As summer arrives, accompanied by a chorus of popping corks and sizzling BBQs, the second quarter of 2025 has tried to metaphorically rain on the world’s collective parade. Alongside continued geopolitical tensions and US tariffs, several events have emerged with potentially significant consequences for markets.
Nuclear tension in the Gulf
The ongoing war in Gaza appears no closer to resolution, with the continuing humanitarian crisis leaving many civilians without food, water, shelter, and medical aid. Despite widespread international concern, these headlines have begun to slip from the front pages as tension between Iran and Israel draws global attention.
For the first time in 20 years, Iran was found to be breaching its non-proliferation obligations. This relates to a 2015 agreement that saw Iran allow monitoring of its nuclear activities in exchange for six world powers (including the UK and the US) lifting economic sanctions. This landmark deal helped alleviate global tensions, but was short-lived. Trump withdrew from the agreement in 2018.
Israel has been vocal in its opposition to Iran progressing in its nuclear capabilities over the past 20 years. Iran’s breach of its obligations has proven to be the spark needed to take action. Since 12th June, both sides of the conflict have sent strikes across borders, with Israel targeting Iran’s nuclear bases. The truth is no one could really predict how close Iran was to producing weapons. Its capabilities had been improving, and it was almost at the required 90% enrichment level needed to start constructing bombs. However, this has been a concern for a number of years, leading some to question the realistic timeframe Iran might have needed to complete the enrichment and construction.
Typically, when unrest arises in the Middle East, there is an impact on various areas of the market in response.
Firstly, equity markets have had a relatively muted reaction, with the Morningstar US Target Market Exposure Index returning -1.48% from 11-13 June.
At the time of writing, the US has weighed into the conflict, carrying out a “successful” bombing of three major nuclear sites in Iran with severe damage inflicted. This has been a significant escalation and has raised concerns about future retaliation.
US involvement has the potential to cause far wider-spread issues across global markets; however, in the immediate aftermath, the Morningstar US Target Market opened relatively flat at 0.77% on 23 June.
Realistically, it is unclear how this will progress and whether the US will further align itself with Israel in a more comprehensive conflict as ceasefires are tested. If Iran looks to block the Strait of Hormuz, which is crucial to oil distribution from the region, the US could become more heavily involved. JP Morgan has suggested that blocking the Strait would likely cause a price shock for oil, and in response to the threat, the price of crude oil has notably rallied. As with many times of market stress, the attacks have seen investors flock to “safe haven” assets, including gold and US Treasury bonds.
Source: BBC (2025)
If investors should take any lessons from this situation, they are
- No one knows what will happen, and trying to guess the markets is often a futile game
- The importance of diversification when investing, not only geographically but also across asset classes and sectors.
For now, we must all wait to see how the situation progresses.
The return of Trumponomics
In the United States, President Trump’s policies continued to roil markets. The White House declared “Liberation Day” only two days into the second quarter, sending a shockwave through markets, with the Chicago Board Options Exchange’s Volatility Index (VIX) hitting above 50.
Trump quickly declared a 90-day pause on the additional tariffs on 10th April, causing a rebound in markets and allowing countries to begin negotiations with the US.
As an additional blow to the Wite House, the US Court of International Trade declared that Trump did not have the authority to impose these sweeping tariffs. While this ruling is currently being appealed alongside the pause, there has been a respite in the markets, with volatility settling almost as quickly as it had risen. Although this was an understandably worrying time for investors, it proves the importance of the adage, “watch the tides, not the waves” when investing.
© Timeline Holdings Ltd 2025: All data is up to the latest available price – 01 May 2025. Past performance is no guarantee of future return. The data is sourced from Morningstar API, for which we are not responsible. Where Morningstar may have missing data or inaccurate data, we are not responsible. Careful consideration has been taken to ensure that the information is correct, but it neither warrants, represents, nor guarantees the contents of the information, nor does it accept any responsibility for errors. Inaccuracies, omissions or any inconsistencies herein. Percentages may not total 100 due to rounding. Performance figures are net of fund manager charges. This tracking error is calculated by Morningstar over a 10-year period and then annualised. Where tracking error is not displayed, the comparable index was not available in Morningstar Direct in order to calculate. The data for the indices and the underlying funds of the portfolios is sourced from Morningstar API. We are not responsible for their presence or accuracy. This chart shows the cumulative performance % of the selected financial assets from the starting point.
Tariffs weren’t the only focus for Trump this quarter, as the Republicans in the Senate revealed their controversial “Big Beautiful Bill”. The sweeping legislative package aims to cut taxes and increase spending on energy, defence, and Immigration and Customs Enforcement (ICE). It also seeks to slash Medicaid and other programmes.
While heavily endorsed by Trump, the bill only passed by a single vote in the House of Representatives. Although cutting some controversial federal programmes, such as Medicaid, the bill would increase the federal debt by $3 trillion over the next decade.
Source: Bureau of Labor Statistics (2024)
There has been some outrage from within the Republican Party over this bill, in particular, the increased national debt. The bill is yet to be finalised but will likely disproportionately harm those at the bottom of the socioeconomic ladder, piling pressure on already vulnerable households.
In for a penny, in for a pound – How does currency affect returns?
Speculation about Trump’s long-term economic plan is rife, with some economists pondering whether Trump is so triggered by the trade deficit that he may purposefully weaken the dollar to help boost US exports.
And the truth is hard to ignore. Dollar movements are important for the majority of portfolios due to the US’s sheer market capitalisation.
The majority of the world’s liquid and investable assets currently sit on the balance sheets of US-listed companies. While currency strength and market returns aren’t necessarily linked, they are important factors for non-domestic investors. US investors would be pleased to see that, in USD, the price return of the S&P 500 index sits at roughly 5.9% year to date. The average UK investor might be disheartened to learn their comparable return of -2.45% does not quite match.
In cases like this, it’s important to compare apples with apples; the conversion of the index into our local currency actually puts the return into the red for the year. Over 2025, the dollar has depreciated in comparison to the pound, and while the figure changes daily, it currently sits at roughly 8% depreciation year to date.
The Timeline portfolios, which we largely use with clients, do not hedge currency exposure on the equity side. The main reason is that currency movements are extremely difficult to predict. While they can affect returns in the short term, over the long term, they tend to cancel each other out, with no consistent pattern. Hedging equity exposure also adds cost, and in a part of the portfolio where investors are generally comfortable taking risk, it offers limited benefit.
It’s important to remember the risk characteristics of the portfolio. In Timeline portfolios, equities do the heavy lifting, and to benefit from the markets, one must accept risk. Fixed income is a fantastic diversifier and defensive asset for those who may not be suited to a purely equity-based portfolio. To help minimise the risk, Timeline does hedge these funds back to GBP, helping to reduce volatility where appropriate.
Mansion House Accord – Reinvigorating Britain or golden handcuffs?
Chancellor Rachel Reeves inherited a difficult economy when Labour took power last year. With sticky inflation, stagnating growth, and an unforgiving electorate, it made for a tricky start. Labour was ambitious in terms of their growth plans for the UK, with Reeves declaring an intention to go “further and faster” than the governments before.
All things considered, growth in the UK has remained underwhelming.
Despite early expansion in 2025, the most recent figures, as reported by the BBC, suggest that GDP in April shrank by 0.3%, more than originally estimated. Labour has been left to formulate some rather imaginative ways to increase investment within Britain.
Source: ONS (2025)
Strangely, it was a Conservative proposition, the Mansion House Accords, that Labour opted for to boost investment within private markets. Some of the 17 largest workplace pension providers have backed the Accords, including Aviva, Legal & General, and Royal London. The Accords outline these providers’ commitment to allocate 10% of their defined contribution (DC) default funds to private markets (5% of which will be UK-based) by 2030. According to Morningstar, the deal is set to funnel approximately £25 billion into UK assets.
So, why is this a priority, and are there any potential concerns? Firstly, Britain lags behind other developed markets in terms of infrastructure investment. The UK has also remained lower on its Gross Fixed Capital Formation (GFCF) as a percentage of GDP compared to other G7 nations.
Source: ONS (2025)
This push into the UK DC pension space appears to be Labour’s way of potentially reducing this disparity, while avoiding the need to increase borrowing or public taxation. There do, though, seem to be some drawbacks to this approach.
This is currently a voluntary arrangement with pension providers, but there has been no mention of ruling out making it a mandatory requirement in the future. Moreover, in theory, this only applies to “default” funds, and clients can switch from these, but the hope is that most will not. Private assets are relatively illiquid and can raise potential concerns for client outcomes from a performance perspective. There may be questions surrounding whether this move is appropriate for the majority of underlying investors in these funds. Finally, this is focused on UK private markets, but the UK public markets have been undervalued for a number of years. The shift of focus from public markets might lead to further unforeseen issues down the line.
Sustainability Disclosure Requirements (SDR) update
Since the FCA began its SDR consultation, many asset managers and MPS providers have struggled to keep up with the various changes. There have been several delays and setbacks, and the FCA was due to release a policy statement in Q2, outlining the rules for portfolio managers and MPS services.
In April, they confirmed that they “no longer intend[ed] to publish” the statement, meaning providers were no longer forced to adopt the labelling process for the time being. There is currently no indication of when this may be picked up again for MPS providers; however, Timeline will be sure to communicate any potential future changes to clients when they arise.
Asset Class Summary
Proxies: Asia ex-Japanese Equities: Morningstar Asia Pacific ex-Japan Large-Mid Cap GR GBP; Developed Market Equities: Developed Market Equities: Morningstar Developed Markets Target Market Exposure GR GBP; Emerging Market Equities: Emerging Market Equities: Morningstar Emerging Markets Target Market Exposure GR GBP; Europe ex-UK Equities: Europe ex UK Equities: Morningstar Developed Europe Target Market Exposure GR GBP; Global Bonds: Global Bonds: Vanguard Global Bond Index Hedged Acc GBP in GB; Global Corporate Bonds (hedged £): Vanguard Global Bond Index Hedged Acc GBP in GB: Global Equities: Global Equities: Morningstar Global Markets GR GBP; Global Growth Equites: Global Growth Equites: Morningstar Global Growth Target Market Exposure GR GBP; Global Property: Global Property: Morningstar Global Real Estate GR GBP; Global Value Equities: Global Value Equities: Morningstar Global Value Target Market Exposure GR GBP; Japanese Bonds: Japanese Bonds: Morningstar Japan Treasury Bond TR GBP Hedged; Japanese Equities: Japanese Equities: Morningstar Japan GR GBP; Overseas Government Bonds: Overseas Government Bonds: iShares Overseas Government Bond Index (UK) D Acc in GB; UK Equities: UK Equities: Morningstar UK GR GBP; UK Government Bonds: Vanguard UK Government Bond Index Acc GBP in GB; US Equities: US Equities: Morningstar US Target Market Exposure TR GBP. Performance periods: 2nd Quarter: 31/03/ 2025 – 30/06/2025, Year: 30/06/2024 – 30/06/2025; 3 Year: 30/06/2022 – 30/06/2025, 5 Year: 30/06/2020 – 30/06/2025.
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