Update: Issue 33
A welcome note from Knightsbridge Wealth
Donald Trump’s bold but unpredictable rhetoric on trade, tariffs and monetary policy has continued to stir markets. The US President’s “Liberation Day” and subsequent 90 day pause on reciprocal tariffs, along with his feud with Federal Reserve Chair Jerome Powell has led to an increasingly disbelieving TACO (Trump Always Chickens Out) mindset. This could be dangerous if it takes hold, with the potential to amplify economic disruption. Concerns about global stability and supply chains are persistent, however, there is an optimism among CEOs, with a 32% uptick in the number expecting global economic improvement in early 2025.
The Kashmir conflict between India and Pakistan continues to fuel South Asian conflict, with the UK and India Free Trade Agreement creating a contrasting economic outlook. Diplomatic measures, such as India’s suspension of the Indus Waters Treaty, trade bans, visa restrictions and airspace closures, signal unresolved grievances, and analysts warn that hostilities could resume without political talks.
The 12-day conflict between Israel and Iran has sparked global investors’ interest in oil prices, but geopolitical influence has weakened. Brent crude prices surged 6.69% to $74 per barrel in DATE due to supply disruption fears, improved access to news, doubts about Iran’s maritime activity, and regional producers developing alternative export routes.
Saudi Arabia has transformed from a repressive autocracy to a stabilising influence in the Middle East, with Mohammed Bin Salman leading a social revolution. The Vision 2030 mission aims to transform the country into a diversified 21st century economy with a flourishing private sector. However, oil remains a significant part of the economy, accounting for 48% of GDP and 60% to 70% of government revenues.
Trade between the US and China is unravelling rapidly, with 73% of US imports coming from China. The World Trade Organisation predicts that merchandise trade will slump by 80% due to current tariffs. The US economy has shrunk by 0.3% in the first quarter, and consumer confidence has plummeted.
The UK commercial property market’s three-year downcycle appears to be reversing, with the vacancy rate in the City and West End of London dropping from 9.5% to 7.4% in DATE. Online shopping growth has slowed and alternative property sectors remain healthy, with hotels, self-storage, residential and student accommodation markets remaining healthy. Schroders forecasts an 8% to 10% annual return for UK real estate over the next four years.
As ever, Update is here to offer insight into the key issues affecting your investment decisions. We strive to paint you a true picture and thank you for your continued support.
What investors should take-away from the India Pakistan conflict
The contested region of Kashmir continues to be a major source of tension between India and Pakistan, fueling ongoing conflict in South Asia. Alongside the recently signed UK-India Free Trade Agreement (FTA), it creates a contrasting economic outlook for those eyeing opportunities in the region and beyond.
The current ceasefire, brokered with US involvement, halted four days of intense cross-border strikes, drone attacks, and missile barrages, which saw some of the worst fighting between the two countries in decades, but the situation remains fragile.
Diplomatic measures such as India’s suspension of the Indus Waters Treaty, trade bans, visa restrictions and airspace closures persist and signal unsolved grievances, leading analysts to warn that without political talks, hostilities could resume.
However, some experts say that previous conflicts have not had a lasting impact on Indian assets, and while the latest may have dimmed New Delhi’s efforts to pitch itself as a safe haven for foreign investors, it has not derailed them.
In the last such flare-up with Pakistan, in February 2019, the Indian rupee held steady and bond yields rose 15 basis points over that month but retreated later, and in June 2020, when fighting broke out between Indian and Chinese troops in the Galwan valley, the rupee weakened 1% but regained ground as the two sides disengaged.
It is also worth noting that since U.S. President Donald Trump unveiled a slate of huge tariffs on his country’s trading partners, Indian markets have performed well, on the back of the perception that there is some insulation from Trump tariffs.
The outlook for Pakistan, with an economy a tenth of India’s, is not so bright. Already strained by inflation and debt, the current trade ban hits its pharmaceutical sector, due to its significant reliance on Indian imports.
Bilateral trade, already down from $2.41 billion in 2018 to $1.2 billion in 2024, now faces further disruption, including via third countries. Estimates peg Pakistan’s losses at $18-22 billion, with $1.2-1.9 billion in military costs and $16-20 billion in economic disruption.
A prolonged conflict could lead to disruption in energy routes and shipping lanes in the Indian Ocean and Arabian Sea, both lifelines for oil, gas and goods. Disruptions here could increase fuel prices, delay shipments and inflate costs, unsettling global supply chains and impacting businesses worldwide.
Pakistan may lean on China or the IMF for aid, shifting regional power dynamics. With nuclear risks looming, investors must weigh a fragile diplomatic landscape, where U.S. and Chinese mediation cannot be relied upon in its current fractured state.
Amid this uncertainty, analysts say the focus remains on trade deals. The UK-India FTA, which was sealed on May 6, offers a counterweight. Billed as the UK’s most significant post-Brexit trade pact, it counters US tariff turmoil and bolsters economic ties with India, offering a lifeline for investors.
In 2024, the UK’s trade with India was worth £43 billion – £17.1 billion of exports and £25.5 billion of imports. Government modelling estimates that trade between the nations will increase by as much as 39% and the UK’s GDP will expand by £4.8 billion or 0.1 percentage points per year as a result of the new agreement. The broader fallout is also stark. India’s suspension of the Indus Waters Treaty threatens Pakistan’s agriculture, which accounts for 24% of its GDP and 40% of jobs, potentially spiking food prices and increasing unrest.
Both the UK and India have agreed to reduce tariffs under the deal. India will immediately lower its 150% tariffs on Scotch whisky and gin to 75% and then to 40% within 10 years. Tariffs on foodstuffs such as lamb, salmon and cheeses will fall from around 30% to zero.
Once the FTA comes into force, which could take up to a year, the UK will allow 99% of Indian imports duty-free access to the UK. The sectors that are set to benefit the most are footwear, textiles and clothing as well as processed prawns, basmati rice and ready meals.
Tariffs on luxury cars will also be reduced from more than 100% to 10% under quotas on both sides. The FTA locks in zero tariffs on industrial machinery, advanced materials for use in hi-tech industries, and components for electric vehicles.
Against a backdrop of rising protectionism and geopolitical tensions. The UK-India FTA stands out as a strategic deal. While the Kashmir crisis poses short-term risks such as market volatility and disrupted trade, India’s economic fundamentals remain robust.
Opportunities lie in UK-India trade with export-focused sectors, services and infrastructure presenting growth opportunities. Protecting against currency and geopolitical uncertainties is wise, but India’s long-term appeal endures.
The new face of Saudi Arabia
The familiar image Saudi Arabia conjures up is not just of fabulous riches but also of political repression and the subjugation of women. The kingdom has exported religious extremism, and thereby shares responsibility for the terrorism and violence that this has fomented. Today, the country is still an autocracy. Its crown prince does not tolerate dissent. However, the Saudi Arabia we used to know no longer exists.
The kingdom is now a stabilising influence in the Middle East. At home, it has undergone a stunning social revolution that has few parallels. The pressing question is over the third part of Saudi Arabia’s transformation, from a petrostate into a globalised, 21st-century economy. Here, change has begun, but it is not fast enough, with potentially grave consequences for MBS’s entire project of reform.
Saudi Arabia has changed radically in the ten years since King Salman ascended the throne aged 79, and his son, Mohammed bin Salman (MBS), became the country’s de facto ruler (as crown prince from 2017 onwards). Ten years ago, women were still shut out of the labour market and public life, prohibited from driving or even leaving the house without a male guardian. Today, they are free to work and travel where they like. Many have ditched the burqa for a simple headscarf. The religious police and “vice squad”, once a ubiquitous presence, have disappeared. Schools have slashed the amount of time devoted to religious instruction. What was once a closed and repressive society has opened up in myriad ways and become far more akin to other Gulf and Middle Eastern states.
Saudi Arabia remains an autocracy, where a superprivileged elite holds power and the crown prince does not brook dissent. But the country no longer sponsors and exports jihadist terrorism and is a force for order and a stabilising influence in the Middle East. It counsels restraint on the conflict in Yemen. It is open to better relations with both Iran and Israel, and has helped Syria’s new government by paying some of its debts. If not exactly an enlightened despot, MBS – still aged just 39, and poised to become king for decades – is at least a sane and increasingly pragmatic one.
MBS’s stated mission, under his Vision 2030 rubric, is to transform Saudi Arabia from a petro-state into a diversified 21st-century economy with a flourishing private sector, readying it for the day when the oil runs dry. The hard truth is that while a start has been made, there is much left to do. Oil’s share of the economy remains high, too, although it has fallen from 36% of GDP in 2016 to 26% last year. Once all economic activity related to oil and gas extraction is factored in, almost half the Saudi economy (48%) is hydrocarbon dependent. And oil still accounts for between 60% and 75% of government revenues, meaning the House of Saud’s fragile social contract is still underwritten by the nation’s oilfields.
Saudi Arabia needs the global oil price to be more than $90 a barrel in order to balance its budget. Prices are currently a little above $60, and are not expected to rise much this year. Goldman Sachs has lowered its year-end 2025 oil price forecast to $60 a barrel for Brent crude, and $56 next year.
One ambition is to establish strength in artificial intelligence (AI) and data centres. Saudi’s new state-owned AI company Human has signed deals worth $23bn with US tech groups…
If prices were to stay around $62 this year, Saudi Arabia’s 2024 budget deficit of $30.8bn would more than double to around $70bn-$75bn. That means more borrowing, probably means more cutbacks on expenditure, it probably means more selling of assets, or all of the above, and this is going to have an impact both on domestic financial conditions and potentially even international ones.”
The lower oil price is a worry, but it’s not about to precipitate a debt crisis. At the end of last year, Saudi’s debt-to-GDP ratio was just under 30% – modest compared with the likes of the US (124%) or France (111%). Riyadh still has significant headroom for borrowing. Yet $75bn in debt issuance would be hard for the market to absorb, and the Saudis will need to look at other solutions. In terms of cutting expenditure, many regional economists believe that some of the flashier projects, such as the vast, futuristic linear city (Neom), will be further scaled back. Other such projects, estimated to cost nearly $900bn by 2030, include 50 luxury hotels strung along the Red Sea, a ski resort in the desert, and the world’s biggest building in Riyadh. There’s also the possibility of selling more domestic assets, including stakes in the state-owned companies Saudi Aramco and Sabic.
Perhaps more important than such projects are the government’s efforts to foster new industries, from tourism to car making. Meanwhile, civil servants are rewriting rules on everything from divorce to foreign investment, with more than 600 packages of reforms in the works. A liberalisation of mortgage lending means that construction is booming. Retail and hospitality are growing fast, as is tourism, which has jumped from around 60 million overnight stays in 2016 to more than 100 million in 2023 (the bulk of this being domestic tourism). Yet the Saudi economy remains a textbook case of crowding out, where the state’s dominance of key sectors has stifled private investment and enterprise. About half the male labour force work as civil servants and political connections remain vital to doing business.
One ambition is to establish strength in artificial intelligence (AI) and data centres. Saudi’s new state-owned AI company Human has signed deals worth $23bn with US tech groups including Nvidia, AMD, Amazon Web Services and Qualcomm, according to its chief executive. And it has launched a $10bn venture-capital fund as it leads the kingdom’s effort to become a global AI hub. But allied to these lofty ambitions are more prosaic goals – improving the country’s education system; attracting the expertise needed to boost emerging sectors, including car making, semiconductors and renewable energy. Social liberalisation may have bought the regime some time in terms of pushing through economic reforms. But those reforms are just getting started.
The most surprising attribute of the new Saudi Arabia is its constructive role in world politics The kingdom has both oil wealth and a hefty population. That clout once made it a menace. It was a financier and exporter of jihadism. In 2015, after his father, King Salman, ascended the throne, MBC began a disastrous war in Yemen against the Houthis. In 2018 came the shocking murder of Jamal Khashoggi, a journalist and dissident, on the orders of the Saudi regime. The stain of those disgraces remains, but Saudi Arabia’s recent actions count for something, too. It no longer sponsors terrorism. It now counsels other countries to wind down their conflict with the Houthis. It has helped Syria’s new government by paying some of its debts to the World Bank, and promising to invest in the country now that US sanctions are lifted.
One reason for believing in Saudi Arabia’s foreign-policy rethink is that it furthers MBS’s central concern, which is to bring about bold social and economic change at home. He needs those changes because oil revenues cannot be counted on to sustain Saudi Arabia for ever. If young Saudis, who are two-thirds of the native population, are to thrive and, in the long run, to sustain the House of Saud in power, they need jobs. An unstable neighbourhood is a headache, because it inflames Saudis at home and raises the risk premium foreign investors attach to the country. A flourishing Middle East, by contrast, would mean more customers for the products Saudi Arabia hopes to make, and for its glittering new tourist resorts.
The stakes for MBS and his country are high. Social liberalisation has bought him time among a youthful population. However, if economic change stalls and Saudis’ livelihoods suffer, their goodwill could easily dissipate. Unrest at home could lead the government to crack down, undoing the progress the kingdom has made. Saudi Arabia has come a long way in just a few years. It still has far to go.
Insurers in the US to step in and foot the bill. Many don’t because obesity treatments are seen as lifestyle related, rather than a health treatment. But attitudes are changing as increasingly widespread research points to the links between obesity and related illnesses, such as heart disease and mobility difficulties, which insurers pay to cover.
JPMorgan estimates that insurers’ coverage of AOMs will jump from 40% today to around 80% by 2030, a sizeable shift underpinning analysts’ upbeat sales and profit projections for the sector. The same research should also convince government-sponsored health services such as Britain’s – where private health insurance is less widespread – to buy and supply more of the medication.
Another difficulty for the sector is short supply of the active ingredients to make the medication itself and the ‘pens’ that are pre-filled before distribution and used by patients to self-inject the correctly measured dose. Both Eli Lilly and Novo Nordisk are working to address these problems, although more efficient supply lines will take time to build. Novo bought manufacturer Catalent for $16.5bn in February to make the pens and other mechanisms.
Beyond short-term challenges, investors are presented with a medium-term growth sector dominated by Eli Lilly and Novo Nordisk. With their significant array of products, research capability and development pipelines, they are jointly expected to control more than 90% of the AOM market, according to Bloomberg. As a fast-expanding duopoly, they are now among the world’s highest-valued pharmaceutical groups.
Strong though these firms’ position is, other players are active in the field. High potential growth rates will inevitably attract new entrants. Pharmaceutical giant Pfizer, for example, is developing existing products and looking at licensing new ones to make inroads into the obesity market. Meanwhile, biotechnology group Amgen is trialling a product it thinks could have fewer side effects and require lower dosing than the current market leaders.
Globalisation on Life Support
Investors are profoundly shaped by big crashes. Years such as 1987, 1998, 2008 and 2020 stay long in the memory. Now, April 2025 should join that list. The period since Donald Trump unveiled global tariffs at the start of the month has seen a record $6.6trn two-day wipeout on US markets, followed by one of the largest one-day rallies in history when Trump announced a 90-day pause to most new tariffs last week.
Trump is instead concentrating his trade guns on China, hiking tariffs on the country to 145%. Beijing has responded with 125% import duties on US goods. The world’s top two economies have effectively declared a trade embargo on each other. America’s $150bn in exports to China will fall close to zero, while about 75% of China’s $440bn exports to America could vanish over the coming 18 months. In America, the consequences will be inflation and possibly a mild recession. In China, growth will take a big hit – exports powered half of the country’s growth last year. Beijing can ill-afford a trade torpedo as it tries to stabilise its beleaguered property sector.
The White House has excluded smartphones and laptops from the highest tariffs, but a huge range of other US consumer goods face steep levies. In all, 75% or more of imported video-games consoles, food processors and toys in the US came from China last year, as did 90% of microwaves and 88% of electric fans, making it harder for US consumers to keep their cool.
Above a certain point, tariff rises have a diminishing impact. If you’re looking for a $20 toaster, the distinction between a $40 and $50 price tag is irrelevant – both are far more than you’re willing to pay. Once trade disappears, there is nothing left to tariff. The White House believes it has the upper hand. The US Treasury Secretary, Scott Bessent, said, “They’re playing with a pair of twos. We export one-fifth to them of what they export to us, so that is a losing hand for them.”
That logic is flawed. From pharmaceutical ingredients to basic semiconductors to critical minerals, the US imports vital goods from China that cannot be swiftly replaced. China, by contrast, has more options to substitute lost US imports of things such as soybeans. A long-term plan aimed at reducing US dependence on China would be sensible. But cutting off trade before alternative suppliers are ready to step in is wildly reckless. Just as in a real war, in a trade war it is suicidal to provoke your adversary before you’ve armed yourself.
US tariffs on China are now so high that they cancel out the impact of the 90-day pause for other countries. The overall effective tariff rate on US imports – total tariffs as a share of total imports – now stands at about 22%, a huge rise from 2.3% last year. Globalisation remains on life support.
The unravelling of US-China trade
What will a decoupling mean for the global economy? Just 12 short months ago, the then-US Treasury secretary Janet Yellen made a trip to Beijing to deliver the message that the world’s biggest economy had no wish to decouple from the world’s second, its biggest trading partner. “Our two economies are deeply integrated, and a wholesale separation would be disastrous for both,” Yellen assured her hosts. Fast forward a year and Donald Trump has imposed a 145% tariff on Chinese imports. Beijing has responded with a 125% tariff on US goods, plus other measures including restrictions on exports of rare-earth minerals (vital components in a range of high-tech sectors, including defence) to the US. The trade stand-off will benefit neither, and the slow decoupling of the two economies is turning into a rapid unravelling.
Bilateral trade was worth $582bn in 2024. The US imports $41bn worth of smartphones a year from China, or 73% of imports in the category. With laptops, it’s $32bn at 66%. In other categories, the value of imports is lower, but China’s dominance is even greater – it accounts for 86% of games consoles, 79% of PC monitors, 76% of toys and 70% of lithium-ion batteries (all 2024 figures from the International Trade Commission). There are niches where US dependency is even higher, with more than 99% of imported electric toasters, heated blankets, calcium and alarm clocks coming from China. The US exports a lot less – its bilateral trade deficit last year was $295.4bn (on US figures). That angers Trump, who believes any trade imbalance means the US is being ripped off.
The US economy shrank by 0.3% in the first quarter and consumer confidence plummeted, while imports surged as businesses tried to get ahead of the tariffs. Meanwhile, Chinese factory output slowed sharply in April as the tariffs led to an immediate slump in US demand. Container traffic from China to the US is collapsing.
According to the World Trade Organisation director-general, Ngozi Okonjo-Iweala, merchandise trade between the two countries will slump by 80% as a result of current tariffs – a drop that would have topped 90% without the White House’s recent exemption for smartphones and other tech goods. Bloomberg Economics projects that 100% US tariffs on Chinese goods would virtually wipe out all US imports from China over the medium term. The drop in US-China trade of the magnitude we are talking about is virtually tantamount to a decoupling of the two economies.
It’s a process of unwinding that has been in train for several years, and was accelerated under Trump’s turbulent first term. China’s share of US imports fell 8% to 13.4% between 2017 and 2024, and it now accounts for only a third of US imports from Asia compared with half in 2018. US foreign direct investment (FDI) in China stood at $127bn in 2023, but the annual flow of funds is shrinking. Meanwhile, China’s stock of FDI in the US fell to $44bn in 2023 – down 16% since 2019 – while the annual flow of funds has been negative since 2020, implying that Chinese investors have been pulling money from American projects. Less tangible metrics also suggest a weakening of the relationship, too. The number of US students studying in China has collapsed 20-fold over the past decade to fewer than 1,000. In the US, India has overtaken China as the largest source of foreign students. Companies, financial institutions and even university students have all long been doing their bit to speed decoupling.
Last year, an IMF study projected that a full decoupling of the Chinese and Western economies – essentially splitting the world into two trading blocs – would slash 7% from global GDP in the longer term, a loss equivalent to $7.4trn, or about the size of the French and German economies combined. Developing economies would be hit hardest if Washington and Beijing were to cut ties. It must be hoped that this is an unlikely, worst-case scenario. The problem, in terms of the fallout for the global economy, is that both sides appear to think they have less to lose than the other. US Treasury secretary Scott Bessent, for example, is confident he has the upper hand.
His optimism is misplaced. The US imports a lot of vital stuff from China, from electronics to antibiotics. China imports much less, and what it does import is far more easily replaced from other sources. China will hurt, but the threat should not be overstated – the US accounts for only about 14% of all Chinese exports. Moreover, Beijing holds roughly $800bn in US Treasuries (government debt). That’s less than 10% of the total (down from almost 30% in 2011). But any sell-off would impact the attractiveness of US debt and its currency. China looks far better placed than the US to withstand the pain of a trade war. If America loses this trade war, its pain will be self-inflicted.
UK Commercial Property rebounds
A three-year negative market in UK commercial property appears to be ending. The vacancy rate in the City and West End of London office market has fallen from a peak of 9.5% in late 2023 to 7.4%, although it is still comfortably above the long-term average of 5.9%.
The rate of growth in online shopping has slowed to the mid-30%, including food, and shopping centres have learned to adapt. Customers see them as a destination. They want to browse in shops, visit cafes and restaurants, and go bowling. Retailers have learned that returns from online shoppers are expensive to handle, so shops are now not just sales outlets, but also showrooms for buying online.
In late 2024, Land Securities paid £490m for the Liverpool One shopping centre, one of the premier shopping centres in the UK. It expects to generate an income return of 7.5% and to meaningfully grow that figure over the next few years. A lot of capital has gone into “big-box” distribution hubs, so rental growth is likely to slow in that subsector. But there is a supply shortage of estates with multi-let industrial and distribution units. Meanwhile, the market for the “alternative” property sector, including hotels, self-storage, residential and student accommodation, is mostly healthy.
There have been plenty of false dawns since the market peaked in late 2022. Values have fallen 20%-25% since the peak, less than the 40%-45% [in 2009], but there has been less debt in the sector than then. In addition, rental values were flat then but have risen 10% since late 2022.
The big story is how little development there has been in recent years, although it doesn’t seem that way in Central London. The return to the office has been more advanced in London than in the regions, but the demands of occupiers have changed. Tenants want more facilities, better energy efficiency and cafes, rather than a small kitchen with a kettle, a microwave and a vending machine.
However, construction costs have gone up sharply and buildings quickly become obsolete: they start to depreciate when the builders leave. With initial rent-free periods of up to three years, leases of up to ten, and obsolescence thereafter, it has become very difficult for developers to make the numbers work. As a result, rents are rising significantly to £150 per square foot in the City, £250 in the West End.
This is pulling up the secondary market. Refurbishing a quality building in a good location is much cheaper, allowing landlords to offer shorter leases (around five years) at far lower rents.
Respected Fund Manager, Schroders, forecasts a total annual return of 8%-10% for UK real estate over the next four years, which would ensure both higher dividends and capital appreciation. The group is keen to add value to the portfolios they manage by repurposing units on its estate and redeveloping tired buildings. There are also opportunities in affordable housing in the inflation-linked income from hotels, but it is more interesting to be an owner and operator than just an owner.
Sentiment in the property market is vulnerable to higher gilt yields and global factors, but with interest rates likely to trail lower, there should be a recovery. With a shortage of supply, we don’t need a surge in demand to see decent returns.
Taxing Times in the UK
A luxury housing development in Florence, Italy, was being marketed at €10,000 per square metre in 2017. Today, they fetch double the price. The surge may be partly due to a policy change in Britain. The Labour government’s decision to scrap the country’s non-domicile tax regime. Until April, this allowed those who lived in the UK but did not originate from the UK to avoid taxes on offshore assets. Its abolition has driven a wave of high-profile departures and demand for luxury Italian property. Those relocating to Italy include Nassef Sawiris, Egypt’s richest man, and Richard Gnodde, a banker at Goldman Sachs.
The aim of the reforms was both to raise money and to make the tax system fairer. However, tampering with these perks has prompted an outcry. It is estimated that one in ten of Britain’s 74,000 or so non-doms have left as a result of tax reforms, with more to follow.
Unlike previous tweaks, the latest changes have abolished the non-dom regime entirely, removing protections that offshore property trusts once afforded. The broadened scope of inheritance tax is the biggest worry, with the inheritance tax rate for foreigners jumping from 0% to 40% overnight.
Heightened global competition also plays a role. Other jurisdictions have rolled out competitive tax regimes as London’s has become more punitive. Italy’s €200,000 flat tax has proved to be a magnet for the global rich. In America, President Trump has launched a ‘gold card’ residency scheme in exchange for a $5m payment. Nearly 70,000 people have expressed interest.
By contrast, Britain has lost its distinctive advantage—the non-dom tax status. The UK had the most attractive tax system for the internationally mobile. Overnight, it turned into one of the worst.
Yet, a revolving door for the rich and mobile makes for a less predictable tax base. The Centre for Economics and Business Research, a think-tank, reckons that the government will raise negligible amounts if even a quarter of non-doms leave the country in the first year. Penalising the rich rarely pays off. Countries such as France and Sweden have swung sharply away from wealth taxes as a result.
And now Britain itself appears to be rowing back. It is reportedly mulling a softening of its inheritance tax reforms. Annoyingly for the government, Nigel Farage, the opportunistic leader of a new political party, Reform UK, is proposing an eye-catching flat tax of £250,000—similar to the scheme that has been luring non-doms to Italy.
Europe: Back in Business
European shares are enjoying their strongest start to a year since 2000 relative to US stocks. Over the past decade, capital has flowed from Europe to America in pursuit of better returns, but now the trend has reversed. European equity funds enjoyed €26bn in net investment inflows in the first quarter, with this quarter set to be even better after global money managers were spooked by Donald Trump’s tariff drama in April. The pan-European Stoxx Europe 600 index has gained 6% this year, more than double America’s S&P 500.
A turning point came in March when German Chancellor Friedrich Merz pledged to rip up the fiscal rules that have held back the continent’s largest economy since the Merkel era. The new government plans to borrow €500bn to improve Germany’s creaking infrastructure, inaddition to easing rules that have constrained defence spending. Berlin’s astonishing reversal of fiscal policy was greeted with elation.
Falling interest rates are another tailwind. At 2%, borrowing costs in the Euro area are already much cheaper than in the US, where they are still more than 4%, and with inflation falling below the 2% target last month, there is scope for more monetary stimulus. As the 2022 gas-price spike fades an older truth is reasserting itself: structurally, the Eurozone is less prone to inflation than the US or Britain. Banks have been surprise outperformers this year, with the iShares MSCI Europe financials index surging a third in dollar terms, European banks languished during the long stagnation of the 2010s, which brought economic weakness and rock-bottom interest rates. Now they are better capitalised, while the risk posed by non-performing loans has diminished. And at roughly book value, the continent’s banks still trade at just half the level of their US peers.
Europe’s rally is proving uneven. France’s CAC 40 is barely beating the US index this year, lagging far behind 17% gains in Germany and 15% in Italy. Banks represent a modest 11% of the Parisian bourse’s value, compared with 46% in Milan, leaving Italian investors to reap the rewards of the banking boom. The CAC is instead heavily exposed to the luxury industry, which is struggling as sales slow down in key Chinese and US markets.
Germany has its own problems in the form of a heavy weighting towards the structurally challenged car industry, but that weak spot has been forgotten as the German government starts to spend freely, which should open the way to higher growth in Europe’s largest economy.
France is having no such luck. A year after Emmanuel Macron’s snap election call resulted in a hung parliament, the country remains beset by persistent political uncertainty.
Oil prices remain cool as geopolitical heat rises
The Middle East has been a powder keg for decades, and the recent 12-day conflict between Israel and Iran, has captured the attention of global investors and sent shockwaves through the energy markets. However, is regional politics still the dominant influence over oil markets that it once was?
The conflict ignited on 13 June, when Israel launched airstrikes on Iranian nuclear facilities at Fordo, Natanz and Isfahan. Brent crude surged 6.69% to $74 per barrel, and West Texas Intermediate (WTI) hit a five-month high of $81, driven by fears of supply disruptions, particularly through the Strait of Hormuz.
Benchmark Brent crude prices, which are often considered a gauge for geopolitical risk, rose to a peak of $81.40 on June 23, following the United States’ strike on Iranian nuclear facilities, but then dropped sharply the same day after Iran’s retaliatory strike on a U.S military base was seen as a de-escalatory move.
The following day, prices then dipped below pre-conflict levels to $67 following Donald Trump’s announcement of a ceasefire agreement between Israel and Iran.
The doomsday scenario that the energy markets were braced for, Iran blocking the Strait of Hormuz, a critical passage for nearly 20% of global oil and gas supplies, did not materialize. In reality, Middle East oil flows faced minimal disruption throughout the conflict, meaning that, for now at least, it looks like the markets were justified in remaining calm.
The modest 15% price fluctuation during the conflict indicates that oil traders and investors have significantly lowered the geopolitical risk premium for Middle East tensions. In the past, regional conflicts have triggered far sharper price reactions.
The 1973 Arab oil embargo caused oil prices to nearly quadruple. Disruption to Iranian oil output following the 1979 revolution led to a doubling of spot prices. Iraq’s 1990 invasion of Kuwait saw Brent crude prices double to $40 per barrel by mid-October. The 2003 Second Gulf War sparked a 46% price surge.
While most of these disruptions, except the oil embargo, were short-lived, markets responded dramatically. Although each conflict is distinct, making direct comparisons complex, the oil market’s reaction to major Middle East disruptions has, in percentage terms, become progressively muted in recent decades.
Several factors could account for the shift in how the Middle East risk premium is perceived.
First, markets may be acting more rationally than before, thanks to improved access to news, data, and technology. Investors can now use satellite ship tracking and aerial images of oil fields, ports and refineries to better understand supply and demand balances.
Despite the risk of supply disruption increasing, along with prices, there were significant doubts about Iran’s actual ability or willingness to disrupt maritime activity over a long period, meaning the increases were not excessive.
Another explanation for the restrained price movements could be that regional producers, acting rationally based on past conflicts, have developed alternative export routes and storage solutions to minimize the impact of disruptions in the Gulf.
Saudi Arabia, the world’s leading oil exporter, producing approximately 9 million barrels per day (bpd), which equates to about one-tenth of global demand, has developed a crude oil pipeline from its Gulf coast to the Red Sea port of Yanbu in the west, enabling it to bypass the Strait of Hormuz. The pipeline has a capacity of 5 million bpd and could probably be expanded by another 2 million bpd.
Additionally, the United Arab Emirates, another major OPEC and regional producer, with an output of around 3.3 million bpd of crude, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.
Saudi Arabia, the UAE, Kuwait and Iran also possess substantial storage facilities in Asia and Europe, enabling them to maintain supply to customers during short-term disruptions.
Perhaps the primary reason for the world’s reduced concern over Middle East oil supply disruptions is the declining reliance on the region’s energy resources. In recent decades, oil production has surged in regions such as the United States, Brazil, Guyana, Canada, and China.
According to the International Energy Agency, OPEC’s share of global oil supply dropped from over 50% in the 1970s to 37% in 2010 and further to 33% in 2023, largely driven by the boom in U.S. shale oil production, the world’s largest energy consumer.
The global oil market was also well-supplied entering the recent conflict, further easing fears.
Consequently, the Israel-Iran conflict underscores a weakened connection between Middle East geopolitics and energy prices, perhaps for good. While geopolitical risks may continue to escalate, energy prices are unlikely to rise in parallel.
The Meal Deal
Trump always chickens out, or at least that’s the word on Wall Street.
The “Taco” acronym has gained significant traction in financial circles in recent weeks and is being used to describe the President’s bold, often inflammatory rhetoric on trade, tariffs, and monetary policy that often sparks panic, only for him to later retreat.
But beyond the headlines, what is the real impact of Trump’s policies and unpredictable behavior on the global economy?
Policy reversals have been a hallmark of both Trump’s first and second terms. During the 2018-19 trade wars, he frequently threatened sweeping tariffs only to water them down in subsequent rounds of negotiation.
A similar pattern emerged this year. After unveiling sweeping “Liberation Day” in April, markets tanked, with the S&P 500 dropping 4.84% and the Dow shedding 1,679 points in a single day on April 3.
However, a subsequent 90-day pause on some reciprocal tariffs and later comments from Trump about de-escalating the trade war with China fueled a market rally, with the S&P gaining 1.7% later that month.
Similarly, Trump’s feud with Federal Reserve Chair Jerome Powell, which saw the president brand Powell a “major loser” and float the idea of sacking him, served as a catalyst for market volatility.
Powell responded by warning that Trump’s tariffs could spike inflation and slow growth, risking stagflation not seen since the 1970s, and markets reacted swiftly, with the Dow falling 690 points within minutes of Powell’s remarks.
Once again, Trump backtracked, saying he had no intention of firing Powell, easing fears and boosting stock futures and the dollar. This begs the question, does Donald Trump’s bark consistently outstrip his bite?
Investors seem to think so and have started betting on the “Taco trade” by anticipating these retreats and positioning themselves for gains when the markets recover, as a result, the volatility seen during April and May has since subsided.
Wall Street’s fear gauge, the VIX index, has slipped back below the 20-line that many view as a watermark. Since Trump became the 47th president on January 20, the index has topped 20 on 47 occasions.
In the five months prior to that, it breached that level 18 times. In the last month, there have been just seven days when the VIX has popped above 20, compared with every day from April 2, “Liberation Day,” to early May.
However, the Taco mindset could be dangerous if it takes hold in markets, to assume that Trump will always soften, could be a risky move, and, as some analysts have noted, could embolden Trump to follow through, potentially amplifying economic disruption if he digs in and ploughs ahead with risky policies to prove a point.
There is no denying that Trump’s tariff announcements sent shockwaves through Wall Street and jolted equity markets. The S&P 500, down roughly 15% from its February 2025 peak by late April, reflects investor unease over potential inflation and slower growth.
Tech stocks, part of the “Magnificent Seven” (e.g., Nvidia, Amazon), took a hit, with Nvidia slumping 6.87% on April 16, 2025, after U.S. restrictions on AI chip exports to China cost the company $5.5 billion. Yet, rebounds followed, with Nvidia climbing 5.4% and the broader market rallying on April 23.
And Trump’s influence extends beyond trade, notably the Russia-Ukraine conflict. Despite his push for quick resolution in such conflicts, his “America First” agenda and tariff policies have raised concerns about global stability, with investors flocking to gold amid fears of escalating tensions.
There is fear that if the president persists with his trade war, it could strain global supply chains, impacting energy and commodity prices critical to Europe and Ukraine.
A Teneo Vision 2025 Survey from December 2024 showed soaring CEO and investor confidence, with 32% more CEOs expecting global economic improvement in early 2025 compared to the prior year. Could this positivity be enough to outweigh any tariff concerns?
All the evidence leans towards cautious optimism. Timing is key, and certainly not for the faint-hearted. Investors should monitor policy outcomes, focusing on sectors like tech and commodities that have shown to rebound post-panic. While Trump’s behaviour drives fear, the data suggests opportunity for those who can see through he noise.
Market report
Bonds: US, UK and Germany look attractive
Over the past month, yields have trended lower and credit spreads have tightened slightly, resulting in strong, positive returns. Volatility was driven by Middle East tensions, US legislative changes and a court ruling against Trump’s tariff authority.
Slowing economic growth and mild inflation have increased expectations for rate cuts. Most central banks have either lowered rates or are on hold with a bias to ease further.
Tariff-related uncertainty persists, impacting economic activity and leading central banks to maintain an easing bias. Long-duration positions in the US, UK and Germany look attractive.
Equities: Bull market continues
After dipping in early April following ‘liberation day,’ global equities rebounded sharply, approaching new all-time highs by mid-June. While markets are still drifting higher, momentum has been slowing as summer approaches, with the economic impact of tariffs set to become more apparent and the 90-day pause in tariff implementation coming to an end.
With markets hovering around record highs, a positive outcome to tariff negotiations is largely priced in. Both the tariffs and the uncertainty surrounding them are expected to weigh on economic growth. Markets are likely to be volatile, but the bull market is unlikely to be over and there is further upside potential over the next 12 months.
As the economy digests the impacts of tariffs, global central bank interest rate cuts, together with pro-growth and deregulation policies in the UK and policy support in emerging markets, will all support values.
Technology remains a preferred sector. In the US, financials look attractive. In Asia, Taiwan and India appeal.
Foreign Exchange: Euro due a boost
The US dollar’s fall is likely to continue, with the Euro likely to benefit in the next cycle, just as Sterling did in the last. The fiscal measures in Germany and increased European defence spending should boost the Euro.
The Australian Dollar should also profit from a weakening USD, as Australian yields remain amongst the highest in the F10, whilst Australia’s low position on the US trade deficit list should limit the direct impact of the trade war.
The Yen has gained 8% against the Dollar this year. Whilst it still has further to go, growth potential is now much more limited. The Swiss Franc has the lowest yield of any G10 currency, yet Switzerland’s safe-haven status makes it an attractive place in uncertain times like this. Sterling is likely to continue to benefit from gradual interest rate cuts.
Commodities: Outlook positive for metals
for base metals was shaped by expectations of constrained supply growth in copper, aluminium and zinc, alongside hopes of a demand boost from lower interest rates and robust fiscal spending. However, as 2025 unfolded, both the macroeconomic and sector-specific narratives diverged, which can be seen in uneven performances. Copper rallied. Aluminium, lead and zinc have seen flat or negative returns. However, the sector posted mid-single-digit gains, with copper’s large index weight supporting the benchmark.
Base metals look positive over the next 12 months, with greater clarity on tariffs likely and a more supportive global monetary policy environment ahead. Copper should continue to drive returns. Aluminium output in China is nearing its cap, with modest supply growth expected elsewhere. In zinc, new mine supply will ease market tightness, but demand could keep prices elevated. Nickel and lead, meanwhile, continue to face oversupply, limiting price upside unless production cuts materialise.
Gold: A safe haven in turbulent times
Gold fell back from its record high of $3,500/oz as the shock surrounding ‘Liberation Day’ faded. Yet, trade policy risks remain, together with persistent geopolitical risks and ongoing concerns over the unsustainable nature of the US fiscal position. This will particularly affect consumer confidence and business investment intentions.
UBS forecasts that central banks will buy over 1,000 metric tons of gold this year, which is double the rate of the decade ending in 2021. That will bring prices back up to their previous highs.
Oil: No supply disruptions so far
Crude prices spiked as tensions in the Middle East flared. Concerns about potential supply disruptions, particularly regarding shipping around the Strait of Hormuz, spurred market participants to build in a significant geopolitical risk premium into spot prices.
However, a de-escalation in tensions and no apparent supply disruptions saw markets roll back this view. Companies will retain a cautious approach with respect to investment and drilling activity. Market-related indicators suggest the physical market remains tight, but this could ease later this year if economic growth disappoints owing to ongoing trade tensions. Natural gas prices also fell on an unreasonably fast increase in inventories, but prices are still expected to recover owing to cooling demand during summer in the Northern hemisphere and rising exports of liquefied natural gas.
