It has been difficult for investors to plan strategically or even tactically after the sweeping tariffs unveiled by the US and the inevitable retaliation by China and other countries.
President Trump’s subsequent backtrack, with a 90-day suspension on imposing most of them (with the notable exception of China), has further shaken already muddled minds.
But fund selectors need to respond and to reassure their anxious and angry clients. They are forced to present a diagnosis and a devise a rational plan.
Jansen Phee, head global investment management APAC fund investment solutions & head global investment management China at UBS Global Wealth Management (UBS GWM), believes that the greatest threat to the world economy is an “escalating global trade conflict from tit-for-tat retaliation from other countries”.
European countermeasures would exacerbate the consequences of an already damaging US-China standoff.
Phee told FSA that he advises his clients to build gold exposure to diversify portfolios, and “seek durable income in good quality bonds”.
“Quality bonds offer attractive risk-rewards and can help diversify portfolios against equity market volatility,” he said. Phee favours diversified fixed income strategies (including senior loans) as well as equity income strategies.
Indeed, income generation and a confidence in long-term structural trends are his lodestones. Phee and the UBS GWM CIO continue to like long-term structural growth themes, including AI, power and resources, and longevity.
They take a “selective approach in Europe segments that are relatively insulated from tariff risks, offer exposure to structural growth and fiscal beneficiaries”, such as Eurozone small-mid-caps in the industrials, IT, utilities and real estate sectors.
They also recommend structural growth opportunities in Taiwan – mega-cap technology companies driving AI capital expenditures – and have a “defensive stance in China by positioning into some state-owned enterprises sectors and companies with high dividend yields in the financial, telecom, utilities and energy sectors”.
Connie Sin, head of funds and alternative investments at Nomura International Wealth Management (NIWM), told FSA that “investors are very cautious at the moment. While the risk of stagflation has risen as growth slows, it has created additional short-term pressure”.
However, while recession risk is needed to factor in portfolio construction, “it’s not my base case yet as news-driven events remain fluid and uncertainty is prevalent,” she said. “Corporate earnings trends for 2025 will be an important indicator for assessing future market trends.”
Over the last few days, the Nomura funds team has undertaken a preliminary review of all the funds covered on the probable impact of tariffs and the massive sell-off some of the portfolio managers face.
“We see many active managers in value and dividend strategies are navigating relatively well and remain resilient. The current trade disruption will create pockets of opportunities as it did during Covid,” said Sin.
In fact, active management will be key to generating alpha in 2025, and for patient investors, “it’s actually a good time now to build a long term fund portfolio”.
Sin believes that adding defensive elements and enhancing diversification into alternatives should help her clients outperform global markets during this turmoil.
“We lower listed equity fund allocation, diversify towards opportunities outside of the US and favour sectors supported by valuations and fundamentals,” she said.
For example, NIWM prefers Japan equity managers with active leans towards domestic-demand oriented companies amid real wage growth, controlled inflation, and a supportive Bank of Japan.
“In times of market turbulence, private markets and hedge funds with stringent risk management processes also offer compelling diversification and risk-management advantages,” Sin said.
Karen Tan, head of managed solutions, Asia, Pictet Wealth Management (WM), also fears the higher probability of recession risks with a surge in global uncertainty
Tan told FSA that she favours Eurozone equities, and has upgraded the UK from underweight to neutral, and for fixed income, she is overweight periphery Eurozone (over the core Euro area) and UK bonds. Pictet WM is also positive on private equity.
In terms of foreign exchange, “we are negative on the US dollar, especially against European currencies, so overweight euro, the Swiss franc and sterling versus the US dollar”.
Meanwhile, Pictet WM is “neutral on emerging Asia but positive on China technology, as we believe China has all it takes to scale innovation across industries”.
Conversely, Tan has turned underweight US equities, the US dollar and has a “negative view on high yield bonds given the higher recession risks”.
More generally, NIWM’s Sin warns that investors need to “stay away from crowded trades and rich valuations among growth and cyclical equities especially in the technology and consumer discretionary segments”.
At UBS GWM, Phee is more sanguine. “We see an opportunity for investors to use ongoing volatility to strengthen and diversify portfolios while positioning for longer-term gains,” he said.
The firm has upgraded US equities to attractive from neutral and believes investors can mitigate near-term market timing risks through phasing strategies or through capital preservation strategies.
“We also believe that gold, quality bonds and hedge funds represent valuable portfolio diversifiers which investors should consider adding in these volatile times,” said Phee.
