April 2025
Market Commentary
Trump Tariffs & Trade Wars
(4 min read)
3rd April 2025
Global Economic Policy Uncertainty Reaches All Time High
Markets have had to digest significant headwinds in the news in recent years. Whether it be geopolitical, conflicts around the world or macro-economic in terms of inflation, government deficits and economic growth, there has been plenty to worry about. Following President Trump’s ‘Liberation Day’ global tariff announcement another layer of complexity has been added not seen since the 1930s.
Markets, at the time of writing, have reacted badly to the prospect of a prolonged trade war. We do not know whether this is the President’s tactics in negotiating new trade deals or a new fixed regime of global protectionism. Either way markets do not like uncertainty and have reacted accordingly. Equity markets fell sharply after the announcement, as did bond yields, the oil price and the US Dollar reflecting the prospect of slower economic growth and consequent interest rate cuts. Counter-intuitively the gold price also fell.
Chart 1 below shows the Global Economic Policy Uncertainty Index, going back to 1997, which is currently at an all-time high above the level reached during the peak of the covid crisis. Government balance sheets are in poor shape and the extent of deficits means that there is no fiscal room to support economies at a time when growth is floundering in most developed countries and certainly showing signs of slowing the US.
Central Banks, led by the Federal Reserve are faced with the dilemma of cutting interest rates to support economic growth, although this would encourage governments to borrow more, or holding rates firm in the face of still strong inflationary pressures. It is no wonder, therefore, that the index in Chart 1 is where it is.
Chart 1
Monthly Global Economic Policy Uncertainty Index
Chart range: January 1997 - January 2025
Source: Highcharts.com
What does this mean for client portfolios?
We have said for some time in previous communications that increased volatility and market gyrations have become an uncomfortable reality of investing and that this environment will continue going forward. We have also emphasised the need to be fully diversified so that portfolios are prepared for all plausible scenarios, and that robust portfolio construction is key:
growth and thematic equities for long-term capital growth to outperform long-term inflation
higher dividend paying equites to balance volatility
bonds for periods of growth shocks
uncorrelated alternative assets to smooth out the bumps along the way.
None of this has changed with recent events around the Trump tariffs.
In our ‘moderate risk’ portfolios our exposure to the US stock market is 30%, well below the 70% in the MSCI Global Index. If capital growth and preservation in real terms after inflation is the key objective, being out of the market and worrying about when to get back in is more dangerous than remaining invested - see Chart 2 below - and dealing with the shock waves of markets in the knowledge that the long-term growth prospects and investment themes are very promising even though it may not feel like it at times when we read the headlines.
Recent moves in the S&P 500 have reversed gains made since September of last year but we are confident in the outlook for the underlying companies in client portfolios.
Chart 2
Time in the market, not timing the market.
Investing $10,000 for 20 years in the S&P 500. Missing the best days in the market can have a dramatic impact on investment returns.
Chart Source: Study by Royal Bank of Canada (RBC) in February 2023 entitled "How to keep calm during a market downturn". Statistics based on Dollar value of $10,000 invested in the S&P 500 over 20 years from January 2003 to December 2022 (including dividends). Dollar returns are rounded to the nearest $1,000.
Web link: https://www.rbcwealthmanagement.com/en-asia/insights/how-to-keep-calm-during-a-market-downturn
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Glossary
www.montgomeryassociates.co.uk/glossary
Risk warning
This article and other articles on www.MontgomeryAssociates.co.uk does not constitute an offer or invitation in respect of investments described, nor should it be interpreted as advice or a recommendation. You should contact your financial adviser or accountant for advice relating to your circumstances. The opinions and information in this article have been prepared from sources believed to be reliable at the time and are given in good faith. The information and opinions expressed in this document represent our views at the time of preparation and may be subject to change. The value of an investment and any income from it can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
