In light of the recent US administration announcements on trade tariffs and the resulting market volatility we felt it worthwhile to share our perspective.
Since April 2nd, markets have reminded us why we take a multi-asset approach to investing. For years, we’ve been asked why we continue to hold non-US equities given their relative underperformance and, more broadly, why we diversify beyond the US. Recent weeks have illustrated the risks of a concentrated strategy — one that often doesn’t align with the risk tolerance of clients.
How Far Can Trump Go?
Tariffs were a well-publicised part of Trump’s campaign, but the scale and approach have taken markets by surprise. In our January annual letter, we identified several key risks for 2025. Risk #3 stated:
“Tariffs are much higher and more widespread than anticipated, with retaliation from other countries, sparking an inflationary shock / stronger USD / emerging market contagion.”
Since the April 2nd announcement, we deliberately held off on any immediate portfolio changes. Our initial view was that the proposed programme would be highly disruptive and potentially self-damaging to the US (and global) economy. The subsequent 90-day pause announced on April 5th, followed by various sector carve-outs, supports that view.
We believe real-world constraints will ultimately limit how far tariffs can go. One such constraint is the impact on US long-term interest rates. Typically, in times of high market volatility, yields fall as investors seek safe-haven assets. But after the tariff news, the 10-year US Treasury yield rose from 4.0% to 4.5%, before retreating to 4.33% following the rollback announcement — an extraordinary level of volatility for such a key rate.
Higher rates are straining the US federal budget, as debt servicing costs continue to rise — something fiscal conservatives in the administration are acutely aware of. Tariffs, by potentially pushing inflation higher, would likely drive rates up further, undermining the administration’s stated goal of reducing debt levels. Other constraints that will be faced will be voter dissatisfaction at higher inflation and goods shortages. Already polling is showing signs of this.
Macroeconomic Implications
The market reaction across bonds, equities and currencies suggests there’s limited room for full tariff implementation. Still, the announcements alone — and the uncertainty they introduce — are enough to put ‘business on hold’. The longer this uncertainty lasts, the more economic damage it may cause.
We’re already seeing evidence of a slowdown in real-time indicators, including airline bookings, and consumer confidence has fallen significantly. To avoid a US recession in 2025, we believe swift agreements with key trading partners and a resolution with China are critical. Without that, the market impact could be severe. Markets currently appear relatively calm, which we interpret as confidence that tariff proposals will be scaled back. However, even if tariffs settle at a 10% baseline, the resulting tax burden — estimated between $200–400 billion — would still be very material.
Historically, recessions bring about a 10% decline in corporate earnings and a 30%+ drop in equity markets. While we expect policy to adjust to avoid a worst-case outcome, a mild recession and weaker markets remain a real possibility. In light of this, we’re taking the following actions:
- Maintaining slightly lower equity exposure than target, as broad corrections offer few places to hide
- Increasing portfolio liquidity to take advantage of potential market dislocations
- Eliminated any USD overweight for clients whose base currency is not USD
Looking Ahead: Key Opportunities
We’ve summarised below our latest insights, based on recent conversations with fund managers focused mainly on the liquid assets space.
1. Equities
Markets have calmed somewhat in the past two weeks, but equity valuations still don’t reflect much downside risk (e.g., S&P 500 forward earnings multiple at 19x). Managers are taking this opportunity to add high-conviction positions in stocks that have sold off significantly and exit those where conviction has waned. These adjustments are happening across regions with no consistent trend away from the US — a sign that bottom-up analysis is driving decisions.
2. Credit & Fixed Income
Credit spreads have widened modestly, and are now closer to long-term averages: ~80–85bps in investment grade and ~400bps in high yield. We’re monitoring closely — further spread widening could open the door to compelling return opportunities from credit risk, potentially rivalling equity returns. We’re also watching the private credit space, particularly BDCs (Business Development Companies), which invest in private loans often used to finance private equity buyouts. The highest-quality BDCs currently yield 10–12%, but during market dislocations, yields can reach 14–15%, which historically has been a strong entry point.
3. Absolute Return Strategies
Year-to-date, absolute return strategies have been broadly flat, with gains in some strategies offsetting others affected by the volatility. US-focused long-short equity managers underperformed, especially those overweight sectors exposed to tariffs (healthcare, tech, industrials). In contrast, global managers have performed better.
4. Tail Risk Strategies
We believe tail risk positions can help hedge against sharp shocks and provide counter-cyclical liquidity. These positions gained ~25% at the peak of volatility following the announcements. As markets recovered, the value in these protection positions fell as expected — but we continue to believe there is a place for these positions given the current downside risks.
If you would like to discuss any of our view please get in touch.
