Investment Update April 2025
- ABP Team
- Apr 2
- 6 min read
Updated: Apr 7
Key Highlights:
The Trump Administration’s accelerated domestic agenda signals a strategic retreat from global roles in favour of reindustrialisation and regional influence.
US debt levels have reached $36 trillion, with a debt-to-GDP ratio of 119%, placing increased strain on fiscal capacity as bond yields hold near 4.2%.
Stable GDP and inflation readings are tempered by concerns over tariff-driven inflation and their complex implementation.
Falling consumer confidence and delayed tax cuts suggest a misalignment in policy sequencing affecting short-term economic momentum.
Europe’s military spend is expected to rise to €800 billion, relaxing long-standing EU fiscal constraints and lifting Bund yields and broader sovereign rates.
The UK’s Spring Statement reflects a cautious fiscal reshuffling with increased pressure on public services and potential for future tax rises.
Investment focus in the UK remains on select larger PLCs offering dependable cash flows and dividend strength despite macroeconomic headwinds.
Japan continues to navigate a trilemma: tackling inflation, defending the yen and managing debt above 200% of GDP, all while facing a demographic decline.
China holds 62% of the global battery electric vehicle (BEV) market, supported by state-led innovation in AI, renewables, and advanced manufacturing, despite headwinds from 25% US tariffs.
Portfolios have been rebalanced with elevated cash levels and increased UK and European equity exposure to manage risk and sustain yield.
Since the inauguration of President Trump just 69 days ago, the roll-out of new policies and Executive Orders have been delivered at warp speed. Only the first 100-days of President Eisenhower can compare. The tactics of “disrupt and disturb” applied to the geopolitical status quo has been breathtaking. Change and uncertainty are features stock markets do not enjoy, consequently markets have trended lower, particular US stocks and their technology leaders. What is President Trump trying to achieve and what are the implications for markets and portfolios? We discuss these key aspects in the update that follows.
A quick analysis of MAGA policies (Make America Great Again) clearly suggests a laser focus on domestic issues, and the dominance of the US on a global stage. However, there is more to it. Today’s US debt to GDP ratio of 119% is akin that of 1946, which stood at 122%. The debt sum involved is $36 trillion, which is mind bogglingly large. President Trump is the first president to tackle the runaway debt balance, with his policies aimed at controlling the increase in the debt mountain. Servicing the debt with bond-yields around 4.2% consumes much of US GDP. Strategically withdrawing from aspects of the US role as “global policeman”, and encouraging other nations to expand their military spending, whilst asserting ever greater influence over Mexico, Canada, Panama and of course Greenland, will position America in an ever more dominant position in the northern hemisphere, whilst saving money. The schematic below shows areas where the Trump Administration are realistically focusing. President Trump’s drive to reindustrialise America will take time, but certainly a weaker dollar and lower bond market borrowing costs are important benchmarks to be achieved.
Source: Alpha Beta Partners, 1 April 2025
Economic health in the world’s largest economy remains robust. GDP and inflation are broadly on track at 2.4%, and Personal Consumption Expenditure (PCE) inflation, which is the Federal Reserve’s preferred measure printing at 2.8%. Interest rates were kept on hold during March, but with a promise of a cut later this year. For us, it is more about the future trend and trajectory, than what has already occurred. Assuming the reciprocal tariffs threatened are in fact implemented on April 2nd then we would expect to see an inflationary pick up over time. The practical imposition of tariffs is easier said than done – example, the complexity of applying tariffs at component level per product is difficult enough. When the product (such as automotive components) travels back and forth across borders several times before it is ready to be sold to an end consumer, it will bring a slowdown of trade, and administrative burdens. We remember only too well the inflationary implications of trade bottlenecks during the COVID-19 recovery period. For now, US manufacturing and services PMIs (Purchasing Managers Indices) remain in palpable health.
The wealth effect is quite real in America. A notable fall in stock markets brings a knock-on to consumer confidence, and the public decide to spend less on goods and services. We note a sizeable fall in consumer confidence underway. We detect the beginnings of a slowdown in US economic growth. The promised “Trump tax cuts” for companies and individuals cannot come soon enough, but this is unlikely to be imminent. As such, a policy sequencing problem in America has resulted. Tariffs and other geopolitical “fist fights” have created concerns and a loss in confidence, which is driving a move lower in economic growth. The positive catalysts of tax cuts and reforms to so-called red tape remains over the horizon, although President Trump might change tack on a sixpence, of course!
Meanwhile in Europe, the requirement to step-up and build essential military resources to gap fill, as America steps back, has created a significant demand for industrial capacity for military hardware. Companies such as, Rheinmettal have committed to build tanks in former Volkswagen automotive production facilities. Implications to European debt levels must not be overlooked. We recall the convergence criteria imposed by the European Commission on member states, and those states wishing to join the EU. To see these fiscal limits and disciplines relaxed so significantly is momentous, and generally absent from the economic narrative. Military spending in Europe is set to balloon to €800 billion. Consequently, German Bund yields and those of other EU nations, have pushed higher in recognition of the debt explosion and demand on the fiscal balance sheet. See chart below. It will be prudent to monitor debt levels and economic performance across Europe from this point. However, despite tough economic conditions, European stock markets have delivered positively.
Source: LSEG, 1 April 2025
At home, we continue to be sceptical over Chancellor Mrs Reeves’ performance to date, and note the contents of the Spring Statement during March, as a rather unsubtle repositioning of the fiscal deckchairs to balance the domestic budget. Cuts to services is the result and a probable requirement for even higher taxes downstream, as GDP growth (Labour’s own success benchmark) projects lower. For us, investment in the UK is more about the quality and appeal of specific companies, than it is about the general health of the UK economy. Larger PLCs in specific sectors offer a lower risk to capital at appealing valuations, whilst delivering strong free cash flows, culminating in attractive and reliable dividend streams. We continue to look favourably upon the select few.
As we indicated here in previous missives, Japan is suffering an economic trilemma. Inflation up requires interest rates at higher levels to dampen its impact. However, by doing so the Yen will move higher, making Japanese products less attractive abroad and the colossal debt to GDP figure, around 200%, even more onerous to service. A shrinking population and an ever-older working age group make productivity tougher yet. The need to embrace artificial intelligence is resounding. Consequently, stocks are notably lower. Indeed, Japanese equities are around 18% lower following our decision to cut exposures. Whilst we cannot claim to be market timers, the results for portfolios have been abundantly positive.
We have seen positive indications from China. As we know, the old Chinese model of providing manufacturing services to the developed world, and generating GDP from internal infrastructure and property construction, proved only partially successful, with a monstrous debt bubble created and sliding real estate valuations. A change was needed post pandemic, and President Xi set about controlling the successful technology sector with strict rules and regulations, resulting in lower valuations at the stock market. However, his message was clear – you succeed only at the permission of the state. Successfully, back to heel in China’s hybrid market driven and state-controlled economy, President Xi has pushed for stronger controlled growth from the creative technology and innovation sectors. This gave rise to DeepSeek’s appearance on the global artificial intelligence stage, and further success in the green tech’ arena with solar power, wind, battery electric vehicles (BEVs) and other innovations. The success of brands such as BYD (Build Your Dreams) electric motor cars will not be lost on readers. China’s BEV success has resulted in a dominant global market share of 62%, against a struggling Tesla and other European automotive brands, who now must combat the imposition of US tariffs at 25%. China’s ambition is only partially pegged to the US consumer – China’s focus is to dominate the Global South, an area with much lower levels of American hegemony.
At portfolio level, we reflect the changing world order, and rebalance in favour of opportunity where it arises, and to protect against apparent risk. Consequently, we have raised cash levels to protect against downside risk, whilst bolstering European and UK equities both in the ongoing search for growth, but also to deliver a consistency of underpinning yield. Portfolio changes are implemented as we write this update, and investors will note changes over coming days. Year to date has been tough, but performance remains appealing relative to peer group. We look forward to updating you next month, when we expect to see more stability in markets following a turbulent March.
Written by the Alpha Beta Partners Investment Team.
All sources Bloomberg unless otherwise stated.
