The Malta Business Weekly spoke with Dr. Mark Azzopardi, Chairman of the Investment Committee for Merill SICAV plc and Portfolio Manager of the Merill Funds, to discuss how the company managed a turbulent first quarter shaped by trade war concerns, increased defence spending in Europe, and evolving market dynamics across the US, Europe, and Asia.
The Merill High Income Fund recently received a four-star Morningstar rating. What does this rating reflect about its performance over the past five years?
The four-star rating as at 31March 2025 is a significant achievement because it reflects strong risk-adjusted returns over the past five years. It places the fund within the top 32.5% of its category globally, not just locally. It highlights our consistent approach to managing risk and delivering solid returns without taking excessive risks. It shows that our strategy has paid off over the medium to long term.
The first quarter of 2025 was highly volatile. What were the main factors behind this instability, and how did they affect global markets?
There were two main factors. The first was the increasing threat of tariffs and trade barriers, which unsettled markets. The second was a shift in leadership between global markets. For the first time in years, the United States (US) underperformed relative to Europe and Asia in terms of equity performance Previously, even with high inflation, the US markets kept rising, led by the so-called Magnificent Seven tech giants. This time, Europe and Asia saw stronger equity performances, while the US struggled. In bonds, US Treasuries performed well as yields fell, whereas European yields rose due the expansionary fiscal announcements.
You mentioned increased European defence and innovation spending having a positive impact. Can you explain how this is expected to trickle down to the wider economy?
Increased defence spending is not isolated. It leads to job creation, higher salaries and increased consumer demand, which in turn stimulates broader economic activity. Factories may shift from producing consumer goods to defence products, but the supply chains and employment generated spreads throughout the economy. Germany’s decision to move towards more fiscal expansion after years of restraint is particularly significant. It suggests Europe is willing to invest more heavily in industrial capacity, innovation and resilience.
How did the Merill Funds perform in this environment, particularly when comparing US and European equity and bond markets?
All of the Merill Funds registered positive gains during the first quarter of this year. In equities, Europe and Asia outperformed the US, and our diversified approach helped us benefit from that. On the bond side, US Treasuries saw yields fall, supporting bond prices. In Europe, higher yields weighed on bond prices slightly, but because we positioned ourselves carefully — focusing on short-to-moderate duration bonds and gradually extending maturity where appropriate — we managed to navigate the environment successfully. The Merill Global Equity Fund remained resilient despite the US weakness, thanks to our conscious effort to avoid concentration risk.
With fears of a trade war escalating, how are you positioning the Merill Funds going forward?
We have moved into a more defensive posture. We have been preparing for the possibility of a trade war for some time by focusing more on sectors less sensitive to tariffs, such as utilities and insurance. In our bond portfolios, we have maintained strong credit quality and have been selective about extending duration. In equities, we have trimmed exposure to companies that are more vulnerable to tariffs, such as Apple, and shifted into companies like Microsoft that are better positioned. We are executing tactical adjustments rather than making wholesale changes, staying flexible and ready to act as opportunities arise.
There has been a lot of discussion about the impact of tariffs on inflation and growth. How do you see this playing out in the US and Europe respectively?
Tariffs are inflationary for the US because they drive up prices for imported goods, making it harder for the Federal Reserve to cut interest rates even as growth slows. That raises the risk of stagflation which is a very difficult environment to manage. In Europe, the picture is different. As an open economy, Europe risks disinflation or even deflation if export demand falls with the impact of the trade shocks and Euro strengthening vs other currencies. However, fiscal spending on defence and innovation should help to offset some of that drag. It is a complex environment, but Europe is arguably in a slightly better position for now.
Given the uncertainty around US policy and global trade, where do you see opportunities for investors right now?
There are still opportunities, particularly in Europe. Sectors like utilities and insurance are attractive because of their strong cash flows and resilience. The good quality credit market is still looking attractive. We are also looking for mispriced assets that have been unfairly sold off during the market volatility. In every period of turbulence, there are assets that fall along with the market even though their fundamentals remain strong. Being active, tactical, and selective is key. We are cautious, but we are also ready to take advantage where value emerges.
