Q1 2025 letters for Week #13
The list of letters that we uploaded to our website
The Q1 letters are flowing in! We added the following letters to our database.
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Fund letters with noteworthy commentaries:
If the news leads to market volatility, investors will reduce their overall equity allocation, and rotate into more “defensive” sectors, fearing that the market may sell off more. Conversely, if the market hits a new high, they may reduce their equity allocation, waiting for a market dip.
This behavior is quite common and is a function of active investors experiencing both “fear” and “greed” together with social herding instincts.
Looking forward, the outlook is uncertain. The Trump Administration is rapidly attempting to re-shape the U.S. economy from a global services-based economy to a domestically focused, self-manufactured orientation which will be a challenge. Forcing businesses to re-shore manufacturing and supply chains to the US will most likely result in lower margins, lower returns on capital investment, and less efficient operations.
Since the end of WWII, the U.S. has pursued globalization of business whereby countries could sell products which have a competitive advantage to others lacking in resources. This has allowed the United States, with 68% of GDP from consumer spending, to purchase a wider variety of goods at a lower price than locally sourced goods.
The China market continued the rally started last year, buoyed by a mix of mooted monetary easing and expansive fiscal policies to drive growth. The market was also supported by the release of DeepSeek’s R1 AI model in January, which marked a significant technological milestone for both China and the AI sector. Major companies like Tencent and Baidu integrated DeepSeek’s AI models into their services, leading to optimism about improved earnings in consumer digital services. The Brazilian market outperformed the Index in the quarter despite substantial interest rate hikes, thanks to the better-than-expected performance of its key agricultural and mining exporters. Recently, a negative fiscal outlook and predictions of a macroeconomic downturn previously meant Brazil ended the year out of favor, which was slightly unwound over the quarter. Domestic demand was unexpectedly resilient, and the passage of a key, long-awaited consumption tax reform in January helped improve sentiment.
International markets are confronting a set of complex crosscurrents. We are analyzing many aspects of economic activity, alongside evolving policy actions, corporate earnings and geopolitical factors. With dogged global inflation and tighter monetary policy, the financial markets remain uncertain, and we expect global volatility will continue until these risks resolve.
Signs of consumer fatigue, sticky inflation, and aggressive government job cuts were already beginning to erode sentiment and prompt lower consensus growth forecasts by mid-quarter. Post Liberation Day, investors must now recalibrate for significantly higher tariffs and the possibility of a drawn-out global trade war. Implications include a likely(at least) shallow recession in the back half of this year, further downward earnings revisions, inflationary pressure, and continued volatility in not only risk assets but rates and currencies.
Market volatility increased significantly following the “Liberation Day” announcement in the U.S. and larger than expected tariffs, which upended economic forecasts and weakened investor sentiment. While credit markets have not been immune to the volatility, they have remained orderly, especially when compared to equities. Spreads in both the high yield bond and loan markets have widened to their postcrisis medians, following a prolonged period of tightness. Tariff implementation remains at the forefront and the market is starting to realize that this is not just a negotiation tactic, but a wholesale revision of global trade. While hard economic data remains sound, incoming soft data (e.g., business and consumer surveys) has been notably weak
Touchstone Balanced Fund
Developing trade policy has created elevated uncertainty around economic growth and inflation. Forecasts for U.S. economic activity have declined in recent weeks amid tariffs and weaker sentiment across businesses and consumers. Investor expectations for inflation are for a meaningful short-term impact but one that is not expected to be persistent. While the Fed paused at their last two meetings, expectations are for multiple cuts in 2025 as downside risks to growth have increased and uncertainty remains high.
The macroeconomic environment since April has been extremely complex and changeable due the policies of the US administration. So far, the worst-case scenarios on tariffs have been avoided while near-term economic data is being discounted by investors. We believe that in a slow growth environment, carry is king and so we have tilted the portfolio mix more towards credit markets and a balance between spread and duration. There is still a window for recession risks to come back later in the year, and critical here is how labour markets hold up. A rise in unemployment would open up scope for far more aggressive rate cuts from central banks.
It seems increasingly clear to us that stock market volatility is likely to persist in the intermediate term, driven by heightened uncertainty around economic growth, business confidence, and consumer health. This mix of limited visibility into key economic indicators creates a challenging investment environment, complicating decisions on risk-taking. Moreover, the market has been progressively extending risk exposure for some time now, providing a vulnerable starting point as conditions become more uncertain. Volatility doesn’t necessarily mean a major market drawdown, but we believe forward market returns could be challenged. These periods are good for stable high-quality growth businesses. Companies in which investors have a high degree of confidence that relatively strong fundamentals can be maintained tend to command a premium for that consistency.
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AMGGW&K Small Cap Core Fund
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