by Robert Cloete, 7th April 2025
The unfolding tariff narrative has created significant uncertainty and volatility, with markets trading on sentiment and investment flows influenced by non-fundamental market participants. During such periods, the benefits of a long-term orientated, diversified, multi asset class portfolio construction approach merit reiterating. Such an approach is specifically designed to weather periods of market stress – even when headline-making policies like global tariffs are announced.
A diversified, multi-asset class portfolio spreads risk across ‘risk on’ asset classes, such as equities and credit, and more defensive asset classes, such as cash, government bonds and gold. In instances where ‘risk on’ asset classes suffer, as is occurring now, these defensive assets can help to mitigate adverse effects on the overall portfolio. As particular countries, sectors and stocks are affected by the tariff narrative to varying degrees, safe-haven asset classes and more defensive sectors such as healthcare and consumer staples, can provide a ballast. While sectors and companies directly exposed to international trade and relying on global supply chains could be more affected, your portfolio’s diversification into a broad basket of equities limits the effect of these vulnerabilities on your overall equity allocation. ‘Risk off’ asset classes continue to benefit from safe-haven flows, insulating your portfolio from equity market volatility and drawdown.
A long-term orientation is also important. Tariffs and other policy shifts can trigger short-term volatility, but over the long term, market (and company) fundamentals and economic growth tend to drive performance. Staying focused on your long-term strategy helps avoid reactive decisions based on temporary market fluctuations. Last week saw significant trading volumes from systematic (automatic) market participants, whose structure and investment objective dictates that they exacerbate prevailing trends: lately, selling into selloffs. This dynamic saw volatility spike significantly, with the VIX ‘fear gauge’ closing the week at 45, suggesting indiscriminate selling.
The prevailing elevated volatility, and other measures that are flashing extremely negative market sentiment, such as the elevated ratio of put options to call options (investors positioning for further falls in the market, compared to those positioning for a recovery) have historically ushered in robust subsequent market returns over longer term time horizons, i.e. the multi-year periods that form the foundation for the strategic asset allocation that underpins your portfolio. It’s important to maintain perspective and distinguish between short term noise and long-term fundamentals. Over the long term, viewed through multi-year holding periods, equities have historically been the only asset class that has consistently delivered inflation-beating returns and are thus a crucial exposure for maintaining purchasing power.
Going forward, an aspect that we are monitoring with interest is the possibility that Europe retaliates to the US’s announced tariffs with a digital services tax. This would disproportionately affect the so-called Magnificent Seven, whose negative performance year to date has been more severe than the broader S&P index, given that around half of this group’s earnings are international, compared to around 40% for the S&P 500. Therefore, were reciprocal tariffs in their current form enacted as planned on April 9th, this could prompt further weakness in the US’s (and world’s) largest stocks, especially if a digital services tax subsequently transpires.
In summary, while global tariffs – especially when introduced on a symbolic day like Liberation Day – can stir market concerns, your balanced, multi-asset portfolio is structured to manage such events. The asset class, country and sector diversification helps to mitigate risk, and historical trends suggest that markets typically stabilise following periods of elevated volatility. While the outcome of the unfolding tariff narrative – and consequent effects on economic and corporate fundamentals – is evolving, we continue to maintain and encourage a long-term perspective, while navigating prevailing uncertainty. Although already underweight ‘risk on’ assets (equity and credit) and overweight ‘risk off’ assets (government bonds and gold) versus respective benchmarks, we further reduced overall portfolio risk today, by trimming equities in favour of cash, pending opportunities elsewhere.
Should you have any questions or concerns about your portfolio, please consult with your Hottinger representative.
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
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