Inside the markets | Multi-Asset review

Hello and welcome to the May, 2025 market update. My name's David Ula and I'm the lead portfolio manager for Invesco's Summit Multi-Asset Fund Ranges and its model portfolio service.

Well, what a difference a month makes in markets and economies. In May, the markets seem to put the so-called liberation day behind them, extending their recovery as consumer sentiment improved, admittedly from very low levels, and trade tensions eased to a degree. Most major equity markets delivered strong gains on a global basis. Developed equities outperformed their emerging market counterparts. Growth equities outperformed value equities, and small caps marginally outperformed large caps. Of course, there's often some nuance within this. In developed markets, the US equity market was the one that led the way, driven by the large tech stocks that have come to dominate the US index. Plenty of muscle memory in the market, it seems. Japanese, European, and UK stocks followed roughly in that order. Emerging market equities also performed well, aided by a weaker dollar. In particular, Taiwanese and Korean equities were the standout performers, with double-digit and high single-digit returns, respectively. When we look at equity returns in sterling terms, however, returns were a little dampened in some areas, in particular Japanese and US equities, and as a result of US equities for global indices too. That's because the pound strengthened against the dollar and the yen for much of May.

When we look into the more defensive parts of the market, global bond markets did lag their equity counterparts, particularly government bonds, which entered the month slightly in negative territory. Yields rose across the board, but in particular for longer-dated government bonds, there were significant negative returns there. As an example, Japanese 30-year government bond yields reached their highest level in more than 25 years. So term premium, in other words, the higher yields that you expect to receive at the long end of the yield curve, are arguably rising for a good reason and could even be considered a normalization of things given the new reality we find ourselves in across developed economies. In the US, higher long-dated bond yields seem to currently reflect a complex mix of things: lower recession risks right now compared to last month, higher inflation expectations, and existing or pre-existing US fiscal deficit worries. Outside of government bonds, investment grade credit was marginally positive over the month, and high yield credit and emerging market debt were really the strongest performers in the fixed interest space. It's still worth noting though that they lagged equities by quite some distance. Gold was a little changed and the oil price was up, reflecting a slight reduction in concern felt by investors about the state of the global economy.

In terms of central bank policy, the US Federal Reserve kept interest rates unchanged, which was the third meeting without a change. They remain in wait-and-see mode. In Europe, the ECB paused after its recent April cuts, and in the UK, the Bank of England cut its base rate by 25 basis points earlier in the month. The justification was progress on inflation. On that topic, headline UK CPI came in at 3.5%, which was a lot higher than the March figure of 2.6, but most of this was expected to come from regulated utilities, so it wasn't really the surprise it may have looked at the time.

So what does all this mean for interest rates? Well, it's pretty hard to know. What we do know is that market pricing changed materially during May. In the UK, at the start of May, just under four rate cuts were priced in for the rest of this year, and at the end of May, it was just over one and a half cuts priced in. In the US, it was 3.7 at the start of May for the rest of this year, and now it's just over two. There was less change in expectations in the Eurozone, where we've gone from 2.7 cuts priced at the start of May to just 2.3 now.

Close to home, we had the EU-UK summit that concluded with a series of agreements, generally pointing to us having a closer alignment with Europe. For example, more coordination and cooperation on things like defense, procurement, and migration. There was also an agreement to make it easier for agricultural products to be traded across the region. No real game changers from what I could see at this stage, but perhaps a sign of the direction of travel we can expect over the next few years. In practical terms, the most exciting part of the deal for us as individuals was probably on passport control, potentially giving UK passport holders the ability to use the eGates that we probably look longingly at when we're queuing for passport control.

Most eyes though are on the US at the moment. In the US, the hard data continues to lag the soft data. By that I mean that while sentiment surveys have weakened quite sharply, although they are recovering a little recently, the hard or actual economic data still looks relatively resilient. Perhaps that's a nod to tariffs affecting sentiment more than activity, or at least up until this point. Personal consumption in the US has actually improved, which is pretty meaningful when you think that the US economy is mainly driven by domestic consumption. It could be, however, that the US consumer is bringing forward some of that spending in advance of the tariffs they are expecting.

May was calmer than April from a rhetoric perspective. It would have done well to outdo it, but that's not to say there wasn't any rhetoric at all from the US administration. Towards the end of May, President Trump threatened a 50% tariff on the EU starting from the 1st of June and a 25% levy on Apple if it doesn't move iPhone manufacturing to the US. That was on a Friday, but on the Monday, the deadline was extended to allow for negotiations during the month. It was also announced that drug prices will be cut in the US, which wasn't received particularly well by investors in UK pharma companies.

With all that's going on in markets and what's still unresolved, I think it's fair for us to at least question whether the market's gone a little ahead of itself, certainly on the equity side, where they're now higher than they were before Liberation Day. That's with tariffs still remaining a concern that wasn't there before. But it should also be said that earnings have remained resilient thus far in the US and outside the US. Over the medium and long term, they are the key drivers of markets. We are less hung up on what the exact rates of tariffs will be and more focused on the fact that they are higher than before. This wasn't an issue six months ago, and as I said on the last update, I think volatility levels will remain elevated. Having a well-diversified portfolio and the tools to adapt to these changing conditions will serve us all pretty well.

I'd like to thank you for watching this update. I'd like to apologize for my very coarse voice, which has made it tougher to get through. I hope it has been of interest and of use. I'll see you on the next one of these. As always, please get in touch in the meantime if you have any questions. Thank you.