Markets – April 2025

Liberation day – or isolation day?

The tariff measures announced by Trump were much larger than anticipated and continue to stir economic turbulence. Trump hailed this day as ‘Liberation Day’. However, many have branded it ‘Isolation Day’, ‘Inflation Day’, or ‘Recession Day’.

For investors, especially those leveraged or in hedge funds, and for day traders, it became ‘Liquidation Day’.

Markets have recently recovered some ground following Trump’s 90-day pause. However, investors need to be cautious about whether we have seen the worst of the market sell-off, or if more is to come. Is a pause a pause, or is it a complete reversal?

Global trade tensions may have cooled a bit, but the outlook for consumers, businesses, and investors remains as murky as it was before Trump’s surprise 90-day tariff pause.

The tariff concessions Trump offered the rest of the world were essentially offset by the extra duties slapped on imports from China. This now sees the world’s two economic superpowers locked in a full-scale trade war. Put simply, it is a ‘who blinks first?’ contest.

The markets provided a level of constraint on Trump

The correction in the US share market and the rise in the US 10-year bond rate provided a level of restraint on Trump. Last week, the US president blinked in the face of a significant sell-off of US treasuries and the increasing view of a recession in the US.

A week before ‘Liberation Day’ the US benchmark 10-year bond rate had fallen to 4%, but then jumped as high as 4.5%, moving further away from the President’s target and signifying a loss of confidence in the US.

The sell-off was triggered by global investors (including in Japan and China) losing faith in the US and therefore exiting out of bonds.

Rumours suggested China was intentionally dumping US bonds to increase the bond rate.

Either way, Trump faced market resistance reminiscent of former UK Prime Minister Liz Truss when she attempted to implement her controversial economic policies, which included large-scale tax cuts and increased borrowing.

Portfolio implications

The impact of US trade policy on the global outlook is highly uncertain and very fluid. The implications for growth and inflation ultimately depend on the level of tariffs, how long they remain in place, how the private sector adjusts, and what reciprocal actions other countries undertake. That said, trade wars are never won; there are no true winners because both sides suffer significant losses. The focus is on minimising losses rather than achieving a clear victory.

In the context of investing, while the final outcome of market fluctuations is uncertain, investors can still take action to manage and mitigate their risks. Essentially, it’s about controlling what you can – to minimise potential negative impacts, even when the overall situation is unpredictable.

Historical evidence shows that overvalued markets are more susceptible to significant losses. Therefore, a prudent risk management strategy is to steer clear of markets where the long-term returns do not justify the associated risks.

As investors, we cannot manage our portfolios based on a tariffs on/tariffs off approach, but clearly, it has had an unsettling effect as we all try to work out what the actual end game is.

In the meantime, ensuring a lower exposure to expensive US assets, holding investments that provide a more attractive value proposition, and maintaining a portfolio with attractive dividend yields will ensure a smoother ride through uncertainties.

Over the last twelve months, our focus on client portfolios has been lowering exposure to the US share market, especially investments in the US tech/AI sector. We have increased our exposure to Europe and Asia and ensured that Australian stocks remain weighted in high-yielding ASX200 shares. We have also increased our allocation to listed property and infrastructure.

Your portfolio will be around a lot longer than Trump will be President. Investing is about the long term. Staying flexible and adaptable is the key. The Australian economy remains strong and retains free and flexible trade relationships with all key trading partners. Our debt levels are manageable. We are well-placed to weather the uncertainties.