The past couple of days have been a whirlwind for global markets following President Trump’s ‘Liberation Day’ announcement of sweeping “reciprocal” tariffs on imports from nearly every major U.S. trading partner. Billed as a response to unfair trade practices, the move has sparked fears of a full-blown trade war and potential global recession.
In this update, we share context on these developments, how our portfolios have navigated the volatility, and our perspective on what lies ahead.
What Happened?
On April 2, 2025, President Trump unveiled tariffs targeting key U.S. partners, including the EU (20%), China (34%), Canada (eventual reduction to 12%), Australia (10%), and dozens of other countries under a flat 10% rate. The scope and severity surprised investors, with duties calculated using an opaque formula that conflated trade deficits with protectionist policies. Global leaders were quick to condemn the move, with the EU and China vowing retaliation if a negotiated solution isn't reached.
Market Reaction
Unsurprisingly, markets reacted sharply to the tariff announcement. The S&P 500 dropped 4.8% on April 3 — its worst day since 2020 — while the Nasdaq sank nearly 6%. Recession fears and future earnings downgrades rippled through equities worldwide. Havens like gold and Treasuries rallied, while economically sensitive commodities such as oil (-6%) slumped on demand fears. The U.S. dollar weakened as its safe-haven status came into question and higher U.S. recession odds increased the likelihood of easing Fed policy.
The Impact on Portfolios
Amid the turmoil, our portfolios have proven resilient due to our disciplined, valuation-driven approach. Our globally diversified equity exposure - with an emphasis on cheaper international and emerging markets, as well as global small-caps - has mitigated the drawdown.
This resilience is no accident. Our "look-through" analysis of underlying fund holdings enables us to assess forward return premiums and downside risks. Coming into 2025, we viewed U.S. large-cap tech as priced for perfection and vulnerable. In contrast, we saw compelling value and a margin of safety in segments like emerging markets. That positioning has helped cushion portfolios in the recent flight from highly-valued sectors.
For example, our dedicated Emerging Markets strategy has not fallen in recent days, while our Global Small-Cap allocation has weathered the selling pressure far better than broad equity benchmarks. Typically, these sectors can be pro-cyclical. To be clear, we did not predict this specific trade escalation, but our portfolios are built for long-term return generation and downside resilience in tumultuous times - sometimes "doing the work" with a forward-looking approach pays off when you need it most.
The Outlook
Make no mistake, a protracted trade war would be a major headwind for the global economy and markets. If Trump's hardline stance persists and tit-for-tat spirals, a worldwide recession (potentially as early as 2026) is likely. We are particularly concerned about stagflation - a painful combination of slowing growth and tariff-fuelled price pressures. U.S. consumers would face higher costs even as job losses mount in export-hit industries.
That said, the sell-off has arguably priced in significant trade frictions already. Any signs of détente between the U.S. and partners - for instance, a deal to reverse or reduce the new tariffs - could spark a relief rally in beaten-down sectors. While handicapping geopolitics is difficult, our portfolios are well-positioned for either outcome.
If trade tensions recede, more cyclically-geared exposures like emerging market equities and small-caps could see a meaningful rebound as that is where we see the growth, especially if global supply chains survive. Conversely, if trade battles worsen and a stagflationary scenario unfolds, our global diversification across less-expensive markets should continue to provide stability. We also expect skilled active managers (something we think could come back into vogue) to capitalise on wider return dispersion in a challenging macro climate.
Summary
While the tariffs have dramatically shifted the 2025 market narrative toward "trade war" from "reopening momentum”, our investment approach remains grounded. A focus on reasonable valuations, global diversification, and high-conviction managers continues to guide how we manage risk and seek long-term returns.
The coming months will no doubt bring more developments on the trade front, but we believe the portfolios are sensibly positioned for a range of possible outcomes.
This article has been prepared by InvestSense Pty Ltd ABN 31 601 876 528 on behalf of Primestock Securities Ltd. The information contained in this report is obtained from various sources deemed to be reliable. No representation or warranty is made concerning the accuracy of any data contained in this document and should not be relied upon as such.
