CFS Market Insights: May 2025

Welcome to CFS Market Insights, I'm Jonathan Armitage. So we're going to start off by talking about bond markets, which is a bit of a departure from normal because a lot of attention is normally focused on share markets, but fixed income markets have experienced an unusually high level of volatility in the last month or so.

So those movements in bond markets have been triggered by President Trump's reappraisal of tariffs, and they very much influenced short term policy responses from the White House. You've seen two significant reactions from bond markets in the last month. 

The first one was from the initial tariff announcements, which were significantly higher than most market participants had been expecting. In addition to you've also seen bond markets react negatively to comments from the US President that he may be thinking about replacing the chair of the Federal Reserve in the US, Jerome Powell.

So why have these had such a big impact on bond markets? It focuses around the issue that tariffs are expected to lower growth, particularly in the US, and also to push up inflation. And so that is expected to lead to lower earnings for companies, but also has produced a reaction in bond markets as the cost of debt has risen because of higher inflation expectations.

One of the challenges for a lot of businesses, not just in the US, but actually across different markets currently, is that with the fluidity of policymaking, it's difficult to make either hiring decisions or actually decisions around where to put capital expenditure going forward. And this is actually showing up in the data that's been coming out of the US in the last 3 or 4 weeks or so, with lower economic activity, greater uncertainty about hiring decisions, and importantly, a real increase in the forward-looking expectations around inflation for both businesses and consumers.

So what is CFS's response been to this policy fluidity? So we have been focused on diversification in our portfolios for quite some time, and we've been adding components like private debt and also insurance linked investments which we think will benefit from, not just a period of policy uncertainty, but also a period where inflation data is a lot more volatile.

So if we turn to activity here in Australia, you've seen a lot of volatility in global equity markets with some significant declines, particularly in the US. Australia's market decline, however, was relatively muted. What we've also seen is that the Australian dollar has weakened quite considerably. 

This is actually something that we've observed in other times of economic uncertainty, where the dollar acts as a bit of a shock absorber to economic activity. Whilst the weaker dollar is painful for those traveling overseas, from an economic perspective it's a huge beneficiary to exporters. One of the other factors that's benefited the Australian equity market has been that on a relative basis, the tariffs imposed by Trump were significantly lower than you'd seen on other economies.

Looking ahead with the degree of policy uncertainty that you're seeing in the United States, Australia has some decisions to make about how we balance our opposing ties of security, that is closely linked to the United States, and commerce, which is heavily dependent on China. This is something that is going to be a dominant feature of policymaking, not just in the coming months, but also in the coming years. It's also creating a strategic dilemma for Australia as the global market becomes more fragmented and insular.

So after an extraordinary four weeks of economic data and policymaking, we do expect in the short term you'll see some continued market volatility, particularly given the policy fluidity you're seeing in the United States. We'll continue to monitor those movements and also to mitigate the risks within the portfolios, but also capitalise on the inevitable opportunities that come out of these periods of market disruption.

As we've said previously, we are expecting a moderating of returns this year after two years of outstanding market returns, both here in Australia but also overseas. Current events will also continue to contribute to this. One thing I'd like to reiterate is that markets historically recover from times like these and grow over the longer term, and it's important to focus on those longer-term elements in your investments.

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