Trump's tariff turmoil creates opportunities

Trump said he was serious about high import tariffs. However, the severity of the tariffs still surprised economists. ABN AMRO Group Economics increased its recession probability as a result. However, our base scenario remains a slowdown of the global economy, not a recession. US stock market indices shot lower on ‘Liberation Day’ and pulled the rest of the world with them. Within a week, the US stock market had reached (intra-day) bear market territory. Meanwhile, the volatility index (VIX) reached the fourth highest level this century. The VIX is often referred to as the ‘fear index’. It measures market expectations of near-term volatility and reflects the uncertainty in the market. 

We believe that these worsening economic and market conditions warranted a correction in stock prices, but we also see opportunities. Markets tend to overshoot during high-volatility periods and can revert to normal levels with eye-watering speeds. The 12% one-day return of the tech-heavy Nasdaq after Trump announced a negotiation period is a prime example. We expect elevated levels of volatility for the foreseeable future, which means we could see some attractive entry points in stock markets. To be able to capitalise on these opportunities we freed up some cash in the portfolio.

In the light of recent developments, both in the economic outlook as well as market behaviour, we are slightly adjusting our sector exposure. Although we remain enthusiastic about financials, we are reducing our overweight positioning to a modest overweight. First, the sector has performed well recently and we want to take some profit after a strong run. Second, we want to de-risk slightly because of the deteriorating economic outlook.

Furthermore, our cautious stance on consumer staples has become less cautious. This sector tends to function as a safe haven during periods of uncertainty. Consumer staples companies produce goods and services that are essential for daily living - products that people need regardless of economic conditions. Given the current market volatility, the consumer staples sector has therefore become more attractive.

Volatility in bond markets was also elevated in the past weeks and forced Trump to backpedal. This volatility combined with a weakening dollar indicated small cracks in the faith of investors in the US. Meanwhile, the credit risk premium on more risky bonds rose quickly as recession fears increased. These trade in less liquid markets than high-quality (HQ) government- or corporate bonds making them more difficult to trade. This is especially true in a downturn.

We have had a cautious positioning on these lower quality or high-return (HR) bonds for quite some time, which is now paying off. Because we want to free up some cash and because of the substantially better liquidity in HQ bond markets, we have decided to sell a small portion of our HQ bond portfolio. This trade rebalances the fixed income portfolio.

Both bond and equity markets around the world have been volatile in recent weeks. We want to be agile and have the ability to capitalise on opportunities. Therefore, we sold a small portion of our HQ bond portfolio. However, we maintain our slightly overweight positioning in bonds and our preference for HQ over HR bonds. The added cash in our portfolio can then be used to act quickly when needed.

Richard de Groot
Chair Global Investment Committee