Market Update - The Panic.

On April 2, President Trump announced his much anticipated tariffs. The depth and breadth of the tariffs caught many investors by surprise, particularly regarding a base 10% tariff on all countries and reciprocal tariffs which were used across a wider range of countries and came in at significantly higher levels than expected.

This exacerbated the risks of a global economic slowdown, with the risks of a US recession in the short-term rising sharply.

Of the major economies, China, Europe, and Japan were particularly hard hit, with China already announcing some retaliation whilst Europe and Japan are considering their options.

Caught By Surprise.

Whilst it’s hard to gauge exactly what caught the market surprise, some of the factors included:

• 10% baseline tariff on all imports was unexpected
• China and Europe were singled out with 34% and 20% tariffs respectively
• Tariffs were applied to more than 60 countries
• Reciprocal tariffs were applied using trade deficits as a base, and then adjusted down for some countries based on existing relationships
• Mixed signals regarding how negotiable the US administration is going to be on these tariffs and how soon deals can be made

This was against a market backdrop of lofty expectations regarding company earnings, particularly in the US, and lofty expectations regarding the US economic growth outlook.

What are reciprocal tariffs and what has been put in place?

Reciprocal tariffs are an intention to “even the playing field” where other countries have tariffs / subsidies / trade barries in place. Given the long history and number of trade barriers in place globally, it would’ve taken a long time and been a minefield to go after each and every single tariff one by one.

Instead, the US administration chose to use current trade deficits divided by the total imports from each country respectively, with that result halved to determine the tariff rate. This is then subject to negotiation thereafter.

The reciprocal tariffs, as published by the US administration, are as per the below (at the time of writing).

How have markets reacted?

In our view, markets have overreacted in the short term, as they usually do, and have “thrown the baby out with the bathwater”.

Equity markets have opened sharply lower in Australia and are expected to open sharply lower (circa 5%) for overseas markets throughout the day and overnight.

Key movements as follows (at time of writing):

• US equities – down 8% over the last 5 days and over 13% calendar year to date (CYTD)
• European equities – down 8% over the last 5 days and almost 3% (CYTD)
• Asian equities – down almost 8% over the last 5 days and 2% (CYTD)
• Australian equities – down almost 4% over the last 5 days and 6.5% (CYTD)
• US 10-year bond yield – has fallen almost 0.40% in the last 5 days and almost 1% (CYTD)
• AUD/USD – down 4% over the last 5 days and a little over 3% (CYTD) to 60 cents.

What do we think?

We continue to retain a cautious posture in portfolios whilst heightening our level of supervision and monitoring. This is the environment when we expect diversification to show its true benefits, along with active management (where applied / appropriate).

The outsized nature and wider application of US tariffs has resulted in a recalibration of expectations ahead, many of which aren’t surprising to us. We do think things will settle as economies, businesses, investors and consumers take stock of what is now in place.

Whilst we expect the US administration to be tough in their negotiations, we also expect the more detailed and intricate negotiations to settle somewhere differently to what would be expected today.

What we know - What we don't know.

History tells us it’s impossible to predict when negative returns will occur… in actual fact history tells us it’s impossible to predict when both the best and worst returns will occur.

One thing we do know however is that 2 things are key to any portfolio being able to withstand market uncertainty:

1. Owning quality assets across various sectors, and
2. Time

Quality Assets.

The best defence against a fluctuating market is:

1. A well-diversified portfolio, spreading investments among stocks, property, bonds and cash, in a strategic asset allocation and
2. Assets that when we look forward 1, 2, 5, 10 years will withstand any short term shocks in markets and economies

Time.

History has shown us that “time in” the market as opposed to “timing” is critical to the long-term health of a portfolio.

Despite repeated attempts by investors and advisers to predict the direction of markets, the evidence is clear that market timing is not only difficult, it’s almost impossible.

While it’s impossible to predict when the best and worst days will come, what we do know is missing just a few days of positive market gains can significantly reduce the value of an investment.

Lured by the ‘possibility’ of succeeding, investors often ignore the real costs associated with market timing – missing the best trading days, potential tax liabilities from selling securities and transaction costs (e.g. brokerage) … costs that erode returns.

Missing out on the best days

History has shown that the market refuses to cooperate with market timing strategies. The simple reason is that even during the worst of times, equity markets can still have many good days.

Days like today, and weeks more recently, do present buying / dollar cost averaging / portfolio rebalancing opportunities, as well as an opportunity to further diversify portfolios. They also reaffirm why we manage portfolios with a conservative lens, with a dual focus on capital preservation (not beating an obscure benchmark) and market fundamentals (not momentum or emotion).

It is important to recognise the importance of diversification and company fundamentals – quality.

What should I do?

The tariff announcements that have led to the market uncertainty is a timely reminder of the crucial role portfolio diversification plays in reducing risk, smoothing out the bumps and providing stability during periods of uncertainty.

As we have done for decades, as with any other case of market volatility, time, a long-term view is critical to the healthiness of a portfolio.

With this situation continuing to evolve, and we’ll ensure to keep you informed of any future changes, and in the meantime, please don’t hesitate to contact your adviser should there be anything at all you’d like to discuss.