We explore the outlook for regional equities, bonds, currencies, and alternative assets.
Discussing how trade tensions and tariff policy during the Trump administration contributed to market volatility and investment uncertainty.Ten big questions that many investors are asking
Henry Cobbe, Head of Research, Elston Consulting
Key Points
1. How long will this tariff craziness go on for?
Obviously we can’t say for sure, but Trump Trade War 1 started in March 2018 and a trade deal was reached with major trading partners in June 2019 so about 15 months. But during that time period there were 2 quarters of negative returns for equity markets (1q18 and 4q18) and 4 quarters of positive returns driven by fundamentals. So it can become a tug of war between fear (tariffs war and recession fears) and hope (economic and earnings growth).
2. Why might a portfolio have a high allocation to US equities?
The largest companies in the world are US based, so world equity benchmarks are dominated by US equity markets. UK equities are more “defensive” so fared better in 2022 and have fared better so far this year in sterling terms. But in all other timeframes since 2008, the returns on US equities have far exceeded that of UK equities, because US companies are growing and UK companies are not growing as much. The UK equity market has shrunk from being ~10% of the global equity market in 2000 to only about 4% of the global equity market today.
The total return on UK equities is driven predominantly by dividends, not earnings growth. In the long-run equities are driven by earnings growth and that’s why the US is expected to continue to dominate. US equities are expected to grow earnings by +11% in 2025 compared to just +0.72% for UK. That’s why we believe that in the medium-term, the “America First” policy from the White House will translate to US dominance of global equity market returns. We saw the same pattern in the Trump Trade War 1.0 in 2018. From a multi-asset portfolio construction perspective, combining global equities with some UK equities (5-20% of the total) for diversification purposes, is a prudent approach. Other managers whose strategic asset allocation has a much higher weighting locked in for UK equities (say 40%) will be doing better this year, but at the cost of structural underperformance for the last 17 years. Dramatically shifting allocations between markets away from a strategic plan can work really well or really badly – and that’s not a game we think managers should play. An adaptive approach is about pragmatic risk management, not aggressive, polarised positioning. 3. Is it wise to get out now?
If advisers’ clients were comfortable with their “risk profile” and related strategic asset allocation before the Tariff shock started, they should stick with their plan. During periods of heightened volatility we see both dramatic down days, and dramatic up days: sometimes in quick session. One has to “roll with the vol(atility)” to ensure long-term investment plans remain on track. So long a clients’ needs and requirements have not changed, it makes sense to “keep calm and stay invested.”
4. What if a client’s spending needs have changed?
If advisers’ clients’ needs and circumstances have changed – for example they have a different shape of near-term upcoming spending plans within the next 1-3 years, then that should be reflected in an updated cashflow model.
A “bucket” based approach can help match different investment strategies to different spending needs. For example, for a client a known upcoming near-term (3 years) spending plan – for example a large tax bill or a new building project then it may make sense to provision for that and allocate funds for that into low risk strategy (if not already). Examples for basic rate tax payers could include a Money Markets Portfolio. For higher and additional rate taxpayers, this could include a near-term Direct Gilts portfolio. 5. Are Government bonds in trouble?
Within a multi-asset portfolio context, we believe that portfolio for UK investors should be anchored in sterling-based bonds that are linked to sterling-based interest rates to avoid a currency or interest rate mismatch. So whilst US government bond yields are key for global market liquidity, and the bond market globally they are less directly relevant to UK investors than UK bonds.
Let’s look US and UK Government bonds in turn. In the US, we do see the possibility of US 10-year yield continuing to grind higher (so bond values lower) on tax cuts and increased debt issuance. However, we have repeatedly heard Treasury Secretary Scott Bessent talk about policy measures to bring bond yields down. We see three paths to lower long-term yields:
So where does that leave a bond allocation? We think it is prudent for a bond allocation for UK investors to be focused in shorter duration that are less sensitive to changes in interest rates or inflation expectations. The yields on near-term debt remain attractive, and there is no need for additional “term” risk by owning longer-dated bonds. Furthermore, holding an allocation to risk-constrained liquid real assets, including gold, as part of a broader alternatives allocation provides some diversification away from bonds without increasing volatility. 6. Where next for currencies?
The disruption from the trade war and tariff policy is causing pressure on the USD which is traditionally a safe haven asset. Traditionally major exporters in China would reinvest their dollar proceeds into US Treasuries. With reduced trade that means reduced purchases of US Treasuries. Furthermore the allocation shift away from US assets towards non-US assets also impacts the Dollar as international investors seek out other safe-haven assets such as the Swiss Franc. For the same reason, Sterling has also appreciated against the Dollar - but we see this more as Dollar weakness rather than Sterling strength.
For equities, this could be positive for US exporters, but it also means that the recovery in US equity market levels is less pronounced in GBP terms. For bonds, multi-asset portfolios are typically predominantly GBP based, hence are insulated from changes in the Dollar. Looking forward, we do expect countries such as China and Russia to continue efforts to de-dollarise their economies and Central Bank reserves - for political and geostrategic reasons - and this has been a continual theme for the last 20 years. On the upside, we see US policy measures to attract international capital (golden visas), dominate the evolving digital currency space (stablecoins), and stimulating Foreign Direct Investment into the US as upside risks to the Dollar. Having a balanced approach to currency exposure is therefore key. Strategically, anchoring the low-risk bond side of the portfolio to sterling (to match spending needs), and allowing equities to remain unhedged for currency effects to wash out over the long-run remains the pragmatic starting point. 7. What are the alternatives to Bonds and Currency?
Gold has proven once again the traditional alternative to both Bonds and to Currency weakness. In addition to Emerging Market Central Bank buying, we are seeing increased demand from retail investors too.
We like gold sometimes on directionality but all the time on its low correlation to both equities and bonds making it a “true diversifier”. 8. What about Europe?
We are currently neutral on European equities relative to benchmark. The German Defence spending is benefiting Germany first. We remain concerned around broader European growth.
Germany has finally moved to having an expansionary budget after years of maintaining austerity. This means German Bunds (10y bonds) could see yields rise, but there is now some growth expected in Europe, concentrated in Germany. European defence equities have had a strong rally and are already pricing in increased growth from defence spending. We do not see Euro-denominated bonds as having a strategic role to play in a GBP-based portfolio. 9. What about Emerging Markets?
We have adopted a more cautious stance on China due to persistent geopolitical tensions and the ongoing trade war with the United States, which shows no signs of meaningful resolution in the near term. Structural issues such as state intervention, regulatory unpredictability, and weak consumer confidence continue to weigh on sentiment in China. In contrast, we are increasingly focused on India, where a combination of political stability, demographic advantages, robust domestic demand, and a reform-oriented government provides a more favourable long-term investment environment. Additionally, India’s growing role in global supply chains and its appeal as a China-plus-one manufacturing destination further strengthen its investment case.
10. What can investors do to navigate these markets?
If investors’ plans, needs, circumstances and time horizon haven’t changed, then there’s no reason to change investment strategy – it pays to keep calm and stay invested.
If there are specific plans or upcoming expenditures that need to be provisioned, then it’s essential that investors speak to their financial adviser and ensure their financial plan is still up to date. There is no “one size fits all” portfolio – portfolio risk, return and liquidity objectives should be aligned to investors’ needs and requirements. Comments are closed.
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