The effect of recent trade policy changes will reverberate across the globe over time periods ranging from days to decades.
While many longer-term implications are uncertain, some effects, such as the gradual rise in real yields on bonds and the secular pressure to increase defence spending, are already evident, allowing us to make informed longer-term portfolio adjustments.
In the near term, tariffs are inherently disruptive and inflationary, though their inflationary effect will depend on companies’ perceived pricing power. Market sentiment, often swayed by headlines rather than fundamental deterioration, has fluctuated drastically. The volatility reflects heightened uncertainty about the future, rather than a definitive economic downturn.
Over the next few quarters we expect a combination of slower earnings or GDP growth and higher inflation, though a technical recession is not necessarily imminent. To navigate short-term noise requires us to lean a bit more heavily on our sentiment and volatility dashboards.
So far the magnitude of the announced tariffs has exceeded both our and the market’s expectations. We no longer believe these aggressive interventions are mere negotiation tools but rather that they are permanent feature of the US’s economic stance, influenced by long-standing ideological beliefs. The intensified counter-tariff responses from other countries could further escalate tensions and it is unlikely there will be a definitive “winner” in this tit-for-tat tariff situation.
This dynamic may reinforce the notion that economic interactions can be zero-sum, which we believe does not have to be the case. There is a genuine risk that the US is underestimating China’s willingness and ability to influence the ultimate geopolitical and geoeconomic outcome.
Given these developments, our tactical outlook has shifted materially. By early February the “US volatility” scenario became our base case, rising above 40% probability, and implying highly volatile markets given the level of uncertainty faced by market participants and central banks alike. Concurrently, our probability for negative market outcomes had also increased notably, now standing at 35%, highlighting the considerable risks still at play.
Throughout February and March we gradually reduced our exposure to risk assets as our outlook for more volatile and negative outcomes increased. This has led to higher cash balances and a repositioning of our currency exposure to capitalise on rand weakness.
Our stance remains deliberately defensive, though the extent changes day by day, reflecting our heightened concerns around immediate political and economic uncertainties, including the potential knock-on effects from aggressive tariff implementation and geopolitical tensions. Nonetheless, investments across asset classes, geographies and sectors continue to provide critical diversification, cushioning our portfolios against market shocks and volatility.
We expect volatility to persist and potentially intensify as tariff policies continue to unfold and geopolitical tensions evolve. Ambitious fiscal goals to reduce the US budget deficit through substantial public sector cuts, while commendable in intention, introduce second-order risks to consumption and employment that could further undermine consumer and corporate confidence.
Meanwhile, despite apparent reluctance to ease tight monetary policy, the US Federal Reserve will need to balance that reluctance with providing support should the growth and unemployment outlook deteriorate materially in the near term, or any instability arises in the US financial system, especially in the scenario where money and/or bond markets become disorderly. It has been emphasised that substantial measures can be taken to support financial stability when necessary.
Domestically, SA political and economic risks remain elevated, worsened by strained US relations, related tariff uncertainty and caution surrounding the stability of the government of national unity all contributing to an uncertain growth and inflation outlook. During periods of heightened global uncertainty emerging markets often find themselves at the mercy of global market movements and indiscriminate selling by global fund managers moving to the sidelines until they regain confidence in their outlook.
Nevertheless, volatility often presents opportunities, particularly in high-quality assets unjustly punished by market sentiment.
• Oberholzer is head of multi-asset at Stanlib Asset Management.
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