Trump’s activism on the US economy is creating fears of recession. To navigate short-term turbulence, we have tactically scaled back our exposure to macro-sensitive assets, such as US equities, including US midcaps, along with high-yield and emerging-market debt, while increasing our allocation to gold.
Key Takeaways
- Tactical implementation of a risk management strategy in portfolios.
- Reduced exposure to macro-sensitive risk assets such as US equities, including midcaps, along with high-yield and emerging-market debt.
- Ongoing preference for gold and hedge funds to navigate the current turmoil.
- Attractive opportunities likely to arise in the US tech sector.
Editorial
Tactical shift for layered risks
Post-election euphoria is giving way to mounting concerns. Once viewed as a catalyst for a thriving US stock market and robust corporate earnings, Trump’s disruptive comeback is now coinciding with a new reality.
Markets are factoring in a chance of recession following Trump’s recent address to Congress, where he acknowledged that his sweeping agenda could cause short-term disturbance for the sake of long-term US prosperity. He then failed to rule out a recession few days later in an interview.
Even though US economic growth remains resilient, the president’s relentless activism is adding layers of risks. His erratic approach is heightening geopolitical risks and destabilising global markets, while tariffs could drive inflation higher and hamper US growth. For the time being, though, we are maintaining a constructive view on the global economy and see short-term weaknesses as temporary.
This unsettled economic backdrop has prompted us to take a tactical decision to scale back our exposure to macro- sensitive risk assets such as US equities, including US midcaps, along with high-yield and emerging-market debt. At the same time, we have implemented a risk management strategy aiming to enhance portfolio convexity, giving us a stronger position from which to navigate the increasingly complex and multifaceted landscape.
Strategy
Managing risk against a turbulent geopolitical backdrop
Donald Trump’s second non-consecutive term in office has begun with a bang, as the 47th US president has set out to reshape not only the architecture of global trade via an aggressive tariff policy, continuing the work he began in his first term, but also to reframe America’s security relationship with its European allies.
The combination of the two has triggered wide swings in volatility since Trump’s November 2024 election, as anticipated in our 2025 Investment Outlook. In preparation for this, we built a strong foundation of assets that can weather such volatility and, in some cases, shield investors from it.
Gold, as we highlighted as far back as 2023, remains a key anchor for preserving clients’ inflation-adjusted wealth as this new era unfolds. Indeed, despite volatility seen for both equity markets and bond yields since Donald Trump’s re-election, gold has delivered a 6% return, outpacing both global bonds and equities amid the tumult.
Even though gold has already seen a strong rally, we continue to expect the yellow metal to head for USD 3,300 as inflation rebounds in the months ahead, driven by not only American tariff policy but also Germany’s historic fiscal expansion. As a result, investors have further opportunities to increase existing positions on gold.
The return of relatively flat yield curves – with short- and long-dated bonds offering similar yields – means that investors are continuing to benefit from low levels of long-term interest-rate risk, while favouring cash and short-dated maturities due to high bond volatility. While credit risk was beneficial for investors at a time of strong economic growth, tariff uncertainty is starting to challenge the historically tight spreads currently seen in credit markets.
Gold and hedge funds remain key anchors for managing risk, and allow for tactical overlays to calibrate exposure amid market volatility.
As a result, it could be beneficial for investors to look at alternative fixed-income strategies, as noted in our 2025 Investment Outlook. These strategies in the hedge fund space offer investors an avenue to side- step interest-rate volatility and manage and capitalise on credit-spread volatility more proactively, while still replicating the returns achieved by more traditional investment-grade bond portfolios.
Indeed, amid the Trump-driven volatility seen since the end of October 2024, alternative fixed-income strategies, such as relative value fixed-income arbitrage, have delivered returns in excess of their investment-grade counterparts.
Investors can use these anchors as the foundation of their portfolios, protecting them against periodic volatility surges across both bond and equity markets, which we expect to occur frequently given the current US president’s attempts to reshape the global landscape. Investors can then overlay more tactical strategies in response to events as they unfold, in order to calibrate exposures to match the rapidly changing landscape.
Read our March House View for more insights.
