Commentary on Recent Events
Markets have been thrown into chaos after the tariffs announced by Donald Trump on ‘Liberation Day’ were bigger and more comprehensive than the market had expected, causing stocks to drop sharply. Investors initially responded positively to the announcement of a 10% base levy on most exports to the US. However, they were dismayed to see the announcement of additional reciprocal tariffs of up to 49% against major trading partners, set in proportion to their bilateral trade surplus with the US. Asia saw the highest tariffs, with levels ranging from 24% to 46%, while Latin America is least affected. Elsewhere, Europe will see 20% tariffs, while the UK is a relative winner with tariffs of only 10%.
The short-term impact is likely to be higher inflation and lower growth for the US economy. An escalating global trade war threatens to significantly raise the prices of many goods, with most economists predict that US consumers will be the hardest hit. It also comes at a time when government spending, which has long been a big driver of economic growth in the US, is beginning to disappear due to cutbacks from the newly established Department of Government Efficiency (DOGE).
Recent Performance
Most global equity markets are down between 9% and 15% from their recent peak. However, these moves should be seen in the context of strong gains in recent months. Moreover, the brunt of the decline has been born by US mega cap technology stocks such as Nvidia, Apple, Microsoft, Amazon, Alphabet and Meta, which are all off 20%, having risen to extremely high levels of valuation in recent years. In this sense the selloff represents a classic correction of an overvalued market.
While our portfolios have inevitably seen a pullback, our approach has once again proved defensive in a time of stress, as portfolios have fared well in relative terms, declining by less than their respective benchmarks over the past month. As a guide our standard portfolios have declined between 1.9% and 4.5% over the past month.
Diversification is a cornerstone of our investment process. Periods such as these show why it is key. By spreading exposure across asset classes, geographies and sectors, portfolios are better equipped to mitigate risk and navigate shifting market dynamics. Although equities have fallen, our portfolios have benefited from exposure to bonds, infrastructure and absolute return funds, which have all seen gains, along with gold, which has also proved resilient.
Looking Forward
In the short term the door remains open to negotiations. Trump has suggested that some of these tariffs could be rolled back in return for the removal of existing trade barriers on US exports. At the time of writing, 50 countries have already started negotiations with the US, with Taiwan, Vietnam and Cambodia offering zero tariffs on US exports.
On the economic front the risk of a US downturn is growing, but at this stage it’s premature to call for a recession. Trump is expected to follow through on his campaign pledge to deliver tax cuts, deregulation and efficiency gains, while further support is likely to be forthcoming from the Federal Reserve, with expectations for three more rate cuts over the course of 2025. Looking at earnings, the corporate sector remains in good health, with analysts still expecting a 16% annualised growth rate into next year. Unless those estimates begin to reverse sharply, it’s unlikely that the current correction will devolve into anything deeper.
Turning to equities, we have been significantly underweight in the US, warning that valuations had become excessive after two consecutive years of 20% plus gains. Recent events may serve to accelerate the shift of portfolio capital away from the US in favour of other regions. Our largest market exposure is in the UK, where there are plenty of arguments for stocks to benefit from this trend. Domestically focussed UK stocks are trading at extremely low valuations and will be largely unaffected by tariffs. UK goods exports to the US are just £60bn per annum, which equates to an overall economic exposure of just 2% of total GDP.
Elsewhere, gold remains in a powerful uptrend and its role as portfolio insurance is likely to remain important. Investors have, until recently, had little interest in the yellow metal and remain structurally underweight, suggesting that the best is yet to come.
While these periods are understandably unnerving for investors, we must remember that corrections are a normal market function and tend to occur more often during bullish periods, when markets become overextended.
Whilst we cannot reliably call the bottom of this recent setback, now would seem like a great buying opportunity for medium to long term investors who have cash sitting on the side lines. Equally, for those that wish to adopt an increased risk within their existing portfolios, now would be an appropriate time to consider this.
