Artemis Strategic Assets Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated.

Market review

The first quarter of 2025 got off to a promising start in the US with the ISM (Institute for Supply Management) services index and non-farm payrolls indicating further growth was likely. However, the release of DeepSeek’s AI model led to a NASDAQ selloff. By the end of the period, the S&P 500 experienced its largest quarterly drop since 2022 following the threat of aggressive tariffs from US President Donald Trump.

In Europe, fiscal shifts led to a potential increase in defence spending, notably in Germany where the coalition government proposed reforming the constitutional debt brake. This led to a rise in the 10-year bund yield and strong performance from aerospace and defence indices and the German DAX. 

Central banks showed policy divergence, with the Federal Reserve keeping rates unchanged but slowing QT (quantitative tightening), the European Central Bank cutting further and the Bank of Japan continuing to hike. 

After a disappointing start to the quarter, fund performance recovered towards the end; notably, it rallied in March while equity markets fell. However, it was still down 0.7% over the three-month period, compared with a gain of 1.1% from its CPI +3% performance target and a loss of 1.6% from its IA Flexible Investment sector.

Positives/negatives

The trend-following Price Based Signals (PBS) portfolio declined over the quarter, with our fixed income positions the key detractors. Long exposure to New Zealand government bonds hindered performance as traders locked in profits from 2024’s strong rally and adjusted expectations of central bank easing. Our equity positions performed better, with longs in the Chinese market and European banks benefiting from the rotation away from the US.

Losses in the (PBS) portfolio were partly offset by gains from the non-directional Market Driver Models (MDM) portfolio, driven by strong performance from our currency positions. The long position in Sweden's krona was particularly significant as improving growth prospects in the Scandinavian country helped it become the best-performing G10 currency in the quarter. Short positions in Canadian and Australian dollars also made a positive contribution.

Activity

We continued to reduce our long position in bonds and ended the quarter with a short duration position of around -2.6 years. This was driven primarily by the change in our exposure to European and New Zealand government bonds. We ended the period with a net-long equity exposure of about 6.5%, marginally lower than at the beginning of the year. Since the change in manager, the fund has shown a low correlation to equities, bonds, and commodities, whilst delivering a high correlation to the cross-asset trend peer group index (BTOP50) that we are trying to capture.

As at the quarter end, our most significant individual positions were:

Short the Canadian dollar: Whilst we had already established a short in the Canadian dollar in 2024, we significantly increased the size of this position against other G10 currencies in early March. Flows, positioning, and carry represent headwinds for the currency.

Long Japanese equities: Within our Price Trends portfolio we hold a long position in Japanese equities based on prior price appreciation, although this position was pared back during March as the index rolled over. We also hold a relative long position against other equity markets within our MDM portfolio. This was due to positive momentum, supportive technicals and relatively cheap valuations.

Short Japanese yen: We established a short position in the yen versus the pound relative to other G10 currencies in February. Relative carry remains supportive of a short, as do flows which have been negative, while only valuation argues for a long position.

Outlook

Tariffs spoil US exceptionalism

Risk assets have come under pressure from increased uncertainty on tariffs which has negatively affected consumer and economic sentiment, leading to weaker growth forecasts and higher inflation expectations. This recently culminated in a further expansion of US tariffs on all its trading partners, which were subsequently reduced and postponed (except in the case of China). Whilst bi-lateral negotiations may see further tariff reductions for some nations, this will take time. Until then, emerging market countries with large trade deficits and little means to buy US goods will be hit hardest.

The market is no longer focusing on money raised from tariffs being used to fund fiscal stimulus through tax cuts and is instead expecting a negative impact on growth this year. Longer-term inflation expectations were rising in US consumer surveys even prior to the 2 April tariff expansion announcement. We see this most clearly in real yields falling, indicating lower growth, and rising breakeven spreads, suggesting higher future inflation.

Federal Reserve on pause for now

We are in the early phase of absorbing a wholesale change in the trading relationship between the US and its partners. As a direct result of higher trade barriers, most analysts predict prices will be higher. The Federal Reserve will have to tread a fine line in setting interest rates, as slower growth demands cuts, yet inflation is already above target and the tariffs announced so far will likely see higher prices in the short term, if sustained.

For now, therefore, the most likely approach in setting monetary policy is for the Federal Reserve to retain rates at the current level of 4.25 to 4.5%. There is, however, a risk that more weight is given to the prospect of slowing growth than higher prices, meaning interest rates are subsequently reduced. At the time of writing, markets are expecting four cuts of 0.25 points this year, which is already two further cuts than expected three months ago. If implemented, these cuts would take rates down to between 3.25 and 3.5%.

Europe to continue cutting rates

Sentiment in Europe has been buoyed by Germany loosening its balanced budget rules and opening the door to significantly higher spending on infrastructure and defence. The 2 April announcement on US tariffs leaves the region facing lower growth and potentially makes the European Central Bank's decision over whether to continue cutting rates much easier.