Trade tariffs and geopolitics dominate in Q2

Bond prices fell on worries about US government spending, but later steadied as the US Federal Reserve took a cautious approach which focused on inflation and global trade risks. The US dollar weakened significantly throughout the quarter.

Bank of England cuts rates

In the UK, markets were shaped by domestic economic challenges including falling consumer confidence and mixed GDP data. Gross domestic product (GDP) is a measure of the total value of goods and services a country produces, which helps to signal how well the economy is performing. The Bank of England cut interest rates from 4.5% to 4.25% in May to support the economy but left them unchanged in June to avoid stoking inflation.

Stock markets recovered somewhat mid-quarter as trade tensions eased and political risks reduced, but concerns remained about economic growth, particularly for consumer-facing companies.

Bond yields fell early in the quarter following weak economic data but later stabilised as investors thought the Bank of England might cut rates again.

Germany unveils huge spending plan

In Europe, the European Central Bank cut interest rates twice to support an economy that had been struggling with weak growth, low inflation, and global trade disruption.

Germany announced a vast spending plan which helped boost business confidence and supported stocks and long-term bonds towards the end of the quarter. But, overall, the Eurozone still faces difficulties from slow growth and its dependence on global trade, with only slight improvements in investor confidence.

China and Japan remain resilient

Japan’s markets held up well, despite global uncertainty, helped by a strong yen and steady economic conditions. The Bank of Japan kept interest rates low and continued other policies aimed at encouraging growth. The stock market was affected by global trade worries at first but improved later in the quarter as trade talks with China and other major countries made progress, reducing fears of recession.

Chinese markets were also driven by trade talks. Despite ongoing trade tensions, China’s economy showed resilience, with strong domestic consumption and industrial output supporting growth. Investor sentiment towards technology and artificial intelligence stocks also improved.

How did this affect portfolios? 

Global equity markets performed well over the second quarter of the year. The MSCI ACWI (All Country World Index), a broad global stock index, rose by more than 5% in sterling terms. This strong performance was mostly thanks to a rebound in US stocks as trade tensions waned and the US economy showed signs of improvement.

UK stocks also made gains over the quarter, with the MSCI UK Index returning 2.4%. Despite concerns around trade and weaker growth in the UK, investors were drawn to the market by steady company profits and wanting exposure to sectors less impacted by global uncertainty. While returns from the UK were more modest than the exceptional gains from the US, it still offered a boost to portfolios in the three months to June.

European shares delivered 4.9% over the quarter, with government spending on defence and infrastructure offering a boost to investor confidence. A weaker US dollar helped European exporters, while low interest rates continued to support the economy and created a more favourable environment for shares.

Emerging markets kept pace with global markets to return 5.5% in sterling terms, as measured by the MSCI Emerging Markets Index. Stocks were lifted by rising commodity prices and better global trade conditions.

In the bond market, trade tariffs and conflict in the Middle East made investors nervous, pushing bond yields higher (meaning prices fell), especially in April. Yields stayed high throughout May but began to settle in June as central banks paused further interest rate changes. Riskier high-yield bonds performed well, especially in the US, as increasingly optimistic investors sought attractive yields in this part of the market.

Real estate investment trusts lagged during April but later recovered, while listed infrastructure performed well, benefitting from falling bond yields globally and a strong showing from stocks at the start of the quarter.

Our view on the major asset classes 

Equities 

Company earnings were stronger than expected in Q2, even with the ongoing trade issues globally. The impact of tariffs varies by country and adds a lot of short-term uncertainty. This makes it harder to predict growth and causes bigger swings in market prices. We still see better value in Japanese markets over time, and we note that Japanese stocks performed well this quarter, which supports our view.

Bonds 

Government bond markets are still unstable, with interest rates going up and down due to concerns about tariffs, economic growth, government borrowing, inflation and what central banks might do next. However, we think government bond prices now offer a fair return for their level of risk. The pricing of global investment-grade bonds (the highest-quality corporate bonds available) suggest investors are expecting fewer credit losses than usual over the next few years. At the moment, high-quality corporate bonds look more attractive than equivalent government bonds. We are slightly cautious on developed market high-yield (higher risk) bonds as we expect default rates to rise, meaning more bond issuers may be unable to repay what they have borrowed.

Real assets 

We maintain the view that diversification through investments in alternative assets such as listed infrastructure and real estate investment trusts (REITs) is important for consistency of returns. This is because of their low correlation to traditional markets, meaning they don’t typically move in line with equities and bonds. 

Overall 

Trade policy changes have caused a lot of uncertainty in financial markets during Q2, and we have been following events closely. We have not yet changed our views on the major asset classes, remaining neutral across the board, but we are constantly reassessing our stance as things change in the wider environment.

How do we view portfolio composition moving forward? 

Over Q2, we introduced the State Street Global Equity Diversified Index Fund (GEDI) into our Multi-Asset Funds, and we plan to bring it into our Model Portfolio Service and discretionary portfolios in Q3. GEDI is an index launched by WTW and MSCI that provides exposure to global equity markets while considering sustainable factors such as decarbonisation and climate risk.

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Information correct as of 8 July 2025.

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