For those of you who prefer to read our views rather than listen to them, we have prepared a written version of the recent webinar focusing on the impact of tariff announcements on your portfolio.

This article summarises the discussion between our Chief Investment Officer , James Calder (JC) and Investment Managers, Jason Armstrong-Butler (JA-B) and James Ross-Russell (JR-R).  All three gentlemen are members of our Investment Committee. The webinar was intended to review the recent market volatility and consider CAM’s response to it and the impact on portfolios.

JA-B: The starting point for our discussion today is to highlight how pleased we are with the resilience of our multi asset real return portfolios.  Performance has been strong in the face of considerable issues with global markets. Taking a step back, what has driven this difficult environment? To answer this question, we need to rewind to Liberation Day on 2 April.

JC: I was in the States on a family holiday on 2 April, which is now an economically infamous date. The news announced on Liberation Day had long been anticipated as throughout Trump’s re-election campaign he made no secret of his views on tariffs. What did take the UK Government and markets by surprise was how aggressive the programme was. Investors had considered the likelihood of massive impact on President Trump’s foes, but it was equally devastating for nations who were historically friends of the US. Overnight, markets became very volatile. Equities were particularly hard hit as investors in this sector like to be able to forecast what is likely to happen in the future.

Here at CAM, all members of the Investment Committee were in continuous communication, and I had many early morning calls from the States. But ultimately our process is based on multi asset, real return, fully diversified portfolios. So, whilst some asset classes in portfolios did perform very negatively, others defended well. In some cases, we even produced positive absolute returns. Overall, our investment strategy responded well to the pressure. That’s not to say that I was happy about the situation – tearing up a global trading order that had been in place for 80 years and today’s announcement that China and the US had agreed to reduce tariffs is welcome but is another example of President Trump’s bark being worse than his bite.  

JR-R: A lot has happened since 2 April. Whilst the Chinese have renegotiated and other deals are in process, equity markets still took a massive hit.  Is there anything that you would point to as driving the recent turbulence?

JC: Whilst we don’t comment on politics, this political decision in the US created a breach of trust in how government is expected to behave. The bond market’s investors were driven to punishing the US by increasing the cost of US debt.

JR-R: Effectively, the sale of US Government bonds demonstrated the lack of faith in US politics and led to a revision of Trump’s approach?

JC: In simple terms that is what happened and the cost of borrowing to the US Government went up. This was the first moment when Trump seemed to pause to think about the tariff programme. A second issue arose when Apple put considerable pressure on President Trump to carve them out from the tariffs entirely. A third factor was that Trump made it clear that he would not sack the chairman of the Federal Reserve who effectively sets interest rates. The fourth change in recent weeks has come in the softening of policy relating to China, heavily driven by the fact that 80% of Amazon’s goods sold in the States come from China.

 This has all led to a brutal economic environment. We did see markets rally this morning (12 May) on news of a US China deal. But if you examine the detail of these arrangements closely, the rhetoric may have become more positive, but the outlook remains difficult. For example, the UK/US deal is not legally binding for either party and it runs to little over five pages. Supply chains have been disrupted. Recession is not our base case, but the probability has certainly increased over the past 6 weeks.

JR-R: From the client portfolio side, I believe the multi asset approach has been key.  When equity markets are buoyant, it can be difficult for a diversified approach to keep pace. But in times of distress, the different assets and approaches prove their worth. The volatility in portfolios has created a potentially difficult journey for clients in recent months but by holding different classes of investment our portfolios have held up well. Our core fixed investment is mostly up over the period. Alternatives, which in recent history have been somewhat troubled, have performed well. Property investments have also helped us along the way.

Looking at leading global indices, the composition can lead you down the path of making significant client investments into the US because those indices have such a high weighting to US companies. 75% of the global equity market is accounted for by the US. However, in recent weeks, a more diverse portfolio has held up much better than investing primarily in the US. The S&P 500 has largely recovered but the slide in the US dollar will still have impacted investors.

JC: Human nature being what it is, it is very easy to measure our overall multi-asset portfolio versus the best performing equity market (the US in the past two years). Considering the tariff announcements, our portfolios did perform well and this was very pleasing. We do have to continue to be reasonable and consider the parts that all the asset classes must play. As you have mentioned, fixed interest has proven its worth, particularly core fixed interest, benefiting from rising interest rates in recent years. As you rightly say, the dollar has weakened, and this has always been seen as a safe haven currency. We do not take currency views because my experience tells me this is very volatile, but I would expect sterling to weaken back to previous levels.

Within property, merger and acquisition activities have generated a couple of good wins. On balance, portfolios have worked well but I remind myself that a multi asset portfolio is designed to perform in a way that means that not all the investments held will be performing the same way at the same time.

JA-B: From a practical perspective, it is worth talking about how we react in times of extreme volatility. Of course, we have regular Investment Committee meetings on an ad hoc basis to discuss the evolving risks and to consider the development of opportunities. On this occasion, we felt portfolios were resilient in the face of dramatic swings when markets were falling 5% a day. Our conversation led us towards where the opportunities to add risk might arise. The sector that drew our attention was European equity.

JC: The Research team and the wider Investment Committee had been considering increasing our investment in European equities for some time. When I started my career in the ‘90s, Europe was the go-to place for equities. Over the last 25 years though it has become a backwater.  Recently, with so many large cap companies trading globally but actually listed in Europe and rumours of changes to the EU, investors have been reassessing this market. The likelihood of lower interest rate and inflationary conditions have led to Europe becoming more attractive, but the market remains on a significant discount to US equities. We are moving cautiously into further investment, targeting German infrastructure following the recent election results and defence, given the likely US stance to NATO.

JA-B: The recent US stance suggests that they will become a less reliable trading partner for Europe which may lead to capital being repatriated from the States.

JC: There will certainly be longer term trust issues with investing into the US. We have historically held a lower weighting to the US than might be suggested by the size of their economy because of the concentration risk presented by the Magnificent Seven technology stocks. There are signs of European money coming back into local markets from America. Here in the UK, there is talk about encouraging UK pension funds to invest more in our domestic economy. 

JA-B: Looking forward, there has been a meaningful recovering in equity markets, dating back from 10 April when Trump announced a broad tariff pause. Do you believe we are out of the woods?

JC: In this job, we must be reasonably optimistic. That said, my outlook is realistic verging on pessimistic. I believe we will see more volatility over the short term. That does provide buying opportunities, but we still need confirmation of what the new world order will look like. Who are the winners? Who loses? But given that we have diversified portfolios we are comfortable with the current environment and believe our multi asset holdings will serve clients well. Focusing on the rest of the world, we had a much-expected interest rate cut in the UK last week. There is plenty of opportunity for us and our clients’ investments are well placed to benefit.

JR-R: If you consider the global weighting to the US mentioned earlier as being 75%, it has been difficult at times to hold such a low weighting in clients’ portfolios to the States. But diversification has really benefited us. It looks as if lower tariffs for the UK are on the cards and that there will be a deal with China. However, whilst Trump remains, we are likely to see further unpredictable behaviour. Markets don’t like uncertainty. Volatility will continue and let’s not forget that the current 90-day hiatus is simply to permit negotiations to be concluded. At the end of that period, we could even see more tariffs. That said, volatility creates opportunities, and we continue to take advantage of those for our clients.

JC: I agree. We will take opportunities where they are presented to us and focus on maintaining our well diversified approach to real return investing.