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The first quarter was a tale of two halves, with January delivering some of the best equity returns seen over than month in 40 years, quickly superseded by a correction with equity market down 10 per cent. The V-shape recovery, we correctly predicted, faded as Trump’s tariffs made investors uneasy, creating clouds over the ‘synchronised global growth’ narrative.
Trump’s tariffs made investors uneasy, creating clouds over the ‘synchronised global growth’ narrative.
What do Trump’s tariffs mean for the rest of the pro-trade world? More trouble for the “Goldilocks economy” or is it a negotiating tactic? We argue it is both, as the first tariffs on steel and aluminium were used mainly as a pressure point against Canada and Mexico during the NAFTA negotiations, shortly after most US allies were exempted from the tariffs until further notice. The $50bn tariffs against China go beyond trade balance. They signal a tug of war over the new digital economy of artificial intelligence, digital payments, cybersecurity and intellectual property rights. Of course, in a tit for tat trade war the only outcome is a lose-lose. Hence, we expect markets to remain volatile which informs our neutral stance and having selective buying in mind.
The lack of consensus, persistent volatility and the Fed’s commitment to policy normalisation create a blurry picture for equities and fixed income. We remain neutral on global fixed income, with a preference for US credit on an absolute and relative basis. Carry is king in the investment grade and high yield space, but we look for short duration issues from high quality companies despite tight spreads globally. A hawkish Fed within equity volatility and a reluctant ECB to tapering will keep rates stable and curves flat, thus providing some comfort to the fixed income investors.
Turning to equities, we remain cautious with the euro area remaining our favourite region. Growth sensitive sectors will remain under pressure, however as we enter the earnings seasons and with a solid macroeconomic backdrop, we should see some relief rally. We are looking for opportunities in financials, consumer and technology. The recent data breach scandal that sent Facebook stock haywire and Trump’s obsession with Amazon, might cause temporary profit taking but the technology theme remains intact. High dividend companies in the UK appear attractive and combined with a positive sterling outlook constitute an interesting choice for international investors.
The lack of consensus, persistent volatility and the Fed’s commitment to policy normalisation create a blurry picture for equities and fixed income.
Finally, exposure to gold and silver (commodities or miners) together with emerging market regions that have low dependency on the US dollar or US trade policies should enhance portfolio diversification.
Our long-term thesis for higher rates and higher equities remains unchanged, but we find it prudent to remain on our neutral positioning for April.