EWA Stock Market and Portfolio Update Q2 2025

Speaker 1 – 00:00
Foreign Excited to bring you our Quarter two market commentary and a EWA Portfolio update. This is happening in
the middle of quarter two due to some economic conditions that have changed and some trades and rebalancing
that we have recently completed. So if you remember in late February the major focus of our quarter one trade was
to reduce the magnitude of our risk on stance and seek ways to build greater resilience into our portfolios. We
maintained a high degree of long term optimism but anticipated increased near term volatility since then. It is
certainly fair to say that equity markets, in particular US equity markets, experience historic volatility with investors
witnessing a sharp drawdown largely attributed to trade policy uncertainty following by a swift recovery over recent
weeks.
Speaker 1 – 00:46
The decision to hold steady during such a turbulent period was bolstered to our proactive risk reduction in February
and post election trades into scarce assets like gold, which helps soften the impact of those recent market swings.
Focusing on what we are doing in this trade, we are tactfully reducing risk, both total and active risk, while
maintaining a moderate risk on tilt. Specifically, we’re cutting our equity overweight from 3% to 1% and trimming our
US overweight, moving closer to neutral in our regional positioning. The recent recovery in U.S. Equity markets gives
us an opportunity to recalibrate our risk on stance. Given the shadows of trade policy and geopolitical uncertainty
still looming large within US equities, we’re rotating away from broad market exposure into more granular high
conviction positions.
Speaker 1 – 01:28
We are emphasizing mega cap and artificial intelligence companies with resilient balance sheets, potentially long
term structural growth drivers, while also increasing exposure to actively managed strategies that can more tactfully
exploit dispersion and volatility in today’s market environment outside the U.S. We are adding the value oriented
international developed market stocks and moving to neutral on emerging markets as well as neutral to China by
allocating to broad emerging market exposure. The short term aim of the emerging market trade specifically is to
mitigate exposure to highly sensitive policy headline the volatility despite retaining long term caution on China.
Specifically within fixed income, we are introducing exposure to short term inflation protection, adding global
diversification through non US core bonds and marginally increasing duration.
Speaker 1 – 02:16
The combination of these moves is intended to improve diversification characteristics of the portfolio overall while
hedging potential near term tariff driven inflation surprises while building in resilience against possible slower
growth and more pronounced disinflation later in the year. Since we traded in February, there has been no shortage
of news or volatility surrounding the markets. Specifically on March 4, tariffs on Canada and Mexico specifically,
their imports took effect alongside increased duties on select Chinese goods. Retaliatory measures from all three
countries followed swiftly and within just a matter of days we saw exemptions, implementation delays, base and
countermeasures, setting the stage for both how much uncertainty as well as the speed of changes we’ve
experienced around the policy in the last several years.
Speaker 1 – 03:01
On April 2, the much anticipated Liberation Day sent shock waves through the market when the Trump
administration announced a baseline 10 tariff on nearly all U S imports excluding Canada and Mexico, along with the
reciprocal tariffs for another 57 countries labeled chronic trade offenders, including the EU, China and Vietnam.
Global equities reacted sharply, with the S and P falling 14% in the subsequent just three days following, including
the fifth worst two day decline since World War II. The Nasdaq entered bare market territory from the February highs,
while Treasury Y yields fell at the fastest pace since co. As quickly as markets panic, they just as quickly found relief
when on April 9th President Trump paused most country specific tariffs for 90 days excluding China, leading the
S&P 500 to gain 9 and a half percent in a single day.
Speaker 1 – 03:52
In the bond market, the 10 year US treasury rose 50 basis points for its biggest weekly gain since 2001. In addition to
the uncertainty around trade policy, other areas of focus have included geopolitical escalations, change inflation,
interest rate and even Fed member expectations, a US Credit rating downgrade amongst many others. And yet April
ended the month largely when we began. It was a historical month not only for the events highlighted, but never
before had the S&P 500 fallen more than 12% intra month, only to close down less than 1%. The dramatic reversal
underscores an incredibly unique environment we’re in with an administration that is driving this high degree of
uncertainty. In this environment, we’re seeing the importance of portfolio diversification amid extreme market
swings and having a more deliberate diversification strategy that goes beyond traditional stocks and bonds has
been valuable.
Speaker 1 – 04:41
We added to gold during our last rebalance in anticipation of an uptick in geopolitical volatility. Since then, prices
have surged, climbing 11% from February 28 to May 15. Gold has served as a portfolio stabilizer this year as
investors sought safety amid a choppy market environment. As we’ve highlighted going back to the last fall, global
central banks continue to significantly influence demand for gold, holding nearly 20% of all physical gold ever mined
and continuing to increase reserves in response to increasing geopolitical tensions. Importantly, gold’s duration like
qualities have not been exhibited this year as week to week. Changes in gold prices have been largely uncorrelated
with treasury returns adding further to our portfolios, we are capitalizing on gold strong rally by tactfully trimming
our positions to realize gains.
Speaker 1 – 05:28
We maintain conviction in the asset’s long term role as a diversifier, especially given increased US dollar volatility,
and see this as an opportunity to take profit while preserving upside potential. Other diversifiers and stabilizers that
have supported performance, including our positions at international equities in particular develop market value
stocks and US Treasuries. Developed market excluding US equities have delivered strong year to date returns on the
back of rising regional defense spending and challenges to the US Growth narrative within fixed income. US
Treasuries have also delivered on their traditional role as a portfolio stabilizer amid a flight to quality markets have
rebounded remarkably fast from the lows on April 8. Looking at the Fear and Greed index, investor sentiment bottom
at nearly zero in extreme fear in late March and shot to greed by May just two months later as equity markets rallied.
Speaker 1 – 06:18
Recession fears have also largely abated in the same period. As polling suggests, market participants now think the
odds of recession are much lower compared to one month prior. Despite this shift in market narrative, we are more
cautious given that many underlying drivers of near term volatility still exist and we’ve yet to see the full impact of
tariffs in the data. With policy uncertainty and geopolitical fragmentation, we’ve seen how reactionary markets can
be to headline volatility and we should anticipate more spurs of de escalation and re escalation. Our outlook
therefore is one of cautious optimism. Although recent tariff actions could lead to modest short term inflationary
pressures, we believe these effects are likely to be temporary and insufficient to disrupt the broader structural
disinflation trend.
Speaker 1 – 07:01
What remains quite unclear is the potential impact of global growth as supply chain disruptions and shifting
business sentiment could weigh on economic momentum along with continued volatility while policy is negotiated.
Given this backdrop, we see we still expect the Fed to look past near term pricing noise and focus more intently on
signs of softening and growth in labor markets, likely delivering a few additional rate cuts later this year as markets
are anticipating. However, in the space of expected volatility over the next few months, we are scaling back active
risk and staying closer to home, especially within our asset allocation and regional exposure. In this environment, we
believe the most effective approach is to stay anchored to our highest conviction ideas while maintaining broad
diversification in order to balance upside potential with portfolio resilience.
Speaker 1 – 07:47
Without question, the biggest driver of volatility today has centered on the U S China trade negotiations. Trump has
emphasized narrowing the U S China trade deficit as a key policy objective for his administration. This stance has
led to a series of escalating tariffs on Chinese imports beginning in February and peaking at 145 tariff rate on
Chinese goods by April. In response, China imposed retaliatory tariffs on U S exports, reaching a high of 125 during
the same period. A temporary reprieve arrived on May 12 when both sides agreed on 90 day pause and rolled back
tariffs by 115%. Post agreement, US tariffs on Chinese goods stand at 30% while China duties on US goods settled
at 10%. We see scope for tariffs to come down even further depending on negotiations during this 90 day pause and
there is a shifting tone from the White House.
Speaker 1 – 08:34
Completely decoupling from China is not likely in the near future, with certain products like medical equipment
semiconductors very unlikely to see on shoring. For these reasons we see an opportunity to tactfully reduce our
China underweight. As discussed in prior trades. We still remain cautious on China due to ongoing structural
concerns including an opaque regulatory environment, persistent distress in the real estate sector which we’ve
covered many times in the past, and heightened geopolitical uncertainty. Our shift brings emerging markets
exposure closer to neutral and aims to reduce headline driven volatility amid ongoing U S China negotiations,
especially during this 90 day pause window where we see potential for greater clarity on bilateral relations in the
months ahead, an outcome that markets may not have fully priced in yet.
Speaker 1 – 09:18
While it appears that the initial worst case scenario surrounding trade talks and tariffs may have been avoided, it’s
important to note that an effective tariff rate approaching 15% would still be the highest we have experienced in
nearly 100 years. Higher tariffs are dampening expectations for future global growth. Confronted with heightened
uncertainty and century high duties, many global businesses have withdrawn or lowered revenue forecast. The IMF
now projects global growth of 2.8% this year and 3% next year, down from the previous estimates of 3.3% both for
2025 and 2026. Despite soft data for both consumers and businesses coming in very weak as of late, the hard data
does continue to hold fairly strong and so we’ll be monitoring this divergence closely.
Speaker 1 – 10:01
While recession does not remain our base case and we anticipate further support for the market from both the Fed
and from fiscal policy, We’ve seen the US equity market rally nearly 20% from the lows, which we feel gives us an
opportunity to cut risk in a period of time where key trade talks remain unresolved, market pricing has returned to
what feels more like euphoria than a mid cycle slowdown. And with so much macro uncertainty being more
defensive in asset allocation, well, being selective in security selection can be a winning formula with so much
dispersion in place. While the potential growth impacts from tariff policy are one consideration, the potential for
inflationary effects are also something worth noting.
Speaker 1 – 10:39
Jerome Powell and the Fed have indicated that they view the tariff shocks as one time event and we’re inclined to
agree as most tariffs apply to goods. This is also notable for our view on growth given that the US is a service
oriented economy. Looking at real time price data from truflation on the right, we’ve already seen a bit of short time
spike inflation. Truflation indexes are released daily making them one of the world’s most up to date and
comprehensive inflation measures. The chart shows the year over year percent of change today versus a year ago
and we can see that the uptick in real time inflation since announcement of the tariffs as consumers and businesses
front loading purchases in March ahead of policy changes.
Speaker 1 – 11:17
Even though it may take several more months to feel the full impact on tariffs, we’d also point to the disinflationary
trend we have seen all year. On the left hand chart you can see that April PPI fell from half a percent, the largest
monthly decline since 2009. Similarly, we saw April headline Consumer Price index print at 2.3% year over year which
was the lowest print since February of 2021. We think the Fed is still very much inclined to continue to cut rates
given this long term trend, having already lowered rates three times last year. For now they have taken a pause
awaiting more data on the effects of tariffs, immigration restrictions and potential tax cuts. Given our view that the
inflation impact will be short lived, we favor short term treasury inflation protected securities to hedge against these
temporary shocks.
Speaker 1 – 12:03
Although short term inflation shock from tariffs is likely weakening, job data points to potential near term rate cuts.
This aligns with the Fed’s dual mandate to promote maximum employment and stable prices. Current labor market
trends give the Fed reason to consider resuming stimulative cuts to support employment and keep joblessness near
target. The Fed the latest job report showing the unemployment rates unchanged at 4.2% with a number of people
settling for part time work due to lack of full time opportunities has surged. This pushed the broader U6
unemployment measure to 8%, its highest level since October 2021. The graph on the left from the link up tracks
total U.S. Job openings from 10,000 global employers. Openings rose in the first quarter but stalled as tariff related
uncertainty has led businesses to pause hiring. The job market now feels frozen.
Speaker 1 – 12:51
Companies are reluctant to hire amid market volat but also hesitant to lay off workers in case conditions improve.
The beverage curve on the right illustrates inverse relationship between unemployment and job openings. A tight
labor market characterized by low unemployment and high openings appears in the upper left of the graph and
signals economic strength. A slack market, high unemployment and low opening sits in the lower right, often
signaling recession conditions. As of now, we sit on the cusp between tightness and slack. With inflation shocks
expected to be transitory, the Fed may soon pivot back towards easing, making this a critical moment to stay nimble
in both duration and risk positioning in the portfolio. Overall, amidst elevated macroeconomic uncertainty, we
continue to believe that investors will prioritize earnings resilience to identify investment opportunities, and that is
where we continue to lean in throughout our portfolios.
Speaker 1 – 13:41
As a result, on this trade we reduce total active risk. We are increasing exposure to several high conviction themes,
namely mega cap and artificial intelligence stocks with a preference for active management where possible.
Artificial intelligence equities have been pressured by recent sell offs, largely due to their dependence on globally
integrated chip and hardware supply chains. The US Administration is committed to maintaining its AI leadership
and is expected to implement export controls and other trade measures to protect that edge. This year, the top four
US tech spenders, Amazon, Microsoft, Google and Meta plan to deploy over 315 billion in CAPEX primarily to expand
AI infrastructure. We expect this investment wave to continue driven by structural demand for AI computation even
amid trade tensions and macro uncertainty.
Speaker 1 – 14:27
Analysts estimates for these heavy AI spenders as well as for the rest of the MAG7 project robust earnings growth,
particularly in 2025 and 2026. While growth rates are expected to moderate compared to the prior two years, the
MAG7 companies are still projected to outperform the S&P 500 and earnings growth as seen in the chart on the left.
In this environment, while exposure to the AI theme itself will likely reward investors, in our view, we believe bottom
up. Fundamental active management by technology specialists may offer an even more effective expression of this
view. Experienced AI investors can make targeted bets across the AI stack from hardware and software to data. As
theme evolves, a flexible research driven approach will be key to identifying the next wave of beneficiaries.
Consistent with the overall themes of this trade.
Speaker 1 – 15:11
One area where we saw an opportunity to enhance diversification characteristics of our portfolios was the addition
of international bonds. The current macroeconomic backdrop whereby we see global central banks like the ECB
shown here attempting to combat lower growth and acknowledge lower inflation by cutting interest rates more often
and more aggressively than the Fed. This creates a near term opportunity in our view to benefit tactfully from non US
government and investment grade bond exposure. We spoke about the one time inflationary shocks that would take
place inside the US as a tariff country, but what is interesting to the point is that this will also result in one time
deflationary shocks for tariff countries which is the rest of the world.
Speaker 1 – 15:49
This should actually put more downward pressure on rates in regions outside the US and thus create potential
upside price appreciation for non US bonds as these effects are realized. In addition, the specific expression of the
non US bond exposures being added in this trade is hedged to the dollar providing additional attractive carry into our
fixed income sleeve. If one expects as we do, the ongoing trade related negotiations will be uncertain in their
outcomes and their magnitude, we aim to layer in additional diversification and return potential from non U S bonds
which could benefit from a continued trend of outperformance and importantly lower levels of volatility versus core
U S bonds as we have seen in recent realized market returns shown on the chart on the right. So to summarize all of
this you will notice a equity overweight.
Speaker 1 – 16:35
So if we take an 8020 portfolio as an example, previously back in the February trade were 4% overweight, so 84%
equity is 16 bonds for normal traditional 8020 portfolio. And now our 8020 portfolio is still overweight but it’s now
cut down to 81 equities 19 bonds. The second thing you’re going to notice two new funds in the portfolio. These are
active ETFs so still very low cost ETFs, but these can hold high conviction trades such as noted mega caps and AI
companies specifically. And the last but not least, we enhanced diversification and fixed income amid growth and
diversification risk. So if we look at the portfolio overall we are closer to the benchmark.
Speaker 1 – 17:19
Specifically in our US versus international exposure were much heavier on us in the last two years, but now recently
looking at 1000 portfolio would be 73% US, 27% international which would be broken down mostly in developed
markets and also a smaller exposure to emerging markets. As always, please reach out if you have any questions on
your portfolio. By the time this video hits your inbox the trades will have already been made. But if you’d like to
schedule to ask any questions to your advisor, please reach out and we look forward to also reviewing this data and
the recent changes during your next financial planning review.