At a glance
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While assessing the impact of tariff announcements on economic prospects, we have seen high levels of volatility in markets as policies are unveiled and then often paused or postponed.
Against this backdrop we argue the case for a more considered approach to portfolio management emphasising conviction where longer-term outcomes are clearer.
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Economic prospects for Europe have improved – not least because of an easing of the debt brake in Germany.
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Investors have grown concerned about the US economy, but we expect to see more market- and economic-friendly policy initiatives soon.
So, 2025 has been a very volatile year, as we have seen in capital markets. On the equity side we have seen real concerns around the tariffs, which have been introduced by the US. But then the pause in the reciprocal tariffs have seen a rally in equity markets around the world. In addition to tariffs, we’ve also seen political change in Europe as well with the election of Friedrich Merz as Chancellor of Germany, and the relaxation of the debt brake.
So, we have seen expectations of higher growth within Europe and, if anything, slower growth within the US – and this has had an impact on equity markets. It has also had an impact on fixed income markets where we’ve seen bond yields in the US come down as we’ve gone through 2025, and the reverse occur within Europe as we have seen bond yields rise. Also within credit markets, due to the uncertainty that we’ve seen brought about most especially by tariffs, we’ve seen credit spreads start to widen as we’ve gone through the year – most particularly within the weaker grade of credits.
Responding to rapid policy shifts and market moves
I think when it comes to the volatility that we’ve seen in 2025, it is very important to recognise where we have conviction and where we don’t have as much conviction.
Let’s take as an example what has happened within tariffs. We’ve seen the US propose very high tariffs around the world, but different tariffs for different countries. So, for instance, we saw on 2 April the introduction of tariffs – or the proposal of the introduction of tariffs – not only the 10% across the board, but then also heightened reciprocal tariffs.
Now what did that mean? That meant that if those were imposed, it would really curtail much of the supply chain, the global supply chain around the world. But then we saw one week later the pause of those reciprocal tariffs, those higher tariffs, except with China. So what does that mean? That means expectations of a sharp slowdown as a result of the initial proposal were then watered down because of the pause, and the expectations that we would actually have negotiations such as the worst-case scenario would not occur.
And then when we look at Scott Bessent negotiating with the Chinese around their reciprocal tariffs and the pause there, the dramatic reduction in the tariffs over a period of time, again, we see volatility in terms of economic expectations as we move forward. So, I think the really important thing to learn from this year is as we see the threat of economic change, actually that [outcome] may not be set in stone. And we have to be aware where we have conviction about change and where that change may be watered down as we go through the year.
A considered approach to portfolio management
I think one of the important things about portfolios is not to react to every proposed policy change, because if we have a proposed policy change, which then reverses again, we will then be locking in what has been assumed within markets, when indeed that [outcome] reverses very soon thereafter. So, it is important not to react to every policy announcement.
But where do we have conviction? We have conviction, for instance within Europe, that the debt brake within Germany is being relaxed. So growth as we move forward within Europe is likely to be higher than it would have otherwise been. Hence, if we look at moves in portfolios, moves in portfolios reflect where we have conviction around changes in policy.
So higher growth within Europe and prospectively lower growth in the US as we’ve gone through the beginning of this year. But let’s be careful about that lower growth within the US, because we are yet to see the announcement or the potential impact of decreased regulation in the US and a relaxation on taxes within the US. So, we’ve seen some of the negative news around tariffs, but not necessarily the accompanying positive news.
So even there, be wary of those who talk about lower economic growth in the US, because we may see a reversal as we go through the year.
Looking for longevity in policy announcements and their impact
I think the important things for ourselves as investors, and indeed for our clients, is to make sure that we don’t react to each policy change as it gets introduced unless we have conviction that that policy change has longevity to it.
So what we would advocate for our clients is not to act in a knee-jerk response to policy change which has occurred, but ensure that we have conviction that that policy change indeed is going to endure.
