Wise Positioning Amid US Tariff Announcements

As you will be aware, we are undergoing a period of significant market volatility, and we are keen to keep you updated on the causes of this volatility, its impact on your investment portfolios, and our resulting positionings.

The Cause

This volatility was triggered by a very singular event – the tariff policies announced by President Trump on the afternoon of the 2^nd of April. These new tariffs were based on questionable calculus – 50% of the current account deficit with all trading partners, with a 10% minimum.

While tariffs were always going to be part of the administration’s economic policy, they were widely assumed to be more of a targeted negotiation tactic. Few imagined they would be implemented on this scale, within such a short time frame and with seemingly little regard for the knock-on economic consequences.

This makes it incredibly hard to rationalise. While the policy is ostensibly designed to “bring back US jobs”, in reality, it is very hard for corporations to shift decades-old supply chains back to the US. It takes time (years), expertise and significant capital to build a new factory. Furthermore, these are the types of decisions that businesses only make with a large degree of confidence in their forecasts, something they now lack.

It also seems like a bad deal for the US consumer – the US runs a deficit in goods but a surplus in services, and the net difference is covered by borrowing in its own currency. In reality, this means that many Americans get to work cushy service jobs, like software development or marketing for $50/hr, while getting to import goods manufactured by workers being paid $5/hr and make up the difference by exporting the dollar as the world’s reserve currency. Put simply, I doubt there are many US accountants with a burning desire to shift careers and sew socks for $5/hr.

The only (semi) rational explanations for this are that:

1. The administration is trying to demonstrate a previously underestimated willingness to implement these policies to negotiate better trade deals, and/or
2. This is a move designed to reduce the US deficit, using tariff income, DOGE cuts and forcing the Federal Reserve to lower interest rates to mitigate the economic fallout, allowing the government to refinance its debt more cheaply.

The issue with the latter is that the Fed has a dual mandate – to help guard the economy, and to control inflation. While economic turbulence may incline the Fed to cut rates, past evidence would suggest that tariffs are inflationary (i.e. businesses pass through the cost of the tariff to the end consumer) and thus may stop the Fed from cutting interest rates, perhaps even putting a hike on the table.

This has created a huge amount of economic uncertainty in the US as well as with its major trading partners, i.e. talk of the global recession. The US consumer represents ~30% of global consumption, and therefore a large % of global exports will now either be subject to large taxes or find themselves uncompetitive with locally sourced US goods. Reciprocal tariffs are also likely and have been announced by several countries and trade blocks, including China and possibly the EU. These retaliations may also be directed at services, which would again be potentially devastating for several of the largest corporations and the downstream consumer demand of their workers and shareholders.

If there was ever a clear economic consensus on any matter, it is that free trade is, generally speaking, a good thing. This has thrown the biggest wrench into global free trade since World War 2.

The Market Impact

The market abhors uncertainty, especially uncertainty that has such a direct tangible impact on the earnings and investment decisions of corporations. As a result, global markets have fallen hard and fast, in a similar fashion to the impact of Covid in March 2020.

This has been led by the largest market – the US, which was already richly valued, and its businesses most adversely impacted by the fallout of these policies. The US index has fallen more than 15% since the beginning of the year, with the lion’s share of that drawdown occurring in the last few days. Europe, the UK, Japan, and Emerging Markets have all also fallen since the announcement on the 2nd. However, they have fared better.

Bond markets have held up fairly well so far. While bond spreads (the difference in price between corporate and government debt) have widened due to heightened credit risk, this has broadly been offset by a drop in yields, due to a “flight to safety” as well as anticipating rate cuts from central banks.

Our Positioning

At Wise, we have long been cautious in the model portfolios over US valuations, and the dominance of a handful of very large companies in US and global indices. We had therefore shifted some exposure away from global equities to areas of the market we felt were undervalued, like UK equities, Emerging Markets and healthcare, most of which have performed comparatively better so far this year.

In many of these portfolios, we have also added gilts to the bond portfolio, while keeping overall bond exposure short-dated and high quality to help blunt volatility.

Most model portfolios also have a small long-standing position in commercial property, which is also reasonably well insulated from the first-order effects of these tariffs.

The net effect of this is that while our portfolios have inevitably felt the impact of this global drawdown, they have so far generally held up better than their respective benchmarks this year, particularly the Growth and Income models.

The key now is looking forward and how we react to these events. The difficulty is that we don’t know whether these tariffs will be implemented permanently or even when this might become clear. Permanent tariffs would fundamentally alter global trade dynamics and likely worsen worldwide economic growth until newer trade patterns are established.

However, it is worth bearing in mind that if US policy changes, markets can bounce back very quickly. The COVID-19 crash in March 2020 serves as a useful recent example of how quickly market sentiment can change. Within a few days, markets crashed more than 20% in the face of seeming economic Armageddon, then by the middle of May, markets were hitting new all-time highs and went on a strong bull run through to the end of 2021. If an investor had understandably capitulated in the dark days of March 2020, they would have missed the full rebound and sizeable gains that came hard and fast over the following days, weeks and months.

We don’t know if history will repeat, but we can be confident that long-term markets will rebound and push on again to new highs. For now, we believe this means sticking with the plan, holding on to the global equities we do have, with an awareness that they may rally hard and fast at the drop of a hat (or tweet…).

In the meantime, we continue to assess if and when the risk/return relationship in US and global equities reaches a point that is more compelling than the other portfolio positions we currently hold (with a view to shifting more exposure back into this market when we believe the prospective returns are compelling). After all, a large drawdown can present a great opportunity for long-term investors.

However, given global equities have only returned to a level comparable with this time last year, it would likely seem that we have not hit that point just yet.

Will Geffen

Head of Investment Management

 

 

Please note that these views represent the opinions of William Geffen and do not constitute investment advice. Where opinions are expressed, they are based on current market conditions at the time of writing, they may differ from those of other investment professionals and are subject to change without notice. This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. For an updated view of the market, please contact your usual adviser.