The Upside: Global markets in 2025 – Economic trends, geopolitical concerns and stories making headlines

[00:00:16] Kyle Cheropita: Hello everyone and welcome to the Upside. I'm Kyle Cheropita. In the first half of 2025, global stock markets showed strong performance and resilience, rebounding after an April slump driven by U.S.-China trade tensions. The S&P 500 and Nasdaq both gained over 5% in the first half of the year with European and Asian markets outperforming, with Germany's DAX index notably surging 20%. The TSX had a good showing as well finishing June up nearly 8% year to date. Despite this, investors remain cautious heading into the second half of the year with geopolitical risks, inflation pressures and currency volatility still weighing. Today's Upside guest has been closely watching the U.S. exceptionalism versus the case for Europe story. Tom Stevenson, Investment Director at Fidelity International, joins me from London today. Welcome Tom.

[00:01:06] Tom Stevenson: Hi Kyle, and thanks very much for having me on the show again.

[00:01:09] Kyle Cheropita: Hey, thanks for joining me today. Great to have you on. I wanted to jump right into it with you and get your thoughts on global markets in the first half of the year. As I mentioned in the intro there, you've been watching it closely, you've been writing articles. U.S., Europe, a lot to talk about. What have you been seeing?

[00:01:27] Tom Stevenson: As you said in your intro, it's been pretty volatile for six months of the year. Markets fell a lot between February and April. They then bounced very quickly. It was a real V-shaped drop and recovery. Markets are pretty much back at their all-time peaks, the peaks that they reached in February. I think that if you go back six months and you look at where we were at the start of the year I don't think you would have anticipated this. If someone had said to you, look, we're going to have all this uncertainty, we're going to have tariffs, trade wars, we're going to have geopolitical uncertainty, wars, worries about inflation, worries about recession, I think you would have not expected markets to be at their all-time peaks at the half year stage, but that's where we are. It's a very good lesson, actually, for all of us as investors to kind of look through the immediate news flow and look at the investment horizon and not to get too worried about things that are happening in the news. The market is very good at pricing that in and if you're already beginning to worry about things and look at things on the news and think how are they going to affect the market, well, the market would have already got there.

[00:02:56] Kyle Cheropita: We hear that a lot from our Fidelity Canada portfolio managers as well.  I'd love for you to dive a little bit deeper into the case for U.S. versus the case for Europe, something that you've written about. You've got a front row seat for what's happening in Europe based in London there. What have you been seeing specifically on that point?

[00:03:15] Tom Stevenson: You mentioned this relative performance of different markets and what we've seen in the first half of the year is that European shares have performed extremely well. In terms of comparisons between the geographical areas Europe has really been the star performer of the year so far. Emerging markets have been pretty strong as well. The UK has not been bad. Actually, the U.S. has been a laggard in the first six months of the year, and that's not something that we've said for a very long time. It has been a change of the sort of mood in global markets compared to what we've seen over the last couple of years at any rate.

[00:03:58] Why is Europe looking so interesting to investors? Well, I think that there are a number of factors. One of them is to do with interest rates, monetary policy. The European Central Bank has been pretty quick to move to cut interest rates and over the last year, since last summer we've seen interest rates fall from 4% to 2%, so they've halved in Europe, and that's providing a real tailwind for markets. The fiscal backdrop is also very favourable. One of the positives which has come out of the changing relationship between the U.S. and many other countries around the world, you in Canada, it's a good example of this but it's true with many other countries around the world, America has actually sort of stepped back from its relationship with Europe, in particular, and it's made it very clear that it is less interested that it has been for many, many years and decades in, if you like, underwriting the security framework of Europe.

[00:05:12] Now, that sounds like a negative but actually in some ways it's a positive because what it's forced Europe to do is to say, look, we need to stand on our own two feet when it comes to our military preparedness and we're going to have to spend some money to do that. In Germany, in particular, the rules have been changed in terms of how much the government can borrow in order to invest in its military capability, in its general infrastructure. This has been taken as a positive by markets because they think that this spending is going to lead to more economic activity and to growth in corporate earnings. We've got the monetary stimulus, we've got a positive fiscal backdrop as well.

[00:05:57] Then if you look at the stock market in Europe and compare its valuation to the valuation of the U.S. market, considerably cheaper. Shares are much cheaper in Europe than they are in the U.S. Investors, they look at lower interest rates, they look at spending by the government, and they look a relatively cheap valuations and they think that looks pretty attractive. That has been what's driven markets over the first six months of this year in Europe.

[00:06:25] Kyle Cheropita: Interesting. Very comprehensive, thank you. There's a few points in there that I wanted to branch off on, ECB, Germany, but just expanding a bit more on the U.S. versus Europe, early July now, where do you think we're going next in that story?

[00:06:39] Tom Stevenson: If you look at the situation in the U.S. in some ways it's kind of the opposite of what I've just described in Europe. We've got a lot of uncertainty in terms of policy. We've talked a lot about tariffs and the trade relationship between the U.S. and the rest of the world. That's creating a lot of uncertainty. I think investors view tariffs as, generally speaking, a negative. They think that they drive inflation and they think that they increase the risk of an economic slowdown, or even a recession. As we look into the second half of the year I think that that is the economic backdrop in the U.S.

[00:07:21] At the same time, I talked about interest rates coming down in Europe, interest rates are not coming down, so far, in the U. S. The Federal Reserve is sitting on its hands, it's having a look to see what the impact of tariffs will be on the economy, on inflation and on the growth outlook, and it's holding fire. There is the possibility that interest rates could come down as soon as this month but I think the expectations for cuts in interest rates are much less positive in market terms than they were quite recently.

[00:08:01] Finally, you look at valuations. Valuations of the U.S. stock market are still pretty high. I talked about that V-shaped recovery in markets that we saw between April and June, that's taken American stock markets back to levels at which they are priced at something around 20, 21 times expected earnings from companies. Now, historically, that's quite a high valuation and I think it makes the U.S. market a bit vulnerable to another correction, similar to the one that we had in the early part of the year. I would say that Europe and the U.S. are probably on different ends of the growth and the monetary policy and the fiscal policy and the valuation spectrums.

[00:08:52] Kyle Cheropita: Any direction from you where you think rates might go next? You mentioned we've got Fed and Bank of Canada I believe at the end of July, European Central Bank in a few weeks as well, any thoughts on that?

[00:09:03] Tom Stevenson: I think the expectation in Europe is that we're probably ready for a pause. We had eight consecutive quarter point cuts which took us from 4% down to 2%. The next ECB meeting is about a week before the meetings in both the U.S. and Canada, which I think are on the 30th of the month. I think the ECB meets on the 23rd of July. Expectation then is that we'll probably have a pause. That may not be the end of the easing cycle. We may have a bit further to go. I've read some expectations that we could get as low as 1 1/2% on European interest rates. I think in the U.S., as I said, there is a possibility that we do get this cut again. We've already had some cuts from the peak interest rates in the U.S. but they have stalled for six months or so. I think that process might start again because we're definitely looking at a slowdown in activity in the big U.S. market. I think consumer confidence, business confidence is definitely slowing, it's diminishing on the back of concerns about the impact that tariffs will have.

[00:10:21] If you look into July, what are the big stories going to be over the next month? Well, clearly tariffs is going to probably the biggest story because we had this 90-day pause that was enacted from the 9th of April until the 9th of July so I think that tariffs are going to be a big story because we just don't know whether the deal is going to be struck at the 11th hour right at the last minute or whether the deals won't be struck and that the U.S. will impose those extra tariffs that it was talking about back in early April.

[00:10:57] Kyle Cheropita: Keeping us on our toes yet again. On a related note, what about the price of oil? There's some tensions in the Middle East, obviously, a developing story, but I believe that plays into the whole tariffs discussion. Anything to add there?

[00:11:12] Tom Stevenson: The price of oil has been very interesting in the last month or so. I mean, obviously, we had that escalation of the situation between Israel and Iran and, obviously, the intervention of the U.S. in that situation with the bombing of the nuclear facilities. When that happened we saw a big spike up in the oil price. It was very short-lived because the response from the parties in the Middle East suggested that it's in no one's interest for this to develop further, to escalate. I think the commodity markets, the oil market, took effectively the climb down very positively. We saw the price spike up to over $80 a barrel for Brent crude oil, it's now down in the 60s, about $67 a barrel. At that level the oil price is not causing a problem for the global economy. In fact, I think it would need to go quite a long way, maybe to over $100 a barrel before it started causing inflation problems and growth problems as well. I think we're pretty relaxed about the oil market at the current level.

[00:12:33] Kyle Cheropita: I just wanted to turn back to something from earlier in our conversation. That was the mention of Germany and their DAX index, very strong. I'm hoping you'd touch on that for a moment. What has caused their index to be up so high year-to-date?

[00:12:48] Tom Stevenson: Largely, it's about expectations of this change in the tax and spend backdrop in Germany. Germany for many years has been reluctant to spend and invest in its infrastructure and, in particular, in its defence industry. What we're seeing is this willingness to spend more money and investors are seeing opportunities, not across the board but in some specific sectors. The defence sector has seen some very strong share price movements and, generally, in sort of infrastructure. There have been some really positive moves in that area. That has been the principle driver. Now, there is a question mark, of course, how much of that expectation will actually flow through in reality, how much of that spending will come, and when will it come, because you can't just turn on a dime and start spending money. It takes time. As ever with stock markets, they're very quick to anticipate benefits and the opposite so it remains to be seen whether there's a bit of scope for disappointment in the pace of spending and, indeed, who will be the main beneficiaries of that.

[00:14:08] Kyle Cheropita: Interesting. Okay, thanks, Tom. I just wanted to change gears a little bit. Now, back in June you wrote a paper on the power of reinvesting dividends. I wanted to draw some parallels for our viewers to something we hear a lot from our Fidelity Canada portfolio managers, and that's the power compounding and making reoccurring contributions to one's RRSP to encourage long term growth. What I'd really like to hear from you, Tom, is your case for the importance of reinvesting dividends but then through that lens of how a Canadian investor can apply that to their own savings through their RRSP accounts.

[00:14:45] Tom Stevenson: This came about because I was just playing around with some charts and I was looking at the relative performance of different markets. One of the things that surprised me was that the most domestic of the UK markets, what we call the FTSE 250 which is kind of mid-cap index, not the biggest companies in the UK, not the smallest, but sort of the ones in the middle and the ones with quite a domestic focus. I was really surprised to see that over a long period of time the FTSE 250 has actually done as well in growth terms as the S&P 500. I think if you ask most people they would say, well, the U.S. market has been the most sort of powerful growth force in investment markets for many years. When I looked more into it I realized that one of the biggest drivers of that performance of the FTSE 250 was the reinvestment of dividends. The UK has always been quite a high dividend-paying market. The dividend yields in the UK have always been relatively high. When you compound those up, you mentioned the word compounding, when you roll up those dividends, you reinvest the dividend, they become one of the biggest drivers of the total return from an investment. It's had a really powerful effect on the performance of the UK market.

[00:16:24] One of the things which I discovered, though, was that one of the real benefits from investing is to drip your money into the market over time. You get a real benefit from doing that, investing regularly, because what you do is by putting the money in early you give it a chance to grow, and the sooner you can get your money into the market the more chance it has to grow. When I compared putting the money in upfront or dripping it into the market you get a real benefit from putting your money in month by month. One of the other benefits of investing regularly in that way is that it's a kind of psychological thing. It's a temperamental thing. It forces you to invest, actually, when you feel least like doing it. When the market falls it makes you anxious as an investor. You look at the market falling, you think I don't want to invest. But, of course, investing when the market has already fallen has been shown to deliver the best returns. Investing regularly is a fantastic way of bypassing that emotional side of investing and forcing yourself to do something which can be quite difficult, which is to invest regularly throughout the cycle.

[00:17:51] Kyle Cheropita: That's smart. On a related note, on last week's Upside we had a clip show featuring clips from our Connects broadcast, which I know you've been a guest on many times. Étienne Joncas-Bouchard, who's our Director of ETF Strategy, spoke about the exact same thing, how you see a lot of money go onto the sidelines and then, specifically looking at the April drawdown, people who have money on the sidelines, take their money out, market drops, then they are a little late to get back in and then they sort of miss that upswing. Whereas, if you're just dripping in regularly, as you said, it has the potential for better gains over the long term.

[00:18:25] Tom Stevenson: Absolutely, Kyle. I mean, this year has been a classic example of that. When you get a sharp fall and a quick rally, very easy to be on the wrong side of that because human nature being what it is you're always going to be slow to get back into the market because you don't quite believe the rally, you don't believe it's sustainable. By the time you do act on it the market's already recovered. Far better to just be putting your money in regularly and then you'll catch it down the bottom there.

[00:18:54] Kyle Cheropita: I think it was late 2018, if I'm remembering correctly, and then COVID, obviously, March 2020 was another example where, yeah, if I'm remembering correctly, pretty sharp drop followed by a pretty decent recovery.

[00:19:07] Tom Stevenson: It was, absolutely. 2020 is a great example of that. It was a very sharp V-shaped recovery. By the summer of 2020 markets were right back up where they'd been at the beginning of the year.

[00:19:18] Kyle Cheropita: Right. I'm curious from your perspective, following these things for a long time, what parallels could you draw, if any, from the COVID days, 2020, to what we saw earlier this year, or even though we saw maybe similar down and up was everything else surrounding that caused that different?

[00:19:35] Tom Stevenson: I think they are quite different situations, actually. Of course, that is the tricky thing about stock market investing, the circumstances, they may look a bit similar, and they certainly may look similar with the benefit of hindsight, but when you're actually going through them they are subtly different. I suppose the similarity I would draw from those two situations is that they were both situations which, at the time, we didn't really understand how they were going to play out. I mean, obviously, with COVID the market fell. We had no idea. I mean, it was a pretty scary time. We had no idea how this was going to work itself out. The market was pretty quick at deciding that this was something which we would find a solution to and we would pull through.

[00:20:25] I think the thing about the tariffs, it's similar in a way because when the tariffs were announced at the beginning of April we had no idea whether these would, actually, be enacted, how quickly, what the impact would be, who would be hardest hit. Over time we've got some clarity on that but we still have quite a high degree of uncertainty, still, about how the tariffs will unfold. In some ways that feels a bit different because with COVID we knew that once we'd got the vaccines sorted out we know that fundamentally the economy would get back on its feet again. With tariffs, even once the tariffs are agreed, I think that in terms of global trade we're in a worse place than we were six months ago because tariffs are a drag on economic activity and they're a source of friction within global trade. I think that is fundamentally different from COVID.

[00:21:35] Kyle Cheropita: Those are fantastic points there, Tom. Thanks so much for that. I think they all speak to the power of advice and why somebody should listen to the experts and not just try to do it themselves. Now, on that note of listening to the expert, you are one of those experts, Tom, how can a Canadian get more information from you and read your pieces?

[00:21:58] Tom Stevenson: Absolutely. I wear a couple of hats here in the UK. I write for Fidelity so on our website, which can be found at fidelity.co.uk, not just me, I'm surrounded by a strong team of experts in investment and the markets. We produce a lot of, I like to think, high quality content which we'd love to share with people all around the world, fidelity.co.uk and look for markets and insights. That's where our content is housed. The other hat that I wear is as a columnist in the Daily Telegraph newspaper. Now, I think that those columns are hidden behind a paywall, unfortunately, but they can be accessed through the Fidelity website because we republish those open access so you can always read those columns on the Fidelity website, or you can go and look at my LinkedIn profile which is easy enough to find. Just search for me on LinkedIn and it's all there.

[00:23:15] Kyle Cheropita: Perfect, and if I'm not mistaken the ink is drying on your quarterly update so on that note final question for you, second half of the year, it's early July now, what are your thoughts going into the second half?

[00:23:29] Tom Stevenson:  I think as we go into the second half of the year, the important thing is where we start. The markets have bounced back. We're in a position where many people will be at the same place, or even probably a bit better than they found themselves at the beginning of the year. However, I would say that the outlook is a bit uncertain. I think that the possibility is that there will be something of a growth slowdown on the back of the tariffs. That said, corporate earnings are still growing quite nicely. I think there is a scope for interest rates to come down all around the world, actually, not just in the developed countries that we've discussed so far, Europe and the UK and the U.S., but in emerging markets, for example. Interest rates are pretty high and inflation is pretty low so there's a lot of scope for interest rates to come down there. Yes, I think there are challenges and they all say about markets that they climb a wall of worry. Markets continue to rise while there is still something to be concerned about and that is the backdrop that I see half-way through 2025. There's lots to be concerned about but there are also reasons to think that the market could progress from here.

[00:24:56] Kyle Cheropita: Well, that's fantastic. You're a busy guy, Tom, so thanks for making the time to chat with me today. I understand you have a vacation coming up, maybe to this side of the pond?

[00:25:05] Tom Stevenson: Absolutely right. I'm on my way to Canada in just a few weeks' time, actually. I'm going over to the west, got family over in Vancouver Island so I'm really looking forward to that.

[00:25:17] Kyle Cheropita: That's great. You've got family there so I'm sure you will get some local recommendations but if anybody in the chat would like to toss a few things in there that Tom can check out locally, like you said, Tofino when we were on the line before, and Victoria so anywhere on the island, please, local recommendations, throw them in the chat there for Tom. Tom, thank you so much for joining me today. We'll see you again.

[00:25:38] Tom Stevenson: Kyle, thanks very much indeed. Bye.

[00:25:40] Kyle Cheropita: Fantastic, and thank you all for joining the show today. For more from us please head to fidelity.ca's investor education section. Whether you're learning investment basics or looking for more advanced knowledge we can help you become a more informed investor. You can check out articles, sign up for the Upside newsletter, get information about upcoming live webcasts and on-demand videos. Fidelity Canada on YouTube, LinkedIn and Instagram is also a great resource for more content, as well as our Upside and Fidelity Connects podcast with new episodes dropping daily. Thanks for watching and I hope you'll join us again on the Upside. I'm Kyle Cheropita.