Given the policy mix in Washington and with the President just reaching his first 100 days in office, we feel that having the portfolios positioned for a wider range of both risks to the upside, with some relief on tariffs or future potential tax cuts as positive catalysts or the downside, with slower growth and elevated inflation as a consequence of sustained tariffs is a sensible course of action.
Our portfolios entered 2025 broadly constructive on global growth having neutralised our government bond duration over the fourth quarter to reflect the new US administration’s pro-growth agenda.
At the time, the US economy appeared set to achieve a ‘soft landing’ as inflation moderated towards target with US GDP, although slowing, still above trend at 2.3 per cent by year end and with the country at full employment with unemployment at around 4 per cent.
Despite this benign backdrop, what has changed significantly since year end is both the speed and breadth of tariffs directly applied by the new President using Executive Orders to pursue the White House’s ‘America First’ agenda to trade policy which has amplified volatility, damped both consumer and business confidence and has triggered a technical correction in the S&P 500 after two consecutive years of double-digit gains, albeit with elevated valuations.
Policy has also changed very rapidly in Europe as the new Trump administration has challenged long held assumptions about the nature of the Transatlantic alliance.
All of which has galvanised European countries to act, with Germany alone committing circa €1tn to future infrastructure and defence spending.
Although China has been in the direct tariff cross hairs, like Europe, we have seen a return of ‘animal spirits’ with sharp advances in Chinese equities.
This has been buoyed by the renewed vigour of technological advances in large language models and the cosy embrace of tech entrepreneurs by the ruling Communist party, having spent the last few years in the cold as the party vigorously pursued its ‘common prosperity’ agenda, de-emphasising private enterprise.
At the margin, we have broadly brought the portfolios back into line with their long-term strategic weightings whilst still maintaining a tilt to government bonds should negative spillovers from this initial trade skirmish escalate to a full-scale trade war, thus dampening global growth and leading to a series of rate cuts from central banks.
Tactically we have reduced our weighting to global listed infrastructure to increase European equities.
In credit, modest spread widening provided an opportunity to reduce our short-dated global government bond exposure which has performed solidly to close off the underweight to global high-yield bonds.
As a result of these changes, the portfolios are neutrally weighted to equities, alternative investments and credit whilst having a defensive tilt on the downside to global government bonds maintained through an underweight to absolute return strategies on yield and valuation criteria.
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