Tactical risk management helped us ride out one of the sharpest market dips since 2020. Gold and cash remain reliable safe havens.
Key Takeaways
- Tactical operations are essential for mitigating the risks in volatile markets.
- Gold remains a safe haven in turbulent times.
- We have reduced USD exposure in non-USD portfolios due to weakened confidence in the currency triggered by Trump’s tariff policies.
- Cash offers safety and flexibility.
Editorial
Riding out market instability
Sharp swings, rising uncertainty, and growing unpredictability are rattling investors as they gauge the tariffs’ impact on the global economy. By sweeping away the post-1945 global trade order, Donald Trump is ushering in a new regime of heightened risks – one that demands faster, more agile portfolio management.
The implementation of tariffs is mechanically introducing macroeconomic risks by altering the trajectory of the economy. A loss of confidence among businesses, investors and consumers could act as a brake on activity, potentially triggering a self-reinforcing downward spiral. In our view, this consequence remains underappreciated by the market.
In this low-visibility environment, risk management backed by tactical operations is our top priority. We pivoted from a strategic stance on US equities to a tactical approach focused on actively managed options strategies. We are also prioritising gold and cash as safe haven.
Strategy
What markets are (and aren’t) pricing in now
Recent weeks have seen volatility surge, with equity markets and bond yields falling as the US unveiled global tariffs (an effective tax on US consumers/businesses) which should serve as a medium-term dampener on economic growth and a catalyst for higher inflation.
Markets appear to be focusing on the first potential impact – weaker growth – and only a ‘transitory’ rise in inflation as described by the Fed Chair Jerome Powell at his March press conference.
Indeed, 5-year inflation expectations are now at their lowest in comparison with their 2-year counterparts since 1980 (outside the 2020 global pandemic’s initial deflationary shock), suggesting that markets are not focused on medium-term inflationary concerns, and instead US Treasury yields are closer to pricing in a recessionary – i.e. weak growth and weak medium-term inflation – environment.
Indeed, despite the falls in equity markets, global equity valuations have returned to near-historical averages, leaving them only unpricing a repeat of the 2017 US-centric economic and corporate earnings boom that came in Trump’s first year in office in favour of more moderate but still supportive economic and earnings growth expectations. However, these more measured expectations fail to reach the recessionary environment that bonds are increasingly pricing in.
Investors will likely need to continue to lean on risk management strategies until markets better price in the new growth, inflation and geopolitical landscape taking shape
Equity and bond markets also appear to be underpricing the prospect of a fiscal follow-on response to the tariffs, as Trump tax cuts, German and potential EU fiscal spending, as well as consumer stimulus from China’s upcoming Five-Year Plan are set to be unveiled in the weeks and months ahead.
As a result, investors will need to continue to lean on the foundations of gold, hedge funds, and cash, complemented by tactical overlays, as their basis for risk management until markets better price in the new growth, inflation, and geopolitical landscape taking shape around the world.
Read our April House View for more insights.
