Q1 2025 Investment Market Update
Tarrif Tantrums and Trump Dumps
Given the magnitude of recent market movements, it would be remiss not to address them in this investment market update. This quarter’s letter follows a slightly different format, beginning with topical commentary, our current outlook, and an update on portfolio positioning—serving as a prelude rather than the usual conclusion to the note.
The start of April has seen heightened market volatility with the S&P500 declining more than 10% over two sessions in response to “Liberation Day”. The implications and outlook surrounding the US’s tariff policy and strategy remain highly uncertain and nearly impossible to forecast. This uncertainty, is likely to impact business conditions and consumer sentiment, which will increase the likelihood of a recessionary scenario unfolding in the US.
In response to ongoing market conditions, we remain focused on proactive risk management. Those following our updates will know that our portfolios have, for some time, been tilted toward more defensive and income-generating assets. This positioning was primarily intended to address valuation risks but has also provided a degree of resilience amid this largely unforeseeable tail-risk event. Over the past quarter, we’ve implemented several additional adjustments that we believe further enhance the portfolios’ risk-return profile.
Despite the noise and fear-driven headlines, the product suite delivered only modestly negative returns over the first quarter, broadly in line with its peer group. It’s worth reiterating that dramatic headlines about billions or even trillions being wiped from markets or highly leveraged hedge funds collapsing often paint a far bleaker picture than the reality on the ground. For investors with a well-structured, diversified portfolio and a long-term horizon, periods of market volatility are not only survivable—they can present opportunities.
Looking ahead, the remainder of 2025 poses significant challenges for investors, with a confluence of macroeconomic and geopolitical risks contributing to an increasingly uncertain and volatile environment. Equity markets are trading at historically elevated valuations, which not only reduces forward-looking return expectations but also heightens the potential severity of any future market pullbacks.
As always, our primary focus remains on preserving capital, managing downside risk, and identifying opportunities to enhance long-term portfolio outcomes. We encourage you to speak with your adviser if you would like to discuss any of the themes raised in this update or explore tailored recommendations aligned with your personal objectives.
Overview
The first quarter of 2025 began with a volatile start to the year, as markets declined over the quarter. January delivered a strong opening, but this momentum quickly faded, with declines across February and March reversing early gains. There were a series of key developments, including a rate cut from the Reserve Bank of Australia, the reintroduction of global trade tariffs under President Trump, and renewed disruption driven by advancements in artificial intelligence.
Despite the turbulence, portfolios remained resilient over the quarter, with performance ranging from -0.2% to -2.88% depending on the strategy, the Arrow Invest portfolios had the softest performance, being our highest risk solutions they carry relatively more exquity exposure. Throughout the period, the Investment Committee made a some changes to portfolios, including rebalancing currency hedging ratios and realising gains on high-performing, higher-risk positions. These changes were implemented to manage overall portfolio risk and lock in returns following a period of strong performance.
By the end of the quarter, portfolios were positioned with an underweight allocation to risk assets and an overweight exposure to investments designed to deliver stable and attractive total return outcomes. This positioning reflects a more cautious outlook, aimed at mitigating valuation risk while continuing to support the achievement of long-term return objectives.
International Equities
During the first quarter, international equities returned -1.9% to Australian investors, equities were strong out of the gate however negative performance insued from mid-february onwards. Our international equity allocation underperformed the benchmark.
The artificial intelligence sector attracted renewed attention and volatility during the quarter, driven by Deepseek’s breakthrough in AI. Widely viewed as a significant leap forward in applied AI capability, the announcement triggered sharp market reactions—particularly among companies at the core of the AI value chain. High-profile names such as NVIDIA, which had previously benefitted from strong upward momentum, experienced heightened share price fluctuations as investors recalibrated expectations in light of both the promise and uncertainty surrounding the demand for computing power. This underscores the heightened sensitivity of innovation-led sectors to news flow and shifting investor sentiment, reinforcing the need for disciplined risk management in areas characterised by rapid technological evolution.
Financial markets reacted sharply to the formal introduction of new tariff measures by President Trump, signalling a significant shift in the administration’s trade policy agenda. The reinstatement and broadening of tariffs, most notably the imposition of a 10% across-the-board levy on imports which renewed investor concerns over global trade disruption, rising inflationary pressures, and the risk of retaliatory policy responses. Volatility increased as markets assessed the potential impact on supply chains, corporate margins, and broader global growth. Export-oriented sectors and emerging market equities saw meaningful repricing, while defensive and domestically focused businesses outperformed in relative terms.
During the quarter, we reduced core global equity exposure within portfolios to fund a new investment in private equity. The Investment Committee viewed this as an opportunity to take profits following a strong period of performance and to manage valuation risk across the portfolios. Global equities, particularly in the United States, were trading at elevated valuation levels relative to historical averages, prompting a strategic shift toward assets offering attractive long-term return potential and diversification benefits.
Early in the quarter, we undertook a rebalance of currency hedging across the portfolio. In the final months of 2024, there were substantial movements in currency markets—most notably the appreciation of the US dollar relative to the Australian dollar—which resulted in a drift away from our target 60% hedged ratio. The adjustment was implemented to realign currency exposure with our strategic targets and ensure consistency in managing currency-related risks across the portfolios.
Australian Equities
Australian equities declined by 2.80% over the quarter & our portfolio's allocation performed broadly in line with the market. The March quarter of 2025 saw a wide dispersion in sector performance across the S&P/ASX 200, reflecting the impact of macroeconomic shifts, including the RBA’s rate cut and rising geopolitical uncertainty. Defensive and rate-sensitive sectors such as Industrials (+2.64%), Utilities (+2.21%), and Communication Services (+1.52%) outperformed as investors sought stability amid increased market volatility. In contrast, growth-oriented and cyclical sectors underperformed, with Information Technology (-17.46%) and Health Care (-9.09%) experiencing the sharpest declines, driven by valuation compression and broader repricing in global tech markets.
In a notable policy shift, the Reserve Bank of Australia (RBA) cut the official cash rate during the first quarter of 2025, its first reduction since the tightening cycle began in 2022. The decision was underpinned by moderating inflation, a softening labour market, and signs of slowing household consumption. While the move was broadly anticipated, the RBA’s commentary indicated a growing readiness to support domestic demand amid rising global uncertainty.
The Australian Government formally announced a federal election, ushering in a period of elevated political activity and policy uncertainty. The timing of the announcement, against a backdrop of shifting economic conditions and a recent pivot in monetary policy has added a new layer of complexity to the investment landscape. Historically, election periods in Australia have brought about modest market volatility as investors seek clarity on fiscal priorities, regulatory direction, and potential sectoral impacts. While markets have remained relatively orderly thus far, we are closely monitoring key policy areas including taxation, housing, energy, and superannuation, all of which may influence investor sentiment as the election approaches.
In February, we made targeted adjustments to the Australian equity allocation within our portfolios. Mid- and small-cap exposures had performed strongly over the past 12–18 months, resulting in a larger weighting within the allocation. In response, the Investment Committee elected to rebalance these positions, taking profits and re-aligning risk across the portfolio in light of a shifting investor sentiment. These allocations, while offering higher growth potential, also tend to exhibit greater volatility compared to the broader market. The decision was aimed to help balance risks across the portfolio.
Property & Infrastructure
Property and infrastructure delivered opposite outcomes over the quarter. Listed infrastructure performed very strongly and was one of the best performing asset classes over the quarter posting a return of 7.0%, whilst Australian-listed property struggled delivering a -6.8% return.
Listed infrastructure demonstrated its defensive characteristics over the quarter of 2025, outperforming broader global equities. Utilities were a key driver of relative performance, particularly in developed markets, as investors sought out businesses with stable cash flows and lower sensitivity to economic cycles. In contrast, economically sensitive infrastructure sectors, such as rail and energy infrastructure underperformed, reflecting their exposure to trade flows and industrial activity.
We are currently in the process of adding a new direct infrastructure investment to our approved product list, reflecting our ongoing commitment to enhancing client solutions to high-quality, real asset exposures. Direct infrastructure offers several compelling benefits within a diversified portfolio, including stable and predictable cash flows, inflation-linked revenue streams, and low correlation to traditional equity and bond markets. These attributes make it particularly attractive in the current environment of heightened volatility and shifting macroeconomic conditions. For clients seeking to explore the role of infrastructure in their investment strategy, we recommend consulting with your adviser to determine whether this opportunity aligns with your long-term objectives.
There were no changes to the property and infrastructure allocation of the portfolio.
Private Equity & Venture Capital
Private equity strategies were an effective source of diversification across the quarter. Core buyout strategies returned between +0.6% and +2.0%, depending on the fund, while our venture strategy declined -0.66. We are still awaiting end-of-March valuations for some strategies.
We caught up with one of our private equity managers during the quarter, who provided an update on the landscape. The market underwent significant evolution throughout 2024, reflecting a clear divergence between the first and second halves of the year. The early part of the year was marked by subdued activity, with limited exits and constrained deal flow driven by ongoing uncertainty in financing markets. However, conditions improved significantly in the second half, supported by increased market liquidity, the reopening of IPO markets, and a notable increase in buyer appetite. This recovery led to the successful exit of leads across the fund, with valuation uplifts averaging ~20% above their carrying values. Deployment activity also shifted, with a growing allocation to secondaries, where high-quality portfolios were acquired at discounts of 10–12%. While direct investments remained highly selective, those executed during market dislocations benefited from favourable entry valuations and are already showing early performance momentum. At the same time, a more accommodative financing environment enhances both new investments and realisation outcomes. The outlook for 2025 is constructive, supported by a backlog of mature, exit-ready assets, continued refinancing tailwinds, and disciplined access to compelling opportunities across both direct and secondary markets.
During the quarter, the Investment Committee approved the introduction of a new private equity position within portfolios which will settle during Q2 2025. This strategy is distinct from our existing allocation, with a specific focus on opportunities in the secondary market. Recent conditions, characterised by reduced exit activity and lower capital distributions, have led many investors to sell their private equity fund interests at a discount, creating attractive entry points for secondary buyers. The addition of this strategy is intended to provide an additional lever of return for the portfolio, enhancing diversification while capitalising on a dislocated and opportunity-rich segment of the private equity market.
Enhanced Income
Australian bonds performed well over the quarter, delivering a return of 1.2%. Bond markets delivered positive performance in the first quarter of 2025, offsetting losses on the growth side of a portfolio. Bonds were supported by a backdrop of rising economic uncertainty and shifting monetary policy expectations. Escalating geopolitical tensions alongside signs of slowing global growth, prompted a flight to quality among investors. This dynamic drove increased demand for sovereign bonds, reinforcing their role as a defensive anchor in portfolios. Gold also saw an exceptional rally during the quarter, as investors turned to traditional safe-haven assets to hedge against heightened volatility, currency movements, and inflationary risks.
For Australia, these external headwinds present additional challenges to the domestic economic outlook and are likely to reinforce the Reserve Bank of Australia’s bias toward a more accommodative monetary policy stance. Should global conditions deteriorate further or financial market instability intensify, the RBA may be prompted to accelerate its easing cycle in an effort to support domestic demand and insulate the economy from broader international shocks.
There were no changes to the enhanced income allocation of the portfolio.
Ryan Synnot
Associate Director, Investment Research & Solutions
Arrow Private Wealth
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