28 March 2025 - Elkstone CIO Karl Rogers’ Market Memo discusses recent market volatility and how it is driven by known macroeconomic risks with uncertain timing and paths impacting investor sentiment.
Over the past two weeks, markets have encountered renewed challenges with volatility impacting several sectors. This note outlines key developments - and more importantly - the key takeaways and considerations for investor navigating these conditions
What is driving recent market moves?
The concepts of ‘known’ unknowns and ‘unknown’ unknowns are well established in risk management. Known macroeconomic concerns impacting return expectations have been evident for some time – these include geopolitical tensions, high public equity valuations, concentration in public equity performance (notably, the ‘Magnificent 7’ stocks), stubborn inflation levels and the growing likelihood of higher-for-longer interest rates. All of these concerns point to an environment of lower growth expectation. However, the path of the known risks is the unknown part. Although the short-term path in markets is always uncertain, medium to long-term forecasts tend to be more reliable. Several institutions have published subdued 10-year outlooks; JP Morgan expects between -2% and +2% annualised returns, Goldman Sachs forecasts around 3% and AQR projects approximately +3.5% per annum over the coming decade.
Geopolitical Risk
While markets tend to move for a multitude of reasons, some of the unknown elements of the known risks are starting to unfold and show their hand - the markets are reacting. At the forefront of this uncertainty is the US trade tariff policy. Typically, when we think of US trade tariffs, we associate them with economic conflict, targeting adversarial nations such as Iran. However, this time, the US imposed tariffs on close US relationships, Canada and Mexico – taking many by surprise. These concerns were further compounded by the highly publicised pressure placed on the Ukrainian President Volodymyr Zelensky, by President Donald Trump and Vice President, JD Vance. Prior to these events, markets were concerned about the unpredictability of a Trump presidency, but few anticipated the current trajectory. As a result, investors are becoming increasingly concerned about the escalation of economic conflict, the potential outcomes and the inflationary effect of such policies.
During periods of geopolitical tension, investors usually retreat to gold as a safe haven. We are in the middle of a gold rally where gold prices have surpassed $3,000/oz for the first time in history. This surge began in 2024 at a time when the macroeconomic environment historically would have pointed towards a price decline. This rally was driven not by traditional Western investors but rather increased gold purchases by central banks. Despite prices reaching all-time highs, the macroeconomic factors and continued geopolitical tensions, the outlook for gold remains positive.
Chart 2: US & German Government Bond Yield Curve
Source: Refinitiv Eikon
The German government’s recent decision to invest approximately 10% of its GDP into an infrastructure fund while separating out uncapped defence spending from the budget is significant. This move signals a strategic effort to reduce Europe’s reliance on the US for security and defence. This should be welcomed by both Europe (as it strengthens their internal capabilities) and the US (as it bolsters a more independent ally). However, the shift will come at a cost - German interest rates have already increased on the back of this announcement. WisdomTree, a leader in thematic ETFs, and their defence ETF (‘Rise of Tension’) has experienced the largest inflows (€475m) of any thematic investment in 2025 reflecting growing investor concerns. Expect this theme to continue for the foreseeable future.
US Concentration & High Valuations
A key driver behind President Trump’s trade war and wider tariff agenda is the ‘America First’ policy which comes at a time when the US is grappling with crippling national debt. We have seen internal cost cutting measures taken by the Trump administration, such as the establishment of DOGE and other America First initiatives aimed at making American products more desirable. There is an argument that the Trump administration is front-loading its aggressive policies around tariffs, cost cutting and inflationary policies in an effort to initiate a mild recession; this would force the US Federal Reserve to start cutting interest rates more aggressively easing some of the US debt burden - a risky move given one can’t control the depth or duration of a recession.
These measures have caused investors to pare back their US equity market positions causing a drop in the index. While it may seem painful, the peak to trough decline is close to 10%, the S&P 500 index only sits down around -3.5% on a YTD basis. To put into perspective, this is a 3.5% drop after two 20%+ return years which came alongside 10% and <10% earnings growth years. This means there has been a significant multiple expansion over the previous years and a cooling down is warranted. However, the extent of this cool down is unknown. Despite a decline in US equity markets, we are seeing a different picture in Europe with the Euro Stoxx 50 up roughly +11.44% YTD. While European economic data remains subdued, there is a growing sense that we may be approaching the trough of negative sentiment. This shift could also signal the early stages of a broader capital rotation, as investors begin to move away from the strategies that have dominated over the past 10 to 15 years – more on this below.
Inflation and Interest Rates
European and US fiscal policies have led to expectations of rising inflation and interest rates. While central banks continue to signal two rate cuts this year, the yield curves (see Chart 2) suggest a pickup in interest rates, particularly in the medium to long term. The prospect of a ‘higher for longer’ environment is becoming increasingly credible.
Chart 2: US & German Government Bond Yield Curve
Source: Refinitiv Eikon
Volatility
Recent declines in some markets like US equities and Bitcoin may appear worrying, but markets have largely anticipated the direction of travel—what remains uncertain are the timing, triggers and path. When analysing the VIX (see Chart 3), it would not indicate a significant shock given it has stayed below 30 the entire month (20 at time of writing). This mirrors 2022, when steep equity and bond drops occurred without significant spikes in volatility. This is important for two reasons:
(i) markets were not surprised by the declines; and
(ii) a long volatility or tail risk strategy (a widely used portfolio hedging strategy) offered little protection.
As a rule, Elkstone generally avoids these insurance-like hedging strategies.
Chart 3: VIX Index July 2024 – March 2025
Source: TradingView
Key Takeaways
While we have been in this new macro environment for some time, market reaction has until recently resembled the dynamics of the previous 10 – 15-year bull market. It is only recently, as some of these known risks start to take a path, we are seeing a change in asset return mix. The past two weeks have highlighted that different macroeconomic conditions bring different sources of returns – meaning strategies that worked in the previous cycle may no longer be effective in the current cycle.
Increased Volatility
Clients have expressed concerns about increased volatility driven by current known risk factors. As new or different regimes emerge, Elkstone’s investment philosophy which leverages an expansive investment universe, truly begins to show its value. One of the core strategies within our multi-asset portfolio that adds real value to investors’ portfolios is ‘trend following’.
Trend-following has historically delivered similar returns to public equity markets and does so in an uncorrelated fashion over the long-term, however the most appealing characteristic of trend-following can be seen in Chart 4 below – showing the convexity of trend-following versus a 60/40 portfolio. The strategy excels during peak volatility, outperforming traditional 60/40 portfolios. With volatility expected to continue, trend-following is well placed as a bolt-on strategy to an investor’s traditional asset allocation. Commonly referred to as ‘portfolio alpha’, it essentially adds actively managed trend-following to a passive equity investment portfolio – something Elkstone has implemented for a number of years.
Chart 4: Trend-Following Lifetime Convexity versus a 60/40 Portfolio
Source: Elkstone
While trend-following should be a key component of any investor’s portfolio, there are other markets and strategies that will help curate a robust portfolio to navigate the choppy waters ahead.
Private Markets
While investors seek alternative markets to help protect and enforce public portfolios, interest in private markets has grown globally. This shift is driven by two broad themes:
1. Accessibility – innovations in fund structures and asset managers pushing to open the ‘private wealth’ channel have made private market investments available to certain investor groups that previously lacked access.
2. Return, Risk & Diversification
Return: Private markets offer a potential replacement for muted public market returns, driven by:
a subdued 10-year outlook (around 3%);
an access to the private market premium.
Risk: Lower volatility helps dampen portfolio losses during times of market uncertainty and stress.
Diversification: By expanding the investment set, private markets introduce exposure to investments that are defensive and stable in nature such as private credit and infrastructure – segments seeing increased investor interest given today’s macroenvironment.