Allocation Views: Sell the rips, don’t buy the dips

Preview

US tariff policy has dominated markets recently, fueling economic uncertainty, inflation expectations and negative investor sentiment. Global equity markets fell sharply following President Trump’s reciprocal tariff announcement in early April, only to stage a relief rally just a week later as tariffs were paused for 90 days, pending broad-ranging trade negotiations.

In this month’s edition of Allocation Views , we take a slightly longer-term view and analyze how tariff policy is undermining global economic resilience. Measures of economic uncertainty are rising, while we are also seeing a fall in US employment expectations and chief executive officer (CEO) confidence. Taken together, these types of indicators are problematic because they breed caution, interfere with growth plans and curtail capital investment.  

Against this background, we have decided to maintain a neutral cross-asset view moving into May, and look for opportunities to sell into strength, as we gradually reduce risk in our portfolios. Australia stands out to us as the least-sensitive region to US tariff policy, while we hold a preference for eurozone government bonds over US Treasuries.

Macro themes

Softening growth

• Leading economic indicators suggest growth is slowing.
• Forward-looking survey data indicates growth is likely to decelerate further, as economic conditions weaken.
• Inconsistent US tariff policy continues to fuel uncertainty, discouraging investment and depleting animal spirits.

Uncertain inflation outlook

• Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels.
• Consumer survey data suggests a marked rise in inflation expectations, influenced by aggressive US trade policy.
• Markets are expecting transitory inflation, but we believe the macro backdrop is quite complex, adding to our uncertain outlook.

Divergent policy outcomes

• We expect a greater divergence of policy outcomes as the Federal Reserve (Fed) adopts a “wait-and-see” approach to interest-rate strategy against a changing US economic backdrop.
• Other Western central banks are set to cut rates more quickly, particularly in Europe, where growth remains subdued despite fiscal stimulus .
• Fiscal policy in major economies such as the United States, Germany and China is emerging as an influential driver of asset prices.

Portfolio positioning themes

Resetting expectations

• Inconsistent US policy threatens to amplify uncertainty, dampen growth and fuel inflation volatility .
• However, equity positioning and sentiment has weakened materially, creating a more constructive setup moving forward.
• Against this background, we expect further market volatility and will leverage positive news flow to reduce risk, selling into strength when equities rally.

Equities: leveling up

• We take a more pessimistic view of the United States, amid heightened uncertainty and lower earnings guidance.
• The appeal of some international markets has improved, notably Australia, which is set to benefit from low tariff sensitivity.
• We retain a neutral view on emerging markets ex China, recognizing the vulnerability to tariffs implied by trade imbalances and strong ties to China.

Selective on duration

• We favor global fixed income, remaining slightly long eurozone duration while we monitor the impact of fiscal stimulus on inflation and growth.
• Market expectations around the depth and duration of policy cycles have increased significantly.
• US duration may not act as a defensive hedge, amid elevated inflation and concerns about the “safe haven” status of US Treasuries.