The past quarter saw markets rattle and rebound in quick succession, sparked by dramatic tariff announcements and unexpected reactions from both equities and bonds. In this quarterly instalment, Darius McDermott and Juliet Schooling Latter of FundCalibre explore the causes and implications of this volatility, whether US exceptionalism is losing its shine, and how investors are reacting to shifting global dynamics. They also discuss renewed interest in European and Latin American markets, the resilience of global small-caps, and why diversification could be making a comeback.
Why you should listen to the interview: This episode gives a clear breakdown of recent market volatility, including what drove it and what it could mean for markets moving forward. Whether you’re curious about tariffs, the US bond market, or why investors are eyeing Europe again, this chat makes sense of the chaos.
This interview was recorded on 18 June 2025. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
The end of “risk off”
“In markets sell off, people sell equities and they buy government bonds. So the yield goes down and the price goes up. Now, the US government bond yields did go down for the first 48 hours or so after the Liberation Day announcement. Then they started doing something quite odd, which was the yield started going up and hence the price going down. This is not normal in a risk off environment. And I think as much as the anecdotal evidence about US retailers telling Trump to backtrack, I think the bond market had a swift word in his ear as well.
“The bond market is always a very strong indicator if things are going wrong in an economy, and you would think tariff equals recession equals rate cuts, but actually rates or yields on government bonds were going up. That is most unusual in a risk off environment and may lead to us talking about US exceptionalism or whatever. But the US government bond market, which is the sanctuary in times of risk off actually only lasted for 48 hours and then started becoming a risk on asset much to the general concern about bond investors globally, but certainly within the US.”
Is US exceptionalism over?
“US equities always trade at a premium to other developed markets because they have better earnings growth generally. And broadly it’s a much more high growth market with the obvious sectors being technology and technology related services where the US dominates.
“Our colleague believes NVIDIA shares are actually cheap on probably a forward PE of under 20 for a global market leader, even in a tariff based world. So I think it’s way too easy to say exceptionalism is over.
“I look at valuations and at an index level and the US market is still expensive versus its own long-term history, whereas other markets are not looking so expensive. So what I think the market showed after the Liberation Day volatility, investors were just starting to think about something else other than just the US. That’s not to say that they’re giving up on the US, I don’t think anybody would be – well, you’d be very brave, if not stupid, to move all your money out of the US – but if people just think incrementally, ‘I will put the next pound or dollar or euro or yen into different assets’, then we might see a bit of a rerating of some other assets as well.”
Will the forgotten UK small-caps finally flourish?
“Well it’s sort of exciting. It looks like it’s finally coming to fruition. We’ve been banging on about UK small-caps for quite some time now. But just back in March they were at the widest discount to their long-term average of any major market at sort of over 24%, but that’s now moved to just 14%. So it’s actually been one of the top performing sectors now over the past three months.
“We talked about the diversification away from the US and the domestic pension funds and there’s private equity sort of snapping up bargains also. And the other thing I suppose is UK smaller companies tend to be more domestic facing, so less to fear from tariffs. And they tend to thrive as interest rates come down. And we’ve seen two cuts this year, but I think we are cautious on the outlook for the UK economy. The impact of the government’s various tax increases are coming into effect, with a lot of wealthy individuals leaving the UK and higher national insurance for companies meaning potentially smaller wage increases or staff cutbacks and reduced profit margins.”
Navigating opportunities
“I think the volatility we had around Liberation Day and then the pause shows exactly my key simple message, which is about long-term. If you had been brave enough to start reducing risk into that sell off, we didn’t know what was going to be the catalyst for a sharp bounce. But again, it was Donald Trump.
“So I think don’t be afraid to buy the dips that volatility will create. I just think all in all, the world looks pretty uncertain. I think having a mix of assets and balance – I have a nice bit of gold in my portfolio, which has done very well – and definitely some cash. I’m not saying go into cash, but if I was doing my ISA or an investment today as we are in mid-June, I might just sit on the cash and see if a better investment opportunity comes later on in the year.”
Conclusion: As we move into the second half of 2025, the markets remain unpredictable—but that doesn’t mean investors are without opportunities. From shifting sentiment on US dominance to renewed attention on undervalued regions like Europe and UK smaller companies, there’s reason to think more broadly. Whether it’s inflation, policy risk, or small-cap resurgence, staying informed and diversified is key.
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