We share our latest observations on global asset markets in relation to T8 Energy Vision

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

Key points

• T8 Energy Vision outperformed global equities and performed inline with its benchmark in the extremely challenging market environment up to and following ‘Liberation Day’.
• Looking beyond the short-term noise around tariffs and trade wars, we have not changed our positive outlook for the electricity sector which is driven by structural, secular and cyclical tailwinds all converging. We believe this will allow it to prosper, even if the economy experiences a slowdown. We believe this period of market uncertainty represents a good entry point.
• US interest rates (which are presently in a cutting cycle) are yet to have a material impact on the electric energy sector and its supply chains. These sectors have historically benefited from interest rates. We believe that this dislocation is explained by recent policy uncertainty (especially up to and following the US election) which has polarised expectations in terms of the outlook for different forms of energy generation and temporarily obscured the impact of this positive cyclical catalyst.
• Booming electricity demand represents a compelling opportunity for investors. Driven by data centres (a secular electricity demand growth trend) and the electrification of road transport (a structural electricity demand shift), the winners will include energy generation, grid infrastructure, energy storage and electrification (as well as their direct supply chains, including critical minerals).

Market update

President Trump’s ‘Liberation Day’ proved to be the catalyst for a sudden and historically significant market drop (the S&P 500 fell 12%). Arguably more surprising was the V-shaped recovery (the entire draw-down on the S&P 500 had been recovered by early May), notwithstanding considerable lingering uncertainty in relation to the outlook for global trade and the impact on an already slowing US economy. We have covered Liberation Day and its implications in a separate paper, which will be published in the near future. T8 Energy Vision outperformed global equities and performed inline with its benchmark in this most challenging of market environments.

Macroeconomic data

While the economic data reported during April was completely overshadowed by Liberation Day and its aftermath, the data was nevertheless relatively benign. Looking ahead, with company reporting season out of the way, in the absence of left field shocks, economic data (especially inflation, unemployment and indicators of economic activity) will be the key catalysts for asset markets over the next 2-3 months.

The key question is the impact of tariffs on the world’s most important demographic: the US consumer

Consumer confidence remains low (you will recall that consumer spending accounts for nearly 70% of US economic activity) and slipped further from 92.9 to 86 during April. This is an important data point as readings of less than 100 indicate a more pessimistic outlook and month over month changes of more than 5 points are considered significant.

The latest reading indicates that tariffs are exacerbating already weak and weakening consumer confidence, continuing a trend since late November last year. The present level is comparable with the lows during the COVID-19 pandemic although still above the levels experienced during the Global Financial Crisis and the recession of the early 1990s.

The response of US consumers to the trade war will be a key determining factor for the trajectory of the US economy. In the short term we are cautious, if not pessimistic, on the basis that the key drivers of improving consumer confidence are believed to be a combination of high job security, rising wages, low inflation and falling interest rates – none of which are the base case.

The outlook for interest rate cuts increased notwithstanding elevated inflation and low unemployment

Interest rate expectations continue to oscillate. The market is pricing in four interest rate cuts during 2025 (relative to the 3 interest rate cuts that were predicted last month). The cuts are anticipated notwithstanding the fact that US Federal Reserve’s clear ‘dual mandate’ (to keep unemployment low and inflation around 2%) is inconsistent with cuts at the present time (unemployment is currently low and inflation is above 2% and elevated by historical standards). It isn’t clear whether the market expects inflation to suddenly drop and unemployment to spike or that the Fed will abandon its mandate.

The Core Personal Consumption expenditures Price Index (Core PCE) contracted to 2.6% (from 2.8% in the prior month and 10 basis points below market expectations). While a contraction in these circumstances would normally be seen as increasing the prospect for interest rate cuts, the assumption that tariffs will be inflationary makes the reading less relevant. The magnitude to which tariffs increase inflation and therefore prevent interest rate cuts is a critical issue to monitor.

The labour market remains very solid with the economy adding 228 thousand jobs during March (you will recall that 100 to 150 thousand is considered to have a more or less neutral impact on unemployment), considerably more than the 140 thousand expected. While an increase to the participation rate resulted in a small increase to unemployment (to 4.2%, an increase of 10 basis points on the prior month), unemployment is not at a level which is concerning to the US Federal Reserve. Once again, the impact tariffs may have on the labour market is a critical issue to monitor.

We note an increasing number of market commentators forecasting economic stagflation (defined as the combination of high inflation, high unemployment, and stagnant or slow economic growth). We observe that the solid US labour market remains the only factor standing between the US and this particularly undesirable condition which, should it eventuate, would be a major headwind for risk appetite but likely to be very good for safe havens such as electric utilities and gold.

Market impacts

While the yield on 10-year US Treasuries ended the month little changed (at 4.16%), the intramonth moves were significant (and possibly even alarming). Yields swung from 4.36% in late March to a low of 3.99% on ‘Liberation Day’ before spiking 4.49% in the days that followed.

The yield curve steepened with the short end of the curve came in with the yield on 2-year and 5-year notes falling 28 and 22 basis points respectively, while the long end lifted 9 basis points on 20-year bonds.

Bonds more broadly benefitted from aversion to risk. The performance of the Global Aggregate Bond Index (+2.9%) relative to an index of US Treasury notes with similar duration (7-10 years +0.7%) emphasises the fact that Treasuries didn’t play their role as a safe haven.

The US dollar weakened rapidly and didn’t fully recover (US Dollar Index -4.6% to 99). This was also unusual because the US dollar typically acts as a safe haven during periods of uncertainty and is likely explained by investors selling US assets given the heightened uncertainty about US trade policy, concerns over rising inflation, and fears of a recession.

We have explored the drivers and potential implications of these moves in the abovementioned paper.

Commodities were materially weaker across the board with the exception of gold bullion (although even gold fell initially in the rush for liquidity, -4.2% on Liberation Day before rallying to end the month +5.3%, outperforming other asset classes). Every other commodity weakened following the sudden reassessment of demand (and fears of a recession) following the US tariffs with crude oil (-15.5%), copper (-5.6%) and silver (-4.3%) all declining materially.

Global equities (+0.7%) experienced similar wild swings to other asset classes and finished the month modestly stronger. At country level, Japan (+1.2%), Germany (+1.5%) and Korea (+3.0%) were the key contributors, while the US was the main detractor. The equally-weighted S&P 500 Index (-2.4%) and the Russell 2000 (-2.4%) highlights that US large caps flattered the headline return of US equities for the month (S&P 500 Index -0.8%). The ‘Magnificent 7’ mega-cap technology stocks (+0.6%) was a key contributing factor, having been oversold coming into April (the Magnificent 7 Index was down 16.0% at the end of March relative to the S&P 500 -4.6%).

The outlook for US equities relative to other geographies is a key issue for investors to monitor on the basis that US stocks account for over 70% of global equities indices (i.e. MSCI World Index) and the fact that we believe that we are observing increasing doubts in what has been a prevailing belief that US stocks would be perpetually dominant (US exceptionalism) and may be losing (or have lost) their safe haven status (relative to other geographies), which has significant implications for the risk profile of global equity markets and should drive investors to diversify.

At sector level, performances were extraordinarily divergent with the technology sector (+1.6%) benefitting from the performance from some of its largest constituents (e.g. MSFT US +5.3%), while the energy sector (-13.7%) fell sharply on the weaker oil price (-15.5%). The performance of utilities (flat) amidst the turmoil underscored the sector’s safe haven status. We would expect electric utilities to perform well in the event of a serious economic slowdown, recession or economic stagflation.

At factor level, growth stocks (+1.7%) outperformed value stocks (-3.2%) and large caps (-0.7%) outperformed small caps (-2.4%). These outcomes were the result of the above mentioned performance of the mega-cap technology stocks.

Future energy stocks

The Clean Energy Index (+1.1%) outperformed global equities driven by its significant and globally diversified exposure to electric utilities (+270 basis points). Electric utilities benefitted as a result of their defensive characteristics as well as many experiencing electricity demand growth for the first time in more than a decade driven by the rapid growth in data centres.

Outlook

Structural, secular and cyclical tailwinds are converging for energy stocks.

Global energy demand growth is accelerating – especially in advanced economies. In 2024, electricity demand grew at roughly double the 10-year average. Electricity is booming, driven by data centres (a secular growth trend) and the electrification of road transport (a structural shift). The winners in this boom will include energy generation, grid infrastructure, energy storage and electrification (as well as their direct supply chains, including critical minerals).

Falling US interest rates (100 basis points of cuts so far) is a cyclical tailwind which is yet to have a material impact on these industries (which have historically displayed very high sensitivity to interest rates). We believe the lag is explained by recent policy uncertainty (especially following the US election) which has temporarily obscured the impact of this positive catalyst.

While the perception remains that the future of electricity will be all nuclear and gas-fired (Donald Trump’s ‘drill, baby, drill’ comments) and that renewables will be under pressure, our research indicates that an ‘all nuclear and gas’ scenario is implausible. We refer you to a short summary of our expectations for the future energy mix in the US.