Investors should consider diversifying away from the mega cap stocks as the markets digest higher tariff from the new Trump administration.
That was the consensus among analysts who also cautioned that volatility would increase as protracted negotiations played out.
“There will be a lot of noise and volatility during the process. The S&P 500 and US treasury yield are the check-and-balance mechanism. The crash of either markets will push Trump to moderate stance,” said Louis Luo, head of multi-asset investment solutions for Greater China at abrdn.
Last week, President Trump came close to imposing 25% tariffs on allies Canada and Mexico before introducing a 30-day moratorium, while he did go ahead with 10% tariffs on China, which prompted a fast response with Beijing implementing tariffs of their own.
Abrdn’s Luo reckons that given the fact that large-cap stocks, particularly the tech giants, have greater overseas exposure, it made sense to start diversifying away from them. Luo also added that abrdn was adding to China as the country was better positioned compared with other emerging market peers.
This point about diversifying away from the mega caps was echoed by Stephen Dover, chief market strategist at Franklin Templeton, who noted that small-cap companies were less reliant on imports and exports and so were poised to outperform large-cap stocks with international operations.
Overall, Peter van der Welle, multi-asset strategist at Robeco, noted that lower global trade volumes would weigh on equity markets. He pointed to the last trade spat in 2018-19, in which the S&P 500 traded around 2% lower in the 20 days after tariffs were announced.
Several investors instead noted that fixed income looked attractive as the asset class was poised to demonstrate its defensive qualities, while overall all-in yields remained attractive.
Benoit Anne, managing director at MFS Investment Management, noted as well that with front-end rates likely moving higher, this would result in some curve flattening overall.
“In the face of elevated macro volatility, there is probably a need to de-risk multi-asset portfolios, especially given the challenging valuation landscape in many pockets of global equity markets,” he said.
“That is when fixed income comes in as an attractive strategic asset class. Fixed income risk-adjusted returns are compelling given the historical levels of total yields, while the asset class also displays interesting defensive attributes.”
