Once again it feels like the world, and thus financial markets, are beholden to the thought process of Donald Trump.
This is the view of Amisha Chohan (Head of Equity Research at Quilter Cheviot), who notes that the US President’s decision on what to do about Greenland, and more importantly the reaction from European allies, will decide how markets react.
For now, he has slapped modest tariffs on those supposed allies with the threat that a trade war could escalate from here.
“What Trump says and what he does can often be two very different things, as events since Liberation Day last year have proved. As such, markets for now are fairly muted around this latest round of tariffs, although those companies most exposed have sold off as a result,” Chohan said.
“What this is likely to do is to shift the mindset of investors from a previously ‘risk on’ environment, to a ‘risk off’ one and going more defensive in their asset allocations.”
That said, we are unlikely to be seeing a repeat of the market falls from last April. Instead, this is more likely to be slower burn while diplomacy plays out, Chohan notes.
“However, as with any tariffs they have the potential to cause volatility in inflation and thus interest rates may not come down as swiftly as investors would like, and this would ultimately be negative for markets.”
The value of diversification
What these events do show is that it pays to be diversified and investors need to ensure they have a good mix of both assets, but also sectors and geographies too, Chohan said.
“While the likes of car manufacturers and pharmaceutical companies are hit hard by such tariffs, more domestically oriented stocks are not, and thus there remain opportunities out there for investors despite the noise and volatility.
“Furthermore, while valuations in the US have been high, there remains good headwinds for investors in the likes of Europe where there is a concerted effort to promote economic growth. Provided this latest trade war does not escalate or become protracted, those friendly conditions should remain in place for some time.”
She adds that volatility is ultimately part and parcel of investing and of financial markets.
“Riding any potential dips is the best strategy anyone can do during such periods, alongside topping up their pots if they have the financial means and ensuring they are not overexposed to one area of the market that is likely to be hit hard by Donald Trump’s actions.”
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