CFS Market Insights: March 2025

Welcome to CFS Market Insights. Thanks for joining us. So we're going to talk about three things today. The first thing is events in the United States, then look at some of the developments in Europe, and then finally talk about things closer to home in Australia.

If we look at the first five or six weeks of the Trump presidency, I think one of the things that is emerging is a level of uncertainty about the direction of policy. If we think about the aftermath of the election, the feeling was that with a clear mandate, some of the potential political uncertainty was going to be removed.

What we've seen with the administration's start is a level of unpredictable policy making on tariffs, defense, and other critical areas of government, which have actually created quite a volatile environment for businesses.

Typically, elections do bring a sense of certainty as businesses can anticipate incoming administration's policies. However, what we've seen in recent weeks is that the unusual execution by the Trump administration has actually increased the level of uncertainty around future policy making.

The way that this manifested itself most recently is in the Purchasing Managers’ Index data (PMI), which came out a couple of days ago, which showed a significant decline particularly in the services sector. 

So the PMI is actually a leading indicator, and it highlights the immediate reaction of businesses to uncertainty around policy making. So companies are actually indicating they're finding it difficult to plan for the future, and that's leading to a slowdown in hiring intentions and also capital investment.

So what we're seeing is this sort of slightly erratic nature of policymaking, coupled with some lack of clarity about the direction going forward, has really led to businesses feeling in a state of flux.

We are starting to see this policy uncertainty feed through into capital markets, and in the last couple of weeks we've seen equities be quite weak, particularly the market darlings, over the last sort of 12 to 18 months or so, in the technology sector, and in other areas that are seen as beneficiaries of a Trump presidency. And this is something that we are watching closely.

So the second topic to talk about is some developments in Europe. And in the last week or so we've seen the results of the German election, which is bringing about a change of government in Europe's largest economy.

This is also important because the change of government is taking place at a time of weak economic growth in Germany and also conversations around a fiscal spending break that is actually embedded in the German constitution.

One of the key focus of markets in the short term is whether or not this spending break is actually going to be removed, which would allow stimulus to feed through into future economic growth and really kickstart what is Europe's largest economic engine.

The political changes in Germany are actually adding another layer of complexity to global markets, as businesses and investors continue to navigate policy uncertainties on both sides of the Atlantic.

What is interesting from a returns perspective is that European equities have actually performed better than the US equities since the US election. Partly, that's to do with the significant undervaluation of growth prospects in Europe. But we also believe that investors are starting to respond to the level of policy uncertainty between both Europe and the US.

We've also seen a significant amount of discussion around ending the conflict in Ukraine. What we have seen is some significant outperformance by defense-related stocks within Europe and also other companies which may benefit from an end to the hostilities in Ukraine. However, it's very unclear how this will play out over the medium to long term, but it's something that we're monitoring very closely.

Finally, and something that is obviously important to people in this part of the world, we had the first interest rate cut for several years from the Reserve Bank of Australia. So the recent interest rate cut has provided immediate relief to borrowers, but actually has done very little to change the overall sentiment in the marketplace.

I think it's fair to say that the RBA's decision could be described as one of the most hawkish interest rate cuts ever announced by the RBA and was certainly accompanied by a very robust message by the governor, indicating that no further cuts could be expected in the near future.

So what does this mean for CFS? We have been preparing for market uncertainty and policy uncertainty for the last nine months or so, and we've been positioning our portfolios to mitigate the risks, as well as capitalise on the opportunities that we see coming out of this period.

Our focus has been very much on diversify investments, moving away from areas like the very large-cap tech companies and increasing our exposure to emerging markets, global smaller companies, and income paying assets.

This strategic shift aims to ensure that we focus on stable cash flows and also reduce our reliance on very high-growing sectors, which may be vulnerable at times of market fluctuations.

CFS has also been reallocating funds away from global fixed income to domestic fixed income and private credit, and we believe those areas offer better income stability in uncertain times.

In an uncertain time period, visible cash flow has become much more important. And so it's at times like these that we go back to some of the less exciting, but we think very important, financial components, like the ability to pay consistent dividends and provide cash flows back to investors. And we think that this is going to be important at a time where future returns may be lower than we've all enjoyed in the last couple of years or so.

Thanks for watching CFS Market Insights. See you next time.