Steady in Uncertain Times: A Values-Driven Approach
David Chen, Portfolio Manager, Catholic Values Trust and Income Trust
March 2025 Quarter Update
Performance Overview
The March quarter was very volatile amid growing uncertainty on the impact of US President Donald Trump’s Tariffs on the global economy. Things kicked off on a positive note — inflation was moderating globally, central banks supported slowing growth with interest rate cuts, and there was a lot of excitement, particularly around investment and developments within the AI space.
But as the quarter progressed, that early optimism began to fade. Markets grew more unsettled from trade and tariff tensions and economic data began to hint at slowing momentum in the U.S. An emerging theme was the growing disconnect between soft data and hard data. Soft data — like business and consumer confidence surveys — reflect how people feel about the economy and what they expect to happen. Hard data, like jobs numbers, retail sales, and GDP, show what’s actually happening on the ground. During the quarter, soft data weakened noticeably, while the hard data remained fairly resilient. That divergence made it harder to get a clear read on the true state of the economy — and that uncertainty left investors uneasy. Overall, we saw a sharp pullback in risk assets, with capital flowing into more defensive areas like fixed income.
Australian shares ended the quarter down nearly 3%, with the banking sector under pressure following a string of disappointing earnings results. Given the elevated valuations of Australian bank stocks, they were particularly vulnerable to negative surprises — and those came in the form of rising costs, softer lending margins, and early signs that some borrowers were beginning to struggle, particularly in the mortgage and personal loan segments.
Technology stocks also struggled, as investor sentiment turned more cautious. In contrast, defensive sectors like consumer staples and utilities held up reasonably well, helping to steady the market during a more volatile period.
We also saw some mixed signals in the domestic economy. Labour market data softened toward the end of the quarter, with the unemployment rate edging up to 4.1% in February. Even so, the job market is still relatively tight, as a high number of people remain active and looking for work leading to a healthy participation rate— which helps keep overall employment levels strong. The economy has remained resilient. GDP growth was positive, and importantly, per capita GDP moved back into positive territory for the first time in over 21 months.
The economy has been supported by Stage 3 tax cuts, rising real wages, energy rebates, and moderating inflation — along with increased government spending, particularly in infrastructure and public services, which helped support demand.
Global shares also finished weaker during the quarter, with the unhedged global index down 2.4%. The year started on a positive note, but sentiment shifted quickly, initially from delayed interest rate cuts expectations in response to persistent inflation data but later on, from growing uncertainty around President Trump’s evolving trade agenda. High valuations in the major U.S. tech stocks left them exposed to a pullback, and we saw that play out as tariff concerns escalated later in the quarter. Both the S&P 500 and Nasdaq fell into correction territory in mid-March — a drop of more than 10% — which weighed heavily on US dominated global indices.
In contrast, European markets held up relatively well, supported by strong corporate earnings, increased defence spending, and expectations of further central bank easing. And in China, while there were some early signs of stabilisation, longer-term structural issues — especially in the property sector — continue to cast a shadow. DeepSeek’s AI developments spurred a rotation into Chinese Tech stocks, as investors saw evidence that US leadership in AI tech was being challenged. Overall, both European and Chinese markets outperformed the US during the quarter.
Turning to the more defensive part of the portfolio — bonds had a solid quarter, supported by falling yields and a flight to safety as concerns about an economic slowdown grew. Although, the RBA has held a hawkish tone in its latest February meeting citing tight labour markets and stubborn core inflation, the markets tell a slightly different story, as investors price in at least 3 more cuts over the next 12 months, helping to bring yields lower. We have been overweight bonds in the portfolio for some time now, and this area has really outperformed, providing stability as risks and uncertainty grows. Although we believe that the RBA is likely to follow a shallower rate cut cycle, there are risks to global growth from US tariffs, which could bring central banks back to a supportive monetary policy but only if inflation remains in check.
The Income Trust, which holds a diverse portfolio of floating rate bonds, have performed well, particularly as we have been in a higher for longer setting from sticky inflation. It has delivered strong income, generated from high-quality credit holdings in bonds and hybrids. Credit spreads remain at historically tight levels, but we did see some weakness in spreads as they floated higher from the global risk off sentiment.
Outlook and Portfolio Positioning
We’re currently taking a more defensive stance across our portfolios.
We remain underweight equities, as sticky inflation, rising trade tensions, and ongoing uncertainty around China continue to cloud the outlook.
Valuations in the banking sector are still relatively high — even after the recent selloff — and we see limited upside in the near term.
On the other hand, we continue to lean into fixed income, where our overweight positioning has served us well. The RBA delivered its first rate cut in February, marking the start of the easing cycle. While they’ve flagged that the easing path may be gradual, we still see fixed income as an attractive asset class — particularly as term deposit rates have started to drift lower. With rates likely to fall later this year, our bond exposure is doing exactly what we need it to: generating consistent income and helping to cushion portfolios during periods of market uncertainty.
As we head into the next quarter, we’re keeping a close eye on inflation, interest rates, and US tariff developments. While the outlook remains uncertain, our approach hasn’t changed. We’re focused on managing capital carefully, staying dynamic, diversified, and making the most of opportunities as they arise.
Why Invest in the Catholic Values Trust & Income Trust?
- Income Stability: Growth assets face increased uncertainty, trading at expensive levels which improve the attractiveness of more stable and defensive fixed income portfolios. In addition, as we progress through the rate cut cycle, we are starting to see term deposit rates fall while the Income Trust has outperformed.
- Commitment to Catholic Values: We believe financial returns should go hand in hand with faith. Our portfolios are shaped by Catholic teaching — avoiding harmful industries and investing in businesses that act ethically and responsibly. Oversight from our Catholic Values Advisory Board ensures we stay true to these principles, with strong governance at the core.
- Strategic Diversification with a Dynamic Approach
Our portfolios are built on diversification — spreading investments across different asset to manage risk. But we don’t just set and forget. We actively adjust our positioning as market conditions change, helping to protect against downside while staying ready to capture opportunities. It’s a balanced, flexible approach designed to support long-term growth.
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*The text has been edited for clarity.
The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Information Memorandum. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 03 9981 3300, visit the website www.sghiscock.com.au or contact your financial adviser. Any investment is subject to risk, including possible loss of income or capital invested.
