.
Japan weakened as the Bank of Japan tightened policy and US trade tariffs unsettled investors. Emerging markets outperformed developed ones, with Latin America and Eastern Europe showing strong growth.3
1st quarter asset class performance
Inflation and interest rates
Understanding Inflation and interest rates is important so you can make informed investment decisions. They may help explain why your portfolio may be behaving in a certain way. The two charts below provide a view of historic and current trends in these areas. This should help you to better understand what’s going on in the current economy.
When interest rates go up, it becomes more expensive to borrow money, which can lead to a decrease in spending and economic growth. This can cause shares and bonds to lose value and make it harder for companies to make profits, which can hurt your investment returns. However, raising interest rates can be a useful tool for tackling inflation. The slowdown in spending helps to reduce the upward pressure on prices that increases inflation. While rising interest rates may have a negative impact, it can play an important role in keeping inflation in balance.
Inflation and interest rates outlook
In the US, tariffs are expected to add about 1% to inflation this year. The Federal Reserve (Fed) faces uncertainty about how much of this cost will be passed on to consumers and how it will affect growth. Despite ongoing inflation and a tight labour market, the Fed has been cautious about cutting interest rates. This is due to the complex relationship between weak growth and higher prices.
In contrast, the ECB has been more aggressive in cutting interest rates. This has provided support to the European economy, which is expected to grow at around 1% this year. The ECB's actions have helped to stabilise the market and provide a buffer against economic uncertainty. European markets are seen as more resilient compared to US markets, partly due to these proactive measures.
In the UK, the impact of increased National Insurance contributions is already visible in business confidence and hiring data. Growth is expected to be around 1%, driven mainly by government spending. However, there is a risk of increased taxes in October, which could further impact growth.
We expect the BoE to cut interest rates a further three times this year, and the ECB twice. Markets expect the Fed to cut interest rates this year as they may be forced to respond to the weaker growth.
Share outlook
The outlook is cautious due to economic uncertainty and slower global growth. Market confidence about tariff rollbacks is viewed with doubt. We prefer safer investments like government bonds. European shares are favoured over US shares since European markets are currently less expensive, making them more resilient. The ECB's interest rate cuts will help to support their economy. In the US, consumer spending is careful, and we forecast growth to be around 1.2%, with a risk of a recession.
Bond outlook
Our current view on bonds is positive. Government bonds are preferred over credit given the market volatility. Investing in government bonds is seen as safer, even though they offer lower returns compared to credit. Interest rates are expected to be cut further by the Fed, which will help bond prices. Bond yields are at good levels right now. A slowdown in the economy will also support bond prices. Overall, we think government bonds are considered a safer bet in the current market.
Baffled by bonds?
Visit our Basics on Bonds page for more information.
Our tactical asset allocation
Our tactical asset allocation reflects our views on financial markets based on the current market conditions and our own market outlook over the coming months. The table below shows where we're underweight, overweight or neutral when compared to a funds benchmark.
If we're underweight, we think an asset class will perform worse than others, so we hold less of it. Being overweight means that we think an asset class will perform better, so we hold more of it. Being neutral means that we think an asset class will perform similarly to others. In that case, we'll hold a similar amount to the benchmark.
Summary
- Global stock markets posted a mixed set of returns over the first quarter of the year.
- The US market underperformed compared to other global markets.
- We expect the BoE to cut interest rates a further three times this year, and the ECB twice.
- Markets expect the Fed to cut interest rates this year as they may be forced to respond to weaker growth.
- Our outlook on shares is cautious due to economic uncertainty and slower global growth.
- European shares are favoured over US shares.
- We prefer bonds over shares, with a preference for government bonds.
Learn more, visit our website here for more insights into financial markets.
Note: Data as at 31 March 2025. 1MSCI, 31 March 2025. 2Trading Economics, 31 March 2025. 3Reuters, 3 March 2025.
Important information
For retail distribution.
This document has been approved and issued by Santander Asset Management UK Limited.
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Opinions expressed within this document, if any, are current opinions as of the date stated and do not constitute investment or any other advice; the views are subject to change and do not necessarily reflect the views of Santander Asset Management as a whole or any part thereof. While we try and take every care over the information in this document, we cannot accept any responsibility for mistakes and missing information that may be presented.
The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Past performance is not a guide to future performance.
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