The article was first published in The Business Times on 21 February 2025.
In case you hadn’t noticed, change is afoot. Some call it exceptionalism, bold leadership, or assertiveness. Others fret about the “electroshock” of new thinking around the evolving role of government, global trade, and security paradigms. Still others condemn its policies as contradictory, erratic, or just plain wrong.
But what is certain is that, under its new president and his upstart administration, the U.S. is charting its own sweeping course, leaving in its wake a tangle of spent orthodoxies, misaligned assumptions, and those on the losing side of a zero-sum game. We are not so much operating on a newly levelled playing field as on an entirely new planet.
In this month’s column, I want to Talk Trump—specifically, how the global investment landscape is likely to evolve in the months and quarters ahead as the President's geo-economic policies, particularly with trading partners, are formulated, enacted, and enforced. I want then to map these observations to the Lombard Odier (LO) recommended portfolio asset allocation.
On Planet Trump, it would seem markets—and goalposts—move fast; meaning the benefits of a diversified, balanced portfolio—serving as a cheap and effective hedge against market volatility—cannot be stressed highly enough
Tariff Jam
From an investment perspective, the scope and speed of change directed by the new administration have been mind-melting. In a few short weeks, President Trump has turned the established global order on its head, announcing, among other things, a swathe of unilateral and/or reciprocal tariffs designed to equalise “unfair” taxes, levies, regulations, and/or subsidies imposed on U.S. exports by its various trading partners around the world.
Those countries that “enjoy” a trade surplus with the U.S.—specifically those with which the U.S. has the largest trade deficit (think China, Mexico, and the European Union (EU))—likely will fall in the crosshairs of “Project Reciprocity” and be subject—or fall victim—to harsh adjustments to the terms of trade that they once enjoyed.
The reciprocal tariffs could be imposed as soon as April, with profound implications for economic communities such as the EU (already reeling from the implications of peace talks between the U.S., Russia, and Ukraine). For example, President Trump has long complained that the EU levies an average 10% tariff on vehicles imported from the U.S., while the U.S. levies an average tariff of 2.5% on vehicles imported from the EU. Under the new scheme, U.S. levies would be raised (unless the EU preemptively cuts first).
Importantly, the new tariffs are expected to be imposed on a country-by-country basis, which has been interpreted by ministries of trade around the world as code for special treatment, carve-outs, and/or negotiation. To be fair, markets have reached the same conclusion, which is why, on the day after the tariffs were announced, bourses across the Asia region rallied hard as “tariff exception” hopes prevailed. Do they know something we don’t?
Read more about 10 investment ideas that we have for 2025 here
Seriously Not Literally
Amid the political and media outrage around tariffs, markets around the world—including the mighty S&P—continue to post fresh highs. How can this be? Surely the imposition and effect of tariffs on global trade—and hence the potential threat to global growth—are so meaningfully negative that markets should be selling off? You’d think so, but in “looking through” the noise around tariffs, I suspect the markets may be on to something.
Let’s take a step back. In 2016, US journalists and commentators famously observed that Trump's critics took him literally but not seriously, while his supporters took him seriously but not literally. In hindsight, this pithy observation was more prescient than many imagined.
My sense is markets are leaning towards the latter “seriously not literally” interpretation. Markets seem convinced that Trump wishes to right wrongs and level the playing field in the U.S.’s favour but simultaneously is unlikely to enact policies (or excessive tariffs) that would directly lead to a state of Mutually Assured Destruction. Above all else, the “Tariff Man” is held as “transactional,” meaning a closed deal justifies the means by which it was secured.
Of course, those who believe President Trump sees tariffs as a bargaining chip or form of negotiating leverage could be wrong. And it could be that we are entering the early and extended stages of a wider trade conflict between the U.S. and its major trading partners. In such a case, we can only assume global trading patterns will be (severely) disrupted, the outlook for global growth will be revised lower, and corporate earnings forecasts derated.
This “nightmare” scenario would have clearly negative consequences for the performance of risk markets. In fact, this type of scenario has more than a whiff of economic Armageddon, and for that reason, I believe (or at least hope) it likely has a lower probability of eventuating. Only time will tell.
What I do have, conversely, is confidence in Lombard Odier’s tactical asset allocation
What Should We Do?
In such a complex “transactional” environment, I suspect transparency will suffer, thereby complicating investment decisions. In the art of the deal, ambiguity is deliberate, uncertainty is perpetual, and threat, bluff, and brinkmanship are commonplace. So what should investors do?
With so much confusion, I would not be rushed into a knee-jerk response to trade. In other words, I would not recommend an investor actively buy or sell into this market unless they have a clear vision of how this era of uncertainty will likely resolve. Lacking a crystal ball, I have no firm insight—nor confidence—as to how this series of events will unfold.
What I do have, conversely, is confidence in LO’s tactical asset allocation. Currently, we keep our overall equity allocations overweight, with U.S. and Japanese markets overweight. We hold overall fixed income at neutral levels, government bonds underweight, and overweight investment-grade credit and high-yield credit. In the alternative space, we remain overweight gold. And in terms of FX, we have raised our USD exposure to overweight.
That said, on Planet Trump, it would seem markets—and goalposts—move fast; meaning the benefits of a diversified, balanced portfolio—serving as a cheap and effective hedge against market volatility—cannot be stressed highly enough.
Source: The Business Times © SPH Media Limited. Permission required for reproduction.
