Reflections of the CIO...

April 2025 will forever be remembered as ‘tariff’ month, a period of exceptional market turbulence, confusion and violent swings in investor sentiment.[1] Unpicking what happened, and why, will undoubtedly keep researchers and historians active for many years to come, as the events of April and the few months before, are both different and more profound than the usual market moving headlines. 

At the heart of the volatility is the attempt by the new US administration to rewire both the global security and trading infrastructures simultaneously, against a backdrop of uncertain economic strength and massive technological disruption. April was the month when taxes on the importing of goods to the USA, or ‘tariffs’, took centre stage. Investors had already anticipated a seismic move on tariff rates from multi decade lows of around 4% to something closer to 11% on average. An announcement of an average effective rate of nearer 26%* was not anticipated and caused a huge shock and immediate panic in markets.[2] The methodology behind the rates applied to each country was also decidedly shaky, resulting in much mockery online and in the press, but the message that trading with the USA was a ‘privilege’ which had to be paid for did come through loud and clear. 

What also came through loud and clear was the markets’ immediate reaction, with falls in stock markets during the first few days of April on a par with the Covid period.[3] Soon the US dollar and Treasury market were also dropping side by side with the equity market, an unusual and toxic turn of events. The US administration blinked first under this market pressure, announcing a 90 day pause in implementation of the new tariff rates to allow countries to negotiate a less onerous outcome. As we write, around 18 countries are in active negotiations with the US over their specific trade deal, and we would expect rolling announcements on terms right up to the summer and beyond. The notable exception to this negotiating group was China, which has punitive tariff rates still in place – a response from the Americans for having the temerity to retaliate to the initial announcements. How the US/China face off eventually plays out will be crucial in working out the long run investment outlook but, as we write, the negotiations have not even begun, with trade between the two effectively facing a ‘dead stop’ in the months ahead.

In the near term, however, the announcement of a 90 day pause on tariff implementation catalysed a sharp recovery in equity markets and dampening of volatility in bond markets.[4] Indeed, by the end of April many indices had recovered nearly all their initial losses, leaving only a rolling series of downgrades to growth and profits as evidence that something serious had happened. The uncertainty over where trade policy will actually settle and, by association, where growth, inflation and interest rates will head, has caused many corporations to withhold guidance on outlooks during the April reporting season. Since no-one had predicted 26% effective tariff rates in advance, no forecaster has much confidence in predicting economic or earnings trends either, albeit that the initial guesses universally reflect a worsening in the outlook compared to where we were entering the year.

In our opinion, unpicking why such sharp market falls are followed so soon by equally sharp recoveries has much to do with the short term focus of global investors in this post Covid period, and the ‘excess’ amount of uncertainty that currently has to be priced. A good example of how tricky it is to form a high conviction view presently comes from observing current economic trends. Forward looking ‘soft’ data from consumer confidence surveys is very weak and unambiguously worrying. Yet actual, ‘hard’ data in the US and global economies is still robust. That leaves some space for compromise on tariffs, interest rates cuts and spending increases to mitigate the effects of the initial shock of the headline policy changes and provide a route away from recession. This is a narrow path for markets to follow, but also one which investors have decided to take for now, judging by the recoveries in asset prices into the end of April.

During April we also had a regular asset allocation meeting and, noting that the themes embedded in existing portfolios had generally stood up very well under pressure, we decided to re-enforce those themes and not to change our ‘glass half full’ mentality on outlook (i.e. we didn’t think it was necessary to make any major changes in portfolios as a result of the tariff experience). We continued to move away from the narrowly led US equity market into much cheaper rest of world equity exposures in the UK, Europe and Emerging Markets, building on a trend we have gently been putting in place for over a year now. Some money was also shifted from equities into higher yielding bonds, a risk asset which we think has a slightly better return profile at this point. Alternative positions have been reinforced, seeking out those trading strategies in foreign exchange and interest rate markets which ‘enjoy’ the volatility that puts so many others on edge. Exposures to the Japanese Yen were also nudged up, as we see it as a cheaper and more reliable portfolio stabiliser than the US dollar in this current environment. These changes are all evolutionary rather than revolutionary and reflect a strategy of seeking the widest portfolio diversification possible, with an added sprinkling of ‘deep value’ assets on top, for future potential gains. You can read more about our asset allocation meeting in our April asset allocation update.

Looking forward into the next few months, there is an uneasy calm in global markets, with investors and businesses adopting a ‘wait and see attitude’ as the tariff shock wears off and trade deals are announced. There will be a price to pay somewhere for this shift in the cost of global goods, in terms of higher inflation and lower growth. This price may be acceptable to markets or it might require further price falls – the jury is still out on that point. For the moment, there is probably a whiff of complacency in the air but there is also a reasonable opportunity set if one is able to look globally and across asset classes for the best ideas. We look forward to updating you on future events as they develop in this remarkable year.