This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
US | Bracing for tariff decisions
US President Donald Trump has made several tariff announcements since he took office in January, some of them being delayed and/or rolled back. These ‘erratic announcements’ have increased policy and market uncertainty.
This week, the White House is preparing to implement significant trade measures (on 2 April). Trump has referred to it as ‘Liberation Day in America’. Previously announced tariffs will come into effect: these are 25% on all cars and auto parts not produced in the US, and 25% on imports from countries purchasing Venezuelan oil. In addition, the US Administration will likely target countries deemed to have ‘unfair trade practices’ or higher tariffs on US goods with reciprocal tariffs.
Uncertainty on the details remains and at the time of writing, discussions and negotiations are ongoing. Reciprocal tariffs have spooked markets as they are broad in scope. But recent media reports suggest these tariffs may be more targeted and narrower than previously threatened, potentially providing a relief to market sentiment and reducing uncertainty by setting a clearer process for international trading in goods.
Of course, this is just a possible (yet plausible) scenario and, taken at face values, tariffs have the potential to raise inflation and lower economic growth, even if uncertainty were to diminish. Looking at the difference between tariff rates charged by trade partners on US exporters and the tariff rate the US charges on imports from those countries, Brazil, Turkey, India, Vietnam, Thailand, Indonesia and South Africa are among the most exposed to an increase in tariffs. Plus, there are broader geopolitical concerns on China. This is why we’re not holding any active tactical allocation to emerging markets.
Overall, we maintain a diversified allocation across asset classes and regions. For instance, we hold inflation-protected bonds, gold, and broad commodities to mitigate the impact of tariff risks on portfolios. Tactically, we overweight short-dated bonds, which can cushion downside risks. In equities, we have diversified away from broad US equities, where valuations are demanding, especially in technology, to an equal-weight index giving greater importance to more attractively valued sectors. These include US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation, and Europe, where we envisage a boost from fiscal stimulus too, centred around defence and infrastructure.
We also stand ready to readjust and, more tactically, we continue to own an ‘insurance’ instrument that appreciates when US equities fall, to mitigate downside risks (where client knowledge and experience, and investment guidelines and regulations, permit). Markets tend to react very swiftly to the news flow as economic, corporate and (geo)political events unfold continuously. Rather than knee-jerk reactions, we seek to maintain composure, anticipating potential developments.
Taken together, this suggests that the market is no longer worried about an unsustainable debt path in the UK, as it was during the ‘mini budget crisis’ in 2022 and (to a lesser extent) during the Autumn Statement in late October 2024. The Debt Management Office’s announcement of fewer bond issuances than anticipated for the fiscal year 2025/26, and the expected gradual easing of the Bank of England (BoE), alleviated the market’s fears. Inflation decelerated in February, both headline and the core reading that strips out volatile components, such as energy and food. In addition, services and core goods inflation are now below the BoE forecast. We maintain our view that the central bank will reduce the Bank Rate to 4% by end-2025 from 4.5% currently. This is supportive for short-dated gilts, in which we hold a tactical overweight in our GBP-denominated portfolios.
Eurozone inflation (Tuesday) is expected to edge down to 2.1% or 2.2% year-on-year from 2.3%, while the unemployment rate is forecast to increase slightly from 6.2% to 6.3%. Hence the data will not go in the way of the European Central Bank, which looks set to reduce rates further. We expect the central bank to bring the deposit rate to 2% by year-end from 2.5% currently.
Lastly, China’s purchasing managers’ indices (PMIs) for March will be released on Tuesday and Thursday. Markets will be looking for signs of stabilisation in the world’s second-largest economy, following a period of subdued domestic demand and lacklustre industrial activity.
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Information correct as of 31 March 2025.
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