Staying composed in a volatile summer

Tariffs | How are we positioned following the recent announcements?
The start of last week brought progress on several trade fronts, but also higher volatility towards the end. The US finalised agreements with Japan and the European Union, secured a deal with South Korea and granted Mexico a 90-day extension. These steps imply higher tariffs, though not as elevated as the US initially threatened, and they help avoid a full-blown ‘trade war’. When announced, they provided temporary relief for global markets and initially supported investor sentiment. However, that tone reversed on Friday, when President Trump signed executive orders imposing new tariffs: 39% on Switzerland, 20% on Taiwan and an increase on Canadian imports from 25% to 35%. Markets reacted negatively, with equities giving back earlier gains as investors reassessed the trajectory of US trade policy. Talks with China, the key event over the next few days, remain ongoing ahead of the 12 August negotiation deadline. Market consensus points to a likely 90-day extension, which would help avoid near-term escalation.

In this context, we stay composed and recommend not overreacting to headlines. We remain globally diversified across equities and bonds, both strategically (to compound returns at longer investment horizons) and tactically (to fine-tune portfolio positioning in the short term). We continue to favour high-quality assets - such as companies with strong balance sheets - and have recently increased our allocation to gold to an overweight position. Low-volatility equities also play a role in managing risk, and we initiated this position recently, too. We continue to hold a US equal-weighted index, which dilutes risks if US tech stocks were to go through a period of volatility.

Generally, while we’re invested in US equities and think they remain compelling at longer horizons, valuations are on the demanding side, so we own more non-US equities relative to our long-term target weightings, where valuations are more attractive. Where allowed by client knowledge and experience, and regulations and investment guidelines, such as in our core flagship funds, we also own a small ‘insurance’ instrument that appreciates when US equities fall, helping dampen the volatility. In fixed income, we tend to prefer short-dated European government bonds in euro portfolios (or gilts in sterling portfolios), as defensive assets.

Central banks | What’s happening on the interest rate front?
Interest rates are crucial as they’re one of the key valuation inputs across assets. Some of the major central banks left rates unchanged last week. On Wednesday, US Federal Reserve (Fed) Chair Powell reiterated that current economic growth and inflation dynamics do not warrant further rate cuts for now. His remarks were measured, offering limited guidance. Positive trade developments earlier in the week initially pushed the dollar higher, as markets interpreted the US-EU deal as a relative negative for European growth. However, that narrative shifted again by Friday.

The release of weaker-than-expected US labour market data, along with downward revisions to prior job numbers and a weak ISM manufacturing report (an important survey to assess the early impact of the tariffs and the general state of the economy), prompted markets to expect the Fed to lower interest rates in the near term, and so the dollar (which tends to depreciate when market expectations assign higher odds to interest rate cuts) weakened accordingly. We continue to believe that the dollar strength seen in July is likely to prove temporary, with fundamentals pointing towards a gradual depreciation, a trend that we could observe over the first half of this year. US Treasury yields remain vulnerable to the significant fiscal plan of President Trump (lower taxes and higher spending, increased budget deficit and more elevated government debt), which is why we maintain a reduced exposure to US fixed income assets across government and corporate bonds, and a reduced exposure to the dollar as well.

The Bank of Japan maintained its key policy rate at 0.5% but raised its core inflation forecast (excluding volatile components such as food and energy) for the 2025 fiscal year from 2.2% to 2.7%, leaving the door open to future interest rate increases and supporting the yen. We recently bought some Japanese government bonds, to increase diversification and because the yen appreciation we expect should be beneficial when translated into euro and sterling portfolios. The European Central Bank, meanwhile, reiterated its wait-and-see approach. President Lagarde noted that inflation is at target and that further rate cuts would require convincing evidence of weaker growth or disinflation. With a higher bar for more rate cuts, we expect the euro to stay supported relative to the dollar.

This week | US-China trade talks and Bank of England meeting in focus
With last week’s global reciprocal tariff deadline now behind us, attention shifts to US-China relations and the 12 August deadline. Any decision to extend negotiations - or escalate further - will shape the tone of global markets in the days ahead. Expectations are for a further extension, which should avoid further tariff hikes for the time being and help avoid a recession in the near term. Investors also expect that some of the tariffs announced for other countries should be reduced via further negotiations, though trade tensions are likely to remain in the background, with deals possibly lowering some tariffs but also potential increases for specific sectors and commodities.

Elsewhere, the Bank of England meets on Thursday and is widely expected to cut its policy rate by a quarter-percent to 4%. In the US, the ISM services report (a key and timely economic gauge) should provide insight into the resilience of service-sector activity. Meanwhile, the second quarter earnings season continues in both the US and Europe, contributing to short-term swings in sentiment and valuation.

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