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Friends and colleagues often fault me for being too much of an optimist. Indeed, one of my more popular articles argued why pessimists capture headlines, but optimists make more money.
Is an optimistic approach wrong in today’s volatile markets? Is this the start of a generational shift in the global economy and markets? We think not – extreme uncertainty is rarely comfortable, but history shows us such discomfort has thrown up some of the best opportunities for investors. Considered optimists are still likely to win.
US tariffs – not the first time
A lot of comparisons of US policy today have been made with the US trade policy of the 1930s. At that time, the US infamously imposed the ‘Smoot-Hawley’ tariffs on imports into the US. That action was viewed as a major contributor to the Great Depression that followed.
We do not agree with this comparison. First, in the 1930s, tariffs were imposed at a time when the US economy had a trade surplus, not a trade deficit like today. Second, US equity markets were coming off a period of apparent irrational exuberance, with gains since the 1920s being multiple times higher than what markets have gained over the past decade. Third, there was no room to adjust monetary policy to compensate for the growth shock, since US policy was based on the gold standard.
Others have made more flattering comparisons with the late 1800s, a period of great debate around US tariffs and their costs and benefits. Some researchers argue that imposition of tariffs had a key role to play in US industrialisation at the time, citing several industry examples. Still, the US economy was arguably very different compared to what it is today.
Other analysts have argued tariffs can play a key role in reshaping trade and capital flows from a US perspective, ultimately helping address the country’s trade and fiscal deficits. By better balancing imports with exports, tariffs are, in turn, expected to reduce capital flows that result in public deficits. Whether this approach succeeds or not is something that will undoubtedly be the subject of a lot of analysis in the coming years. It’s a great time to be in research!
Fighting the right battle
In the face of seemingly generational shifts in the global economy and markets, human behavioural biases are urging us to ‘do something’, a classic fight or flight response. In investing, taking a deep breath and taking a more considered approach almost always leads to superior long-term outcomes. Indeed, at times like these, fighting our own behavioural biases can be a much bigger, and more important, battle than answering the analytical questions.
Again, some perspective can help. A long history of US equities (based on Shiller data) going back to 1872 shows us that equity markets still delivered strong 10-year annualised real returns, ranging from high single digit to low double digit, throughout the tariff turbulence of the late 1800s and through the period between the two World Wars.
A two-step approach to staying calm
In a world where the outlook is changing by the day, if not by the hour, we believe a two-step approach to portfolios can help investors find a harbour in the storm and adopt a more balanced view of which opportunities to take, and which risks to avoid:
Ensure adequate diversification. When faced with extraordinary uncertainty, diversification is your friend.
After several years of debating the value of 60 (equity)/40 (bond) portfolios, the benefits of diversification are back with a bang. At least in the initial days of the violent sell-off in equities, bonds, gold and safe haven currencies such as the Yen rose, proving their value as diversifiers.
Volatility of balanced portfolios has been far more muted than headlines would suggest.
Start building your shopping list. Periods of volatility are also times that offer the best buying opportunities for long term investors.
Within a well-diversified portfolio, our current focus areas are a mix of cyclical and defensive equity exposures. These include the US technology software and healthcare sectors, industrial and financial sectors in Europe, the Hang Seng technology and high dividend state-owned enterprise sectors in China and the financial and consumer discretionary sectors in India.
Corporate bonds, similarly, would be in our shopping list as wider yield premiums start to create more value. A reasonable exposure to gold and alternative assets would also help ensure portfolios are prepared for a wide range of scenarios.
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This article is for general information only and it does not constitute an offer, recommendation or solicitation of an offer to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This article has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice or an investment recommendation. It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person or class of persons. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product or invest in an investment. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product or service described herein is suitable for you.
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Outlook 2025: Playing your Trump card
We head into 2025 Overweight equities and gold and Underweight cash in our Foundation portfolios. The US is likely to be in the driver’s seat, outperforming other major markets, as business and consumer confidence gets a boost following Trump’s election.
