Trump’s Truss Moment…

Given the political events of the last 10 days or so, we thought it appropriate to send out an interim note to clients, to keep you as informed as we can as to what we believe is happening, how the uncertainty is playing out, and where we are positioned from an investment perspective.

It will come as no surprise that investment markets have been highly volatile over the last week, often with daily movements of between 5% and 10% in both directions, though predominantly with more downside pressure. The catalyst has been Trumps demands for significantly higher tariffs on goods imported into the US, than anyone with any economic insight would have imagined was likely. The actions from the Trump administration are essentially off the scale in terms of recent history, and it is no surprise to see markets react violently, much as they did around the Liz Truss budget announcement in 2022. At that time, the reaction was restricted to the UK bond market, on this occasion, Trumps ‘Truss moment’ has had an effect on a global scale.

 What is going on in markets?

Markets don’t like uncertainty, and that’s exactly what they were thrown into. This war on trade has spiked fears of an imploding US led global recession, rising inflation (tariffs are a cost to the consumer), and lower profitability of companies (where costs cannot be passed on), all of which lead to negative economic outcomes. The initial reaction of markets was to sell out of risk assets in search for safe havens.

As the week progressed, markets then began to fear stagflation, which is a combination of low economic growth and higher prices. This environment can only be prevented by increasing interest rates, and this in turn tends to lead to a deeper recessionary environment.

Trumps main driver behind the trade war is to devalue the US dollar, increase tariff take and maintain an economic momentum. He believes in the long run this will help reduce US indebtedness. But the bond market has tested him, concerned about inflation and the sustainability of government debt if growth slows. This caused a spike in bond yields, and Trumps decision to announce a 90 day pause on tariffs was his response to curb that trajectory. That has helped ease market nerves and resulted in investment markets regaining some ground and trading on more of a stable footing in the last few days.

Where are we now?

The main factor in all of this remains the uncertainty. The trade war looks like its centred in the main around the US and China, with China increasing tariffs on the US again today (though announcing that this is their final uplift). It remains to be seen how and when Trump responds.

Across the rest of the world, the 90 day pause gives us just that, a pause for collective thought, before negotiations begin. We’d like to think these negotiations will result in positive outcomes, though we can take nothing for granted. Trump is unpredictable, and that makes planning very difficult. How can any Chief Finance Officer of a global business provide investors with forward guidance for the next 12 months ahead? How are they able to deliver any form of accurate forecast without having a clear understanding of costs and tariffs, the effects on supply chains etc? Consequently, we see this as a very difficult environment for a company’s share price to grow. The sooner companies and markets have clarity the sooner we can revert to normality.

Whilst economic growth in the UK and Europe is very low to flat, growth in the US is slowing from higher levels. There will be calls for central banks to cut interest rates much faster than is currently priced into markets, though they will need to see economic data start to worsen, and inflation falling, to give them confidence to act. On the positive, employment levels in the US, UK and Europe are near to all-time highs. Companies and consumers (comparative to historic records) are on the whole, well capitalised, with lower than average debt levels. This provides some degree of stability, and if a trade resolution can be reached, then investment markets are priced at a good discount to where they were 3 months ago, hence there are some reasons to be optimistic, though perhaps not just yet.

How are we positioned?

 As outlined across our recent blogs, we have been reducing investment risk, and in particular US exposure throughout Q1. Consequently, we have our lowest equity weighting in history. In part this was due to the opportunity that we still see very much in the fixed income (bond) market, which we felt on a risk reward basis offered far better value than equities. Our bond exposure has offset most of the falls in our equity portfolio, which is why our portfolio values have been well protected. This will hopefully provide us with a great platform moving forward, and ultimately if the economic outlook darkens, this will prove to be a huge asset to returns.

As well as the reducing equities overall, it is important to note we focused the reductions on the most sensitive holdings, with the remaining allocation defensive in nature, for example investing into quality dividend paying assets.

Our portfolios remain highly diversified, with enhanced exposure to short dated fixed income and cash, which has helped us cushion a huge amount of the volatility in markets. We have retained a small amount of equity risk in our low risk portfolio’s as its impossible to time markets.  We know through our experience that our lack of correlation with sell off is excellent not just from the perspective of preserving capital, but also as we have retained our income steam that continues to drip into the portfolios on an ongoing basis (4-6% per annum dependent on the risk profile). This in turn gives us the opportunity to use our cash to buy more equity value when we feel it is appropriate.  

 Where do we go from here?

Our sense is that the worst case scenario (a spiralling trade war and deep recession) are now much less likely, given Trump’s concessions. However, a lot of uncertainty remains.

The next key questions are:

• How bad does the economic data start to look over the coming weeks?
• How do policy makers react from here?

On the first one, unless there is an immediate and positive resolution, it’s inevitable that data in the coming weeks will start to trend negatively. You can’t really have this level of uncertainty without a slowdown towards a recession, though to some degree markets have started to price that in. It will now really depend on how bad or resilient things are, which will help to determine the direction.

On the second, who would be a policymaker?! Governments are fiscally out of room, so cannot support like they did in Covid without spooking bond markets. Central Banks can cut interest rates aggressively, and likely will at some stage, but they will probably want to see economic data deteriorate before acting, especially given the inflationary impact of the tariff policy. This is one of the challenges markets are grappling with currently… where is the policymaker backstop?

What are we likely to do?

 Firstly, stay very flexible and alive to change. As we have seen across every other crisis, the right decisions in difficult periods have a significant impact on returns on the way out. We have a great track record of adding risk during difficult periods and seeing portfolios perform well on the other side, and we are fully focussed on using this correction to our advantage. In the short term though, we need to see improvements beyond Trump’s temporary pause, to become more optimistic.

When things do change, we hope to add more risk into our portfolios at great prices which will place them in a better position to bounce back. This may be weeks or could be much longer, it really depends on how the backdrop evolves, both economically and from a policy perspective. For now, however, we would reassure clients, that we are looking through the noise, we are defensive, and are working through the opportunity set that will provide further positive returns for the future.

As always, if you have any questions at all, please get in touch with our team.