Note: Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for their latest positioning.
What you need to know
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The US recently introduced broad tariffs, triggering retaliation from China and the European Union. This escalation brings risks to growth and inflation. Uncertainty around tariff implementation, often driven by sudden announcements and reversals, has been more damaging to sentiment than the tariffs themselves. Still, with new rules in place, markets may start to recalibrate, especially when negotiations eventually begin. While this could change as things develop, exceptionally, we’ve decided not to adjust portfolios back to their long-term targets just yet. After the drop in equities and rise in government bonds, our current positioning is more cautious, with less overall risk.
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Following the sell-off in equity markets on Monday, we’ve decided to buy equities which we’ve funded by selling bonds. This is not because we’re attempting to ‘buy the dip’. Instead, we’re simply rebalancing portfolios towards our long-term target allocations. In essence, as equities fell, the proportion they made up in our portfolios also fell, with bonds moving in the opposite direction. To bring equities and bonds back to their target weightings, we bought some equities (at lower prices), financed by selling some bonds (that had gained in value). This purchase does not take allocations back to the position they were in before the sell-off. Back then, we were overweight equities. Now, we’re roughly neutral equities, as we believe bringing portfolios back to our original overweight-equity position would be too much.
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Recent volatility has reminded us of the value of protecting portfolios from losses as well as seeking to grow them. We hold an ‘insurance’ instrument in our flagship discretionary and some other portfolios, which appreciates when US equities fall. Given the sell-off, we’ve decided to sell part of that protection to lock in profits, while keeping some of it in place to cushion the impact of any further volatility. These strategies won’t eliminate risk, but they can soften the blow, much like real insurance. We stand ready to further adjust portfolios as appropriate. To further increase diversification across our investment fund selection, we’re also in the process of reducing exposure to an active European fund with a specific, more concentrated style and reallocating to an exchange-traded fund with a broader focus, mitigating volatility and risk.
Daniele Antonucci
Daniele Antonucci
Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in Luxembourg, he jointly chairs the investment committee, owning decision-making and performance outcomes. As head of research, Daniele oversees the investment strategy feeding into portfolios and the teams of specialists across asset classes and solutions, ranging from macro, fixed income and equities to funds, alternatives, and structured products and derivatives. He leads the network of chief strategists, communicating the house view on the economy and markets to financial advisors, clients and the media.
Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley in London. He completed the High Performance Leadership Programme at Saïd Business School, University of Oxford, holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. Featured in The Economist and Financial Times and often quoted in the generalist press, he’s a published author in finance and economics journals and investment magazines, a frequent speaker on CNBC and Bloomberg TV, and an ECB Shadow Council member.
Trade wars: understanding the path to resolution
The escalation in trade tensions between the US and the rest of the world is grabbing the headlines and driving market volatility higher. The US announced broad tariffs on key trading partners last week, bringing the effective US tariff rate to levels not seen in decades, including a baseline universal rate of 10% and targeted reciprocal tariffs. All this comes on top of the tariffs already implemented. There will be a 34% tariff rate on China on top of the existing 20%, which has prompted China to retaliate with an equivalent increase, followed by extra tit-for-tat on both sides. Asian countries are among the hardest hit (though now some are indicating a willingness to negotiate, from India to Taiwan), with Japan also facing a 24% tariff. US President Trump also announced a 20% rate on the European Union (which announced moderate retaliatory measures too) and 10% on the UK. But there are exemptions as well. Tariffs to Canada and Mexico remain at 25%; the rate on foreign autos and auto parts remains at 25%, too; gold, other metals and minerals are exempt, and so are sectors such as semiconductors and pharmaceuticals.
This escalation in trade tensions adds downward pressure on economic growth and risks pushing inflation higher. For now, markets are focusing on the near-term implications for economic activity (weaker growth) more than the effect on consumer and producer prices (higher inflation). However, while the US job market remains strong, as shown by last Friday’s data, the most significant impact so far has been on investor, business and consumer confidence due to the uncertainty generated by announcements on international trade. While it’s hard to get a sense of whether we’re at peak uncertainty, as trade wars could escalate further, we think the path to resolution is likely to be a ‘process’. Investors now know the new rules of the game when it comes to trade in goods, and eventual negotiations might well lower uncertainty. This could potentially open investment opportunities in assets where valuations are now adjusting lower, from equities to credit.
Fiscal stimulus: an underappreciated market driver
We’re not in a position to ‘buy the dip’ just yet (to purchase assets at a discounted value, believing in a subsequent rebound) and get back to our original overweight-equity position. After all, uncertainty hasn’t really cleared. Tariff implementation could be tricky, given the exemptions, and markets don’t know how long these tariffs could be in effect. Negotiations, as and when they happen, could reduce this uncertainty, however lengthy and complicated the process seems today. Looking just at tariffs could be short-sighted, though. US policy sequencing (implementing tariffs now, with a negative effect, before the positive impact of tax cuts and deregulation) has spooked markets. Although it will likely come at a later stage, given the need for Congress approval, the Trump Administration will now likely focus on fiscal support and deregulation. Fiscal stimulus should be a tailwind for the US economy and markets, offsetting some of the downside risks from higher tariffs.
The rest of the world is likely to see fiscal stimulus, too, alongside monetary stimulus in the form of interest rate cuts, which are more likely in the eurozone, where inflation is lower, than in the US, where it’s stickier, with the UK somewhere in between. In Europe, the key theme of the past few months among policymakers has been extra European spending and investment, from defence to infrastructure. Because of this key catalyst, we’ve recently increased exposure to European equities to a tactical overweight. Obviously, we’ve added several European defence stocks to our list of eligible investments for clients in our advised mandates. But, in our discretionary portfolios, we haven’t focused solely on defence stocks. Instead, we opted for a broader exposure. Defence and fiscal spending will benefit various sectors, such as industrials, financials, technology, utilities and energy. We want to maintain a diversified strategy and not be overly exposed to any single, narrow sector.
How to think about equities in the current environment
We get lots of questions on whether investors should ‘keep faith’ with US equities, and the answer is yes. We think US equities remain a compelling asset class. Our research shows it has superior earnings prospects at medium horizons. It’s a broad, high-quality and liquid market that’s highly exposed to key themes such as AI, cloud infrastructure and next-generation medical innovation. It’s also a market where valuations are on the demanding side in the near term, though the sell-off is making them more reasonable once again. Of course, the situation remains very fluid, and positioning could change rapidly as catalysts such as trade retaliation or negotiation, or policy stimulus, materialise. Our tight risk management process will continue to provide a key input into when and how to add or reduce risk.
Would we add to US equities right now? Not yet. Recently, we’ve reallocated part of our US allocations to markets with more attractive valuations and positive catalysts. We did this in two ways. First, we diversified away from broad US equities, where valuations were demanding, especially in technology, to an equal-weight index. The index gives a higher weighting to more attractively valued sectors, such as US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation. Second, we increased our position in European equities (including the UK in sterling portfolios), where we envisage a boost from fiscal stimulus, which is centred around defence and infrastructure. Better-valued assets tend to fall less than more expensive ones in a sell-off.
As the sell-off began, we made an active decision not to immediately rebalance portfolios toward their long-term risk and return goals. As a result, given the sell-off in equities and the rally in government bonds, our short-term stance became more defensive, with less of the former and more of the latter, with a lower level of risk. Subsequently we bought some equities at lower prices, financed by selling some bonds that had gained in value. Importantly, as there are still risks out there, this purchase does not take allocations back to the position they were in before the sell-off. Before the sell-off, we were overweight equities, meaning we held more equities relative to our long-term (strategic) asset allocation. Now, we are roughly neutral equities, meaning we’re in line with our long-term strategic asset allocation.
The value of 'insurance' and portfolio diversification in volatile markets
We’ve long held an ‘insurance’ instrument that appreciates when US equities fall (where client knowledge and experience, and investment guidelines and regulations, permit), to cushion equity drawdowns. Last month, given the pick-up in market volatility, we monetised part of that position, mitigating downside risks. We’re now executing a similar strategy, locking in an extra gain in that position while at the same time recalibrating the protection in case markets were to fall further. To be clear, these strategies are unlikely to eliminate all downsides. It would simply be too expensive to insure against all possible risks. However, these strategies can provide some offset when markets go down, smoothing the journey.
What else helps in this environment? Keeping your return and risk objectives in mind. Does it make sense to liquidate your investments at a loss when markets fall and attempt to get back in the market later on, inevitably paying a higher price? We don’t think so. We believe it’s often more sensible to stay diversified across regions and asset classes, so that a wobble in one part of the portfolio (say, equities) can be offset by a gain elsewhere (say, government bonds, which tend to appreciate when uncertainty rises). Moreover, we’re now swapping an investment fund exposure with a narrow focus to a broader instrument that tracks the wider market in Europe, reducing volatility and risk. We’re also sticking with our existing investments in government, high-quality corporate and inflation-linked bonds, gold and commodities. For now, we have a lower exposure to risky bonds, even though valuations are becoming more attractive. This positioning aims to mitigate the impact on portfolios of the uncertainty that’s likely to remain until a path to trade de-escalation and policy stimulus sets in.
If you have any questions about our latest market views or portfolios, please speak to your Client Advisor who will be happy to help.
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