Positive signal provides financial markets with a breather
The temporary suspension of U.S. tariff increases is a short-term positive signal for financial markets. However, we expect continued high volatility and a political risk premium for U.S. securities. Existing tariffs and ongoing high uncertainty negatively impact consumers and businesses. Likely negative earnings revisions will put renewed pressure on stocks. Therefore, we have reduced risk and decreased our exposure to U.S. equities.
What happened?
The U.S. import tariffs, which took effect on Wednesday, averaged 21.3%, higher than expected, causing global stock markets to plummet. On the same day, the new tariffs were suspended for 90 days, except for China, where they were further increased. This occurred after the market crashes also triggered tensions in other asset classes, leading to increased losses in commodities, dollar-denominated currencies, and corporate bonds due to rising credit premiums. U.S. Treasury bonds also came under pressure, possibly related to China being the second-largest holder of U.S. debt, indicating a new level of the trade conflict.
Rising financing costs for companies with unchanged earnings expectations
How do we assess the situation?
he suspension of the increased import tariffs followed a sell-off in U.S. Treasury bonds after investors had already endured significant losses in the stock markets. As seen during the U.S. tariff regime of the 1930s, this sharply increased the probability of a recession in a short time. While the temporary suspension of U.S. tariffs is initially reassuring, the situation remains opaque, and the U.S. has quickly built a mistrust premium. This is also evident as the U.S. dollar has continued to depreciate since the announcement. The trade war between the U.S. and China is escalating, and the base tariff rate of 10% for other countries remains in place.
Recent events make our main scenario, that the trade crisis can be resolved in the medium term and thus a recession can be avoided, more likely again. Nevertheless, higher import tariffs will burden U.S. consumers, companies will face increased margin pressure, and earnings expectation adjustments are foreseeable. The opacity and associated uncertainty in global financial markets remain high.
How is our investment strategy performing?
Currently, defensive positions in CHF and JPY, the underweight in commodities, USD, and corporate bonds are proving effective. In contrast, the overweight in emerging market equities and the recent sale of U.S. equities have had a negative impact so far. Alternative investments such as private equity, insurance-linked securities, or convertible arbitrage are bringing the desired stability to the portfolio.
Relative positioning, as of April 10, 2025
What adjustments are we making?
After increasing the underweight in commodities, we have also slightly reduced our equity quota. We executed the equity sales in the U.S., where uncertainty is currently the highest. Valuations remain elevated, and the still high earnings expectations are likely to be adjusted soon. This could mean further pressure on prices. We continue to analyze the situation and closely monitor the development of earnings revisions in the current reporting season and China's response.
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As of 01.06.24
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