Although April saw one of the largest shake-ups to the global trading system in a century, there has been surprising resilience in equity markets following the initial sell-off.
In local currency terms, both US and European equity markets are back within a touch of all-time highs signalling how investors believe ongoing trade negotiations could mitigate the worst of President Trump’s Liberation Day.
However, not all markets are as optimistic. Though Liberation Day’s tariff increases may well be negotiated away, the narrative of ‘American Exceptionalism’ – that the US is perceived as unique in the leading asset price growth – and the reputation of the US as being one of the best places for business has taken a significant knock.
As such, a flight of capital from the US into other regions has placed downward pressure on the dollar and sent US Treasury bond yields soaring.
While a weaker dollar has long been a goal of the Trump administration in order to boost the competitive of US exports, the moves in bond markets have led to higher borrowing costs for the US at a time when the federal budget deficit is still out of control.
That said, it’s not just the US that has budgetary pressures. On this side of the Atlantic, many European countries are led by governments with evolving sets of priorities that must be considered in the context of debt-to-GDP levels not seen before in peacetime, leaving very little room for manoeuvre.
When we look around the world, there are several emerging investment opportunities that could lead to a ripe landscape for stock pickers. The recent election in Germany has significantly changed the growth outlook for Europe, receding globalisation could well throw up new trends in Asia with the rise of new trade blocs, and the outlook for rising defence spending has become a serious topic across NATO member states.
Uncertainty is a natural state that investors must continually navigate, re-assessing portfolio positioning in an ever shifting global context. If anything, the last two months have shown the importance of resisting knee-jerk reactions, staying invested, and looking through the noise.
Overall, we think positioning portfolios with limited active sector weights is the most prudent approach. We do hold a modest overweight to European and UK equities, reflecting our sense of caution in terms of US assets for the time being. We have also looked to diversify portfolios through inclusion of highly rated euro denominated bonds. We’re closely watching the evolving landscape and will adjust portfolios as opportunities appear.
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