Staying the course

Equity markets respond aggressively to tariff threats

Global stock markets have responded vigorously to the latest tariff rhetoric from the US administration, and increasingly the response from trade partners. As we have noted before, there are no winners from a trade war: the economic pain will be felt by both businesses and consumers.

Unlike people, financial markets cannot be forced, pressured, bullied or manipulated. They have no political affiliation. They don't like uncertainty, and they are known to overreact - in both directions. Today's move may well be a case in point.

Markets and investors seem to already be discounting the possibility of a recession in the US, and maybe in other economies – after last week's actions by the Trump administration, such a scenario is now more likely. The real question is whether these higher tariffs will endure or whether such threats form part of a high stakes negotiating strategy.

We pride ourselves in our ability to cut through the noise, separating the personal from the portfolio. Maintaining our resolve in volatile markets is a challenging exercise, but we are meeting on a daily basis to assess recent events and decide if we need to make adjustments to portfolios.

Headline volatility will continue…

We should brace ourselves for sensational headlines in the near term. As different countries respond to tariffs and people share their frustration with higher prices and reduced choice in their supermarkets, the media is likely to amplify this noise. It is possible that at some stage, analysts may be forced to adjust their expectations on future earnings and the financial press will make sure to amplify these changes. It will likely continue to feel very uncertain and therefore, uncomfortable.

… but markets have already travelled a long way

At the time of writing the S&P 500 has fallen nearly 15% year-to-date, Japan is down more than 20%, and continental Europe has erased all of its early year-to-date gains. Most visibly, the German DAX index has fallen 7% this morning. Even defensive Switzerland is now down more than 5% so far this year.

Sharp falls like this, in such a short timeframe, are unsettling. While such setbacks can often present investment opportunities for those investors with a longer time horizon, we cannot know when the markets will stabilise. And at some stage, these markets will have travelled too far, too quickly. Valuations are not cheap enough to make a compelling case on their own, but they are certainly a lot more attractive than at the beginning of the year.

We have been adjusting portfolios

Through this period, we have been adjusting our portfolios to make them more resilient.

Back in November 2024, we reduced our very long-standing overweight in equities down to neutral – and replenished our cash allocation in the process. In addition, last month, we reduced our regional overweight in the US to neutral to capitalise on a very strong performance, which also reflected reduced visibility and rising policy noise.

During that period, we also started taking advantage of the very low volatility in markets and bought portfolio protection, which has surged in recent days.
We changed our direct exposure to Asia and China with a Capital Protected vehicle, precisely to help us navigate periods like this one.
Finally, last week, we also decided to further reduce cyclicality in the portfolio by closing most of the active positions we had across sectors. 

We continue to look ahead, not behind

It is very tempting to overanalyse what brought the market here and if there were any signals that should have been detected earlier. The reality is that the unpredictability and unreliability of the current US administration makes it nearly impossible to second guess what they will do, not do, or if they will reverse course on these policies and others. Financial markets look forward, not backwards, and so should we.
What we know is that, at some point, market participants will start finding interesting opportunities and taking positions even if the news is still very negative.

We have been here before: when the pressure is very high, and the noise is too loud. COVID remains firmly etched into our memory: at the time, most pundits were forewarning of the collapse of the world as we knew it. We argued that it was a health crisis, not a financial crisis. We positioned portfolios with the understanding that the impact on markets was self-inflicted by government policies aimed at preventing contagion. We benefited from a very strong rebound as soon as restrictions started to be lifted.

During 2024, when much of the developed world was undergoing some leadership change, there were conflicts in the Middle East, China was dealing with problems in their Real Estate market, Germany was in a recession and France called a snap election. We argued that the political events did not have to translate negatively into financial markets. We positioned the portfolios accordingly as a result, and benefited from it.

We do not know how long the current situation will last, but we know that this is self-inflicted, and as such, it can be reversed by a change in policy.
For the time being, we leave our asset allocation unchanged, with a neutral weighting in cash, stocks and bonds, but with a more defensive positioning in sectors and markets and having very little active positions. Not "waiting to see" but "actively waiting" for the next leg in the markets.