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.
The latest | Sweeping tariffs
The US finally announced broad tariffs on key trading partners on 2 April, bringing effective US tariff rates to levels not seen in a century. These measures include a baseline universal rate of 10% as well as targeted reciprocal tariffs, which range from 10% to 50%. These duties will be on top of those already implemented. In practice, the basis tariff rate of 10% will come into effect on 5 April, while the higher reciprocal tariffs will apply from 9 April. Looking at the US main trading partners, Trump has announced a 20% rate on the EU, 10% on the UK, 34% on China (on top of the existing 20% rate), and 24% on Japan. Asian countries are amongst those hit the hardest by the new trade policy.
But there are exemptions as well and some better-than-expected news in what remains an uncertain context. Tariffs to Canada and Mexico remain at 25%. The rate on foreign automobiles and auto parts remains at 25%. Gold, other metals and minerals are exempt, and so are several sectors, such as semiconductors and pharmaceuticals.
What’s next | Markets deciphering new tariffs while we’re looking at the broader US policy mix
With uncertainty soaring to unprecedented levels ahead of the announcement, the market was looking for clarity. For now, it’s hard to say if we’ve decisively moved past the peak of uncertainty. Though we got some clarity, a ‘process’ for international trade relations, nonetheless. Implementation could be tricky, too, given exemptions, and we don’t know how long these tariffs could be in effect. Some countries, like Vietnam, have already engaged in negotiations with the US in the past few months, showing an openness to cut or scrap tariffs. But Vietnam’s move didn’t prevent Trump from singling out the country during his press conference. Negotiations could be lengthy and add an element of uncertainty, though we think we’re on a path to reduce this uncertainty via potential trade negotiations further down the line.
Looking solely at the tariff impact, we see downside risks to US (and global) economic growth and upside risks to inflation in the US but also elsewhere if there were retaliation. That said, it’s still hard to precisely gauge the impact of tariffs given the exemptions. Take India, for instance, which has a 26% tariff rate. Pharmaceuticals account for more than 6% of total Indian exports, and they should be exempt from the tariff. So, we think market volatility will stay elevated in the coming days or weeks as markets try to fully understand the impact.
That said, looking just at tariffs could be short-sighted. Trump’s policy sequencing (implementing tariffs before tax cuts and deregulation) has spooked markets, particularly in the US. 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. This should be a tailwind for the US economy and markets, offsetting some of the downside risks stemming from the tariff implementation.
How we invest | Stay calm and diversified to avoid knee-jerk reactions
Over the past year, we’ve gradually increased portfolio diversification through strategic and tactical positions. This has helped mitigate a wide range of risks that have emerged since mid-2024, while also capturing opportunities. From a strategic perspective, we own a diversified set of exposure across asset classes and regions, particularly in equities. Furthermore, the reason why we strategically hold inflation-protected bonds, gold and broad commodities is to mitigate the impact of tariff and geopolitical risks on portfolios.
From a tactical perspective, we are overweight short-dated bonds, which can cushion downside economic risks. In equities, we diversified away from broad US equities, where valuations are 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. We also recently increased our position in European equities, where we envisage a boost from fiscal stimulus too, centred around defence and infrastructure. Better-valued assets also tend to fall less than more expensive ones in a sell-off. In addition, we continue to hold an equity ‘insurance’ instrument (where client knowledge and experience, and investment guidelines and regulations, permit) in the US, which cushions equity drawdowns. Our exposure to credit risk is limited, with tactical underweights in US investment-grade and risky high-yield bonds.
Once again, markets tend to react very swiftly to the news flow as economic, corporate and (geo)political events unfold continuously. Rather than knee-jerk reactions and market timing, which we think tend to crystallise losses by ‘selling low and buying back high’, we seek to maintain composure, anticipating potential developments and aligning portfolios to clients’ long-term objectives across risk and return considerations. We also stand ready to readjust if economic and market conditions deviate materially from our baseline scenario.