MARKET OVERVIEW
April was a highly volatile month of trade developments that whipsawed the equity market, with volatility levels (VIX) last seen during the Covid crisis or GFC. The month opened with the “Liberation Day” tariff announcement by President Trump. Although expected, the scale, breadth and methodology associated with this announcement took investors by surprise. Equities, in particular US equities, came under pressure as recession fears increased, while US rates rose on the back of the perceived risk of tariff-led inflation pressure, and the USD weakened against most major currencies. Some of these initial knee-jerk reactions receded as the US administration announced a 90-day suspension for some tariffs to allow for a negotiation period with a dozen countries, while escalating trade tension with China further. In a stark reversal of past trends, US equities were the weakest and closed the month down, while equities from other key regions ended in positive territory.
The volatility surrounding significant events such as Liberation Day creates opportunities for us as bottom-up stock pickers.
INVESTMENT THESIS
The effects of the trade war go beyond short-term moves in market averages. The new administration has also overturned the market narrative of 2024. Last year there was a momentum market. Many stocks appreciated in value because they had appreciated in value: price rises fed on themselves. The market favoured companies with strong projected earnings growth over the next year, or even the next quarter, especially those involved in artificial intelligence. While the S&P 500 rose by 23% in 2024, the stocks with the strongest 12-month momentum were up by 58%*.
Now the momentum market appears to have come to a halt. Investors have looked more soberly upon many of the companies that had until recently driven returns. In 2025 these stocks have proven vulnerable to bad news. Consider the emergence of DeepSeek, a Chinese AI competitor. Anyone grounded in AI was aware of the model, and its capabilities, in 2024. Yet the release of the DeepSeek chatbot in January 2025 took many investors by surprise, sending the prices of many hot AI companies sharply lower. The episode reveals an important truth about the market in 2024: it projected an image of strength, yet beneath the surface it was surprisingly fragile.
There has been another important market development in 2025. It concerns the relative strength of the US market. By the end of 2024 many investors were convinced US outperformance had become almost a law of nature, meaning earnings and returns would compound in the US’s favour for years to come. The investment team thought this was complacent. As the investment team wrote to you in their final letter of 2024, the US companies that they track had become expensive relative to similar companies in non-US markets. By the end of the year the portfolio was highly exposed to Europe.
So far this year, ex-US markets have easily outperformed the US. The new administration in Washington is, so far, hurting not helping America. There could be more damage to come. The investment team worry about cuts to the funding of the National Institutes of Health, the lifeblood of many scientific discoveries. Generation are not economists, but they hear growing worries about a US recession. Many of the new administration’s policies are not only damaging in themselves, but also raise uncertainty, which has its own negative effects. On the other side, Europe (and in particular Germany) has developed a taste for infrastructure investment, not only in the military but also in the green transition.
The investment team believe the portfolio is in a strong position, both in 2025 and in the years to come. As always, they are alive to the fact that many of the recent trends discussed in this letter could themselves reverse. They are aware that a global recession, widely predicted in 2023, may eventually come to pass – when America sneezes, after all, the world catches a cold. But they still think there are pockets of attractive valuation, especially outside the US. At the time of writing, they estimate the portfolio’s fair value is 50% higher than its market value – a high ‘upside’ by historical standards.
Generation have taken steps to insulate the portfolio from the most acute forms of economic and geopolitical risk. This included trimming exposure to regions where valuations have run ahead of fundamentals and rotating into assets with more resilient cash-flow profiles. They are not trying to time the cycle – they are trying to prepare for it. Above all, they remain focused on assets they believe can compound through periods of volatility as well as in benign conditions. In an uncertain world, Generation are grateful for the longer time horizon our clients afford us. If the US confirms its entry into a bear market, it will be the sixth in our careers. They will use this upheaval, as they have done in prior periods of market turmoil, to continue to build a portfolio of excellent, high-quality companies that have derated and, they believe, will deliver excess returns over the next two decades..
* https://www.morganstanley.com/ideas/stock-market-rising-momentum
PERFORMANCE REVIEW
Generation's process is underpinned by a bottom-up approach to stock selection, the manager refers to the stock attribution attached for the drivers of performance during the month of April.
As long-term investors that integrate a sustainability lens into their analysis, Generation is focused on their long-term outlook for the companies in the portfolio and whether their thesis remains intact, despite any near-term headwinds and share price movements.
The top performers during the month included Mercado Libre, Microsoft and Equifax. The bottom performers included Becton Dickinson, Thermo Fisher and Agilent. Whilst these companies are experiencing short-term headwinds, the Generation team retains his conviction in the long-term thesis on these names and others in the portfolio.
Generation is focused on strong execution of its process and has made adjustments on areas the manager identified for improvement.
