The first quarter was volatile as angst over President Trump’s tariffs rose which had a chilling effect on economic activity and sentiment. Prior to the tariffs being published, this rhetoric dragged the hitherto all-conquering “Magnificent 7” stocks down 16% and the S&P 500 down 4.3% in contrast to Europe’s EURO STOXX 50 and the UK’s FTSE 100, up 7.7% and 6.1% respectively. This rotation from the US to the Rest of the World represents one of the most dramatic in market history, with US equities posting their worst quarterly relative performance since 1988.
In the long-term, a broadening out of fund flows will be healthy for non-US investors. However, in the near-term the less liquid mid- and smaller-sized indices suffered disproportionately. The FTSE 250 posted a 4.9% loss and FTSE AIM was down 5%, with the median AIM stock (the middle-ranked company) posting a negative 8.3% return.
Why then are we increasingly bullish on future returns? As outlined in our recent webinar, Reasons to be Cheerful (Believe it or not), we see the prospect for UK equity inflows increasing with £1.5bn from local pension fund mandates due in May; the pensions review driving UK equity allocations up from 4% on average to a reported 8-10%; and ISAs realigned to favour stocks and bonds investments over nonproductive cash. Fund flows move prices and will be hugely welcomed after four years-plus of incessant outflows and could prove especially potent given the extreme value currently on offer in UK markets. There may even be longer-term upside from tariffs if it leads to quicker and more frequent interest rate cuts than expected previously, which should catalyse significant relative outperformance of smaller versus larger companies.
