Trade gets reordered

Given US President Donald Trump has not yet been in power for 100 days, he’s certainly made his mark on markets. This quarterly piece largely observes the US President’s tariff policies and their impact on global economies. Equity indices have tumbled, along with most US international relations.

But it’s crucial the current fear in markets does not reinforce itself and spiral away from reality; an idea defined by financier, George Soros, as reflexivity theory. Reflexivity is a feedback loop where perception affects fundamentals, which then changes perception, and so it continues. This is when investors begin to base decisions on their perception of reality, instead of reality itself. Determining reality is a murky area as subjectivity comes into every facet of our lives. But there can be a false hype in markets which is important to identify as it becomes a bubble which inevitably then bursts. Reflexivity basically says that fear of volatility can end up leading to more of it, a self-perpetuating vicious cycle. Today’s investors would be wise to remember the fundamentals and not get carried away by turbulence and headline-grabbing policy changes.

That’s easier said than done. Keeping a cool head requires experience, preparation and a degree of optimism. According to our analysis of economics and market cycles, we were well prepared for a slowdown and volatility, and our portfolios are subsequently well positioned for this environment.

Early April saw US President Donald Trump announce a minimum 10% baseline tariff on all imports to the US. This rate was even higher for many (including Vietnam and Bangladesh) who were hit with tariffs of at least 50%. China faced a staggering rate of over 100%. Countries in the European Union were initially given a tariff of 20%. Uncertainty flooded the market and sent global equities tumbling. The tax will likely lead to significant changes to global trade patterns. It remains to be seen how the worst-hit countries will retaliate, but shocks will no doubt continue.

We believe tariffs, as with other supply chain shocks, are inherently inflationary. Furthermore, in this instance where there are marginal re-shoring moves in manufacturing, these will be into the expensive US dollar (as opposed to cheaper foreign currencies), adding intrinsic cost into the economy. It’s possible that interest rates will have to rise to counter this inflation, and any significant rate changes could be the driver of a policy rethink.

Prior to the tariff announcements, recent data in the US have been more mixed, with some signs that consumption is slowing. We see this as more noise than signal currently, but the pullback in US equities is consistent with a slightly higher probability of a slowing economy. Risk of recession has risen.

We don’t have to look far into history to find the scars of previous tariff policies. During the Great Depression, nations turned inwards to protect their faltering economies only to find international trade plummeted and economic woes worsened. Protectionist wounds ran deep. Eventually, countries rallied and the General Agreement on Tariffs and Trade was established (in 1947) to promote global commerce and reduce trade barriers, heralding the start of successful multilateral trade agreements. History does not always repeat itself, but it does serve as a warning.

Trump’s impulsivity makes it hard to know what will happen next. But if we look at his past actions and behaviour, we see someone who does not easily acknowledge a mistake and completely reverse his position. He’s more likely to double down than back down. His message around the perceived long-term benefits for US industry remains paramount.

The challenge for investors will be how to process this fast-changing news cycle and understand how various sectors and countries will be affected. If US/China relations break down completely and some of the biggest US companies need to quickly pivot away from using Chinese goods, investors would be wise to identify businesses which do not rely on US/China trade.

Japan may survive this turmoil well as it looks likely that Japan and the US will reach a trade deal. If there is free trade agreed between Japan and the US, Japan could end up benefitting from this global reordering of manufacturing, strengthening the country’s position as an investment opportunity. We are well positioned for this possibility if it comes to fruition.

The new tariff policies have plunged tentative economies into uncertainty. The year began optimistically, with global equities delivering 3.4% before Trump’s proposed tariff programme began to rattle markets. In February, US stocks tumbled on the back of these uncertainties, unwinding their exuberance of 2024. April saw indices fall further across the world and fearful investors sought out safe havens.

The large intraday movements of early April indicate we’ve entered a bear market, our third in the last five years (we also saw bear markets in 2020 and 2022). It’s the length and severity of this one that will be hard to predict as swift and significant policy action has alleviated the impact of the previous two. This time around, policy action is rich with uncertainty amidst these fast-changing political tensions. A U-turn, or a significant deal, at this point could still avoid a recession.

Equities have lost all their 2024 gains, but not all sectors and asset classes have tumbled. Fixed income has long languished at the bottom of performance tables but returned positive performance in February and March, benefitting from an increase in market uncertainty and rising risks to growth. Initially, tariff-wary investors began to allocate to less risky assets, so global bonds yields fell, and their prices rose. Ultimately as global investors soured on the US and started selling treasuries it appears that the sudden spike in yields drove the administration to press pause on the implementation of their new policies. Bonds are the key market to watch over the next few months as interest rates may move up again to counter any tariff-driven inflation. Trump also seems particularly sensitive to any significant moves in US Treasuries.

Europe has also told a better story so far this year, as the region’s political tone has improved and its shares subsequently advanced. The European Central Bank is leading the interest rate cutting charge, and various proposed fiscal spending projects are being warmly received by investors, particularly in the European defence sector.

Commodities have also fared well in 2025 . The asset class is usually considered a late-cycle performer, protecting portfolios from inflation and benefitting from sustained demand. Today’s late-cycle environment is no different. US dollar weakening has also given commodities a welcome boost as the asset class is now relatively less expensive (we typically see an inverse relationship between the US dollar and commodities). In amongst all the turbulence, commodities have delivered robust positive performance this year, perhaps most evident in gold and gold miners which have surged. The outlook for broader commodity markets from here is less certain, with weaker demand likely to weigh on prices despite the attractiveness of the asset class in periods of higher inflation.

These dramatic changes to global trade have drummed up a noisy start to the year, but they haven’t led to any fundamental changes in our strategy. We are well positioned for a late cycle slowdown; our portfolios should be resilient in this environment. Our hedging strategy, allocation to alternative strategies, and equity positioning are designed to weather sharp market swings well, effectively smoothing the investment experience.

Although the downward pressure on equity markets has been relatively widespread, in the US the moves have been most pronounced in some of the stocks that we are deliberately underweight, such as US mega-cap tech. Small-cap US stocks should benefit from the tariffs, but they will not be so good for multi-national companies. Domestic, small-cap stocks (like the ones we hold) should do better against large cap, although that’s not certain.

Our overweight to Japan and emerging markets has supported returns year to date, as has our defensive positioning in gold and some portfolio hedging. We also have a relatively high allocation to alternative strategies as a diversifier over fixed income, and these outperformed global bonds in March.

Periods of heightened volatility can be good opportunities for long-term investors to buy assets at more attractive prices. While we have not made any changes at a portfolio level, our current preference for active management means that over the long term, our nimble portfolios can benefit. Our dynamic asset allocation and investment process allows us to act quickly and decisively when needed, and to take advantage of opportunities as they arise.

US dollar weakness has been a surprise feature of Trump’s second term. It certainly wasn’t the story of his first, which saw a stronger dollar throughout. But his aims for the currency are far from clear. The US President says he wants the currency to remain dominant but also advocates for its weakening to boost US exports. If he follows through on tariffs, inflation could reignite, leading to higher interest rates for longer, pushing up the dollar. Tariffs could also cause weakness in other countries, improving the US’s relative strength, and pushing up demand for its currency. However, the tariffs also risk dampening the US economy which could weigh heavy on the dollar.

The initial tariff threats against China, Mexico and Canada saw the US dollar rise, before it shortly fell again after they were suspended. April’s dollar has rolled back its January highs, and as valuations were so extended, it fell fast and far. The further move down in the US dollar in the immediate days after the policy announcement was perhaps one of the bigger surprises to markets. But this dollar weakness has been a key catalyst for other markets, notably emerging markets and Japan.

The correlation between the Japanese Yen and US tech is high. When the Yen strengthens, US tech shows higher volatility, and vice versa. That relationship is down to carry trades which involve borrowing in a currency with a low interest rate (the Yen, for example) and investing in assets denominated in a currency with higher interest rates (the US dollar, for example). When the Yen strengthens against the US dollar, these carry trades may unwind, so less capital flows into US markets, affecting the price of tech stocks.

This is exactly what we’ve seen in the past few weeks. The recent moves in US tech stocks have coincided with a strengthening Yen, which is now starting to rise from its 40-year lows. Japan’s equity story is attractive and if the Yen recovers and capital is repatriated, the opportunities in Japan will start to look significant. The end of disinflation, cheap valuations and improving fundamentals write a strong long-term investment case for the country. We expect the return on equity to increase, and that would be an important driver for future returns. We think Japan could emerge as a winner in this weaker US dollar environment.

We’ve previously written about noise vs. signal. We explained the importance of distinguishing between noise (or short-term volatility) from what really matters: signals, or directional moves in markets. Economics works in long cycles, moving circularly from expansion to contraction, and as long-term investors, it’s our position in the cycle we keenly try to determine.

At this stage (although the current economic and political situation is fast paced), we consider the market reaction to the tariff policy announcements as being more noise than signal. Although the falls in indices have been fast, they have not yet taken broad markets (mostly) to particularly 'cheap' levels. In the US, the headline indices are at similar levels to where they were a year ago.

However, we do believe that the current risk of recession is elevated. This is a longstanding belief grounded in thorough analysis of economics and market cycles. We have tried to avoid getting caught up in the recent volatility, instead seeking long-term trends with solid fundamentals, an example of which is the biotech exposure we have been adding to portfolios in the last quarter.

We believe there are two possible routes to a slowdown. The first scenario is one in which growth is slowing, and that slowdown will simply continue until we reach recession. This scenario is supported by the weakening of the manufacturing (although this is now showing signs of improving) and steadily increasing jobless claims data. The second possible route to slowdown says that the recent strength in the economy will continue, but persistent inflation and higher interest rates could eventually choke off growth and lead us to a recession. Falling inflation isn’t typically associated with a strong economy, so if the economy is as robust as it could appear, inflation is likely to remain sticky, driven by consumer spending, and persistently higher input prices.

The immediate aftermath of Donald Trump’s victory in the US election looked to have increased the likelihood of scenario two. Although as we highlighted at the time, our view was that the probabilities of several outcomes had increased with less certainty around any particular direction. The pullback in US equities is consistent with a slightly higher probability of a slowing economy.

We have deliberately designed an investment strategy which is resilient in periods of extended market volatility. While we did not foresee the exact catalyst or impact of any turbulence or recession, we had carefully protected portfolios against falling equity markets. We also believe there is upside inflation risk, which we have also protected portfolios against through broader exposure to gold, gold miners, and equities with pricing power.

However, in case markets do recover, or are more resilient than they currently appear, we are also adding to areas of opportunity including biotech which we believe continues to look appealing. We will be exposed to various areas of upside if recession is avoided.

We are always monitoring markets. Our dynamic asset allocation and investment process allow us to act quickly and decisively when needed . We believe portfolios are well positioned and ready to step in, either defensively or to take advantage of opportunities as they arise.

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