It is natural during turbulent periods to have questions related to why the stock market is reacting as it is, to what extent portfolios were prepared for this, and how they are likely to be affected.
Why is the market reacting as it is?
President Trump has been clear as to his views on the global trading system and his desire for a rebalancing of the U.S. economy over several years.
While we came into the year with the expectation of rising tariffs, what has surprised markets has been the size and breadth of how the tariffs have been implemented.
One major factor that markets are now reacting to is the potential for lower future global economic growth and higher levels of uncertainty. Equity market prices ultimately reflect the future economic prospects of companies, so any downward change to the growth profile or increase in uncertainty attached to that trajectory will negatively affect prices.
How were portfolios prepared?
Ultimately, large swings in the macroeconomic environment are difficult to plan for given their unpredictable nature. The portfolios are invested with a long-term time horizon in mind. Any adjustments we make to portfolios will reflect an evolution in our long-term views.
As such, our focus has been on increasing portfolio resilience and managing unintended exposures within the portfolio. Over recent quarters, we have focused on minimising how portfolios may be exposed to these sorts of events, particularly those which have the potential to shock markets from unforeseen directions.
In practical terms, we have continued to ensure investments remain highly diversified, both globally – with a broad mix of regions and countries represented – and across business sectors – with investments exposed to a wide mix of goods and services across a range of industries.
An outcome of our investment approach is that we have generally avoided large exposures to highly concentrated parts of the market – such as that of the large U.S. technology companies over recent years – which not only work against key diversification goals but also fail on key sustainability tests.
We have also tilted portfolios away from companies whose business models are disproportionately reliant on government support to remain economically viable such as some renewable energy technologies. Fiscal stability is an ever-growing risk in our thinking which puts government fiscal packages in jeopardy.
We also look to ensure appropriate levels of diversification across different asset classes. For instance, we have taken steps to adjust the allocation of bonds in portfolios, so they are more resilient and likely to perform well compared to equities should global growth slow.
How are portfolios likely to be affected
No matter how diversified a portfolio is, it will not be immune from shifts in risk appetite globally. However, diversification will help to insulate portfolios from the largest moves in the stock market.
With uncertainty still at elevated levels, the direction of markets will be very hard to call in the near-term. As trade negotiations (and inevitably retaliations) between the U.S. and its trading partners begin to unfold, this could well result in further market volatility in either direction.
Experience shows us that it’s often darkest just before the dawn, and turnarounds in market fortunes are often sharp and unexpected. Rather than trying to call the market, the right course of action amidst this market volatility should be to keep the long-term picture in mind, and to resist the temptation to sell investments when markets are at such a high level of volatility.
Having exposure to companies whose future growth is linked to key sustainability trends – such as changing demographics, environmental sustainability, and technological advancement – helps to keep our focus on the long-term.
We are here to help you navigate these more challenging periods, so please do get in touch if you have any questions.