The imposition of US tariffs has reshaped the economic landscape, creating both risks and opportunities across global equity markets and sectors. In our Global Focus strategy, we’re emphasising high quality companies that have been overly punished in the subsequent market sell-off, companies whose valuations have become disconnected from their fundamentals, and cyclical stocks that have the pricing power to mitigate the impact of tariffs and are now available on more attractive valuations. In this fast-moving environment, we remain agile and responsive to market shifts.
Investing at a time of market extremes
Navigating the current volatility presents significant challenges. To put the economic and markets situation into context, the level of trade uncertainty around the world has jumped to all-time highs, according to the Bloomberg Global Trade Uncertainty Index, while the US Economic Uncertainty Index has now also reached Covid level peaks. This uncertainty has permeated through the equity markets, resulting in volatility, as measured by the VIX index, reaching levels we have only seen twice before in the past 25 years: first in the Global Financial Crisis (GFC), and second at the height of the pandemic.
We think the situation today is more similar to the Covid crisis than the GFC, with the current market volatility stemming from an external (in this case, policy-driven) shock. As with Covid, the damage caused by tariffs is highly nuanced and will vary widely by sector, and by individual company. Also, the tariffs policy itself is fast moving, which has made it difficult to pinpoint the economic impact with any accuracy. However, as the political and economic pain increases, certain limits to the policy are emerging, hopefully providing some downside protection for investors.
Responding to tariff turbulence
A particularly noticeable consequence of the tariff-induced volatility has been a big factor move in global equities, out of US high growth cyclicals and into European value stocks. Our measure of US semiconductor returns vs. European value returns shows a large swing in performance towards Europe in April. While the catalyst for the move is clearly the US tariffs announcement, the outlook for Europe itself has also been boosted by expectations for a significant increase in government spending on defence and infrastructure.
This factor shift highlights the importance of regional diversification for global equity investors. While Europe is undergoing a fiscal recovery, investors have rewarded stocks perceived as clear benefactors. While some of these share prices have now moved significantly above their long term fundamentals, we are still able to find attractively valued European Industrial Cyclicals that are well positioned to benefit from Europe’s fiscal measures, with high relative exposure to German manufacturing and any potential rebuilding of local supply chains.
Focus on earnings quality
We’ve been navigating the tariff volatility by tilting the portfolio towards high quality, attractively valued businesses that have pricing power and are supported by solid fundamentals.
At the top of our list are companies that have been unfairly caught up in this indiscriminate sell-off. These stocks are some of the hardest to find but offer the highest risk-reward trade-off. As an example, we’ve added to Ross Stores, an American discount clothing retailer offering brand names at bargain prices. The stock’s resilient business model means it’s well placed to perform well in economic downturns, even as other retailers start to struggle.
Meanwhile, we have been trimming parts of the market that investors have perceived to be tariff safe havens: defensive services (such as exchanges and non-life insurance companies) and consumer staples, as valuations have reached record premiums relative to their history.
Finally, we’ve been adjusting exposure to high growth cyclicals by adding to quality semiconductor and technology stocks that also have the pricing power to mitigate the impact of tariffs. In the early April market sell-off, semiconductor stock valuations fell 2 standard deviations from their long-term average (according to our valuation measure), providing opportunities to add to positions in companies such as ASML and TSMC, which we believe are well placed to pass through any potential tariff to their customers.
Cheaper valuations and the ability to pass through cost increases to the consumer have also provided opportunities in some of the mega-cap US “tech titans”, including Meta, Microsoft and Apple.
Conclusion: Investing for resilience and growth
In our Global Focus strategy, we remain committed to providing a concentrated portfolio of our highest conviction global stock ideas, with the aim of delivering attractive long-term returns for clients.
While the tariff-related uncertainty is set to continue, we do feel that past periods of uncertainty can provide a guide. The pandemic, for example, showed us how an extreme valuation dislocation could provide opportunities in many areas of the market, where attractively valued companies backed by strong balance sheets were able to ride out the crisis and bounce back strongly as the volatility abated.
It’s these quality stocks, which have been unfairly penalised by extreme investor risk aversion, and those attractively valued cyclical stocks with pricing power, where we’re finding opportunities among the volatility.