Tariff sell-off reaction

The sustainable equity manager view: George Crowdy, Sustainable Fund Manager

With markets selling off late last week following the ‘Liberation Day’ tariff announcement, investors have been asking us for thoughts on navigating this volatility.

As of today we continue to maintain a cautious stance towards markets and expect market uncertainty related to tariffs to likely continue for weeks (if not longer). We are however on the front foot with assessing new opportunities presented by the recent market sell-off.

Our approach is to take advantage of the volatility to upgrade our portfolios, investing in companies which we feel are the strongest from both a sustainable and financial perspective and are now trading at compelling valuations. We have experience in managing our portfolios across similar market sell-offs including during the financial crisis and the Covid pandemic, and while each sell-off was a result of different reasons, markets do and will find a floor. There will ultimately be a point where we want to add risk back into portfolios to benefit from the stabilisation and recovery in markets.

As Mike Fox wrote last week, these events could mean the changing of the economic order. Read more. 

markets do and will find a floor.

The sterling credit manager view: Paola Binns, Head of Sterling Credit

Following the 2 April announcements of US tariffs, risk assets have sold off aggressively, while safe haven assets such as government bonds have rallied. This is an unsurprising ‘risk-off’ reaction to what is currently being seen as a shock to global growth. Broadly, cash and fixed income markets are building in expectations of rates being cut by more than previously anticipated, given lingering higher inflation fears but now facing greater fears of lower growth and possible recession risks.

In our view, current volatility is a function of markets re-pricing growth expectations, and is likely to persist until more certainty is gained, particularly with regards to any responses and final agreements on tariff levels and their impact on growth expectations. In cash and government bond markets, yields have moved lower, led by the front end of yield curves and focused in nominal yields and more in core versus peripheral markets (eg Germany vs Italy) but notwithstanding pre-existing concerns around borrowing levels – such as the UK.

current volatility is a function of markets re-pricing growth expectations, and is likely to persist until more certainty is gained.

In credit, spreads have widened uniformly across curves in an acceleration of a trend already in place since recently having reached recent post-GFC tight levels; sterling investment grade spreads have widened* (c.20-40bps from the lows and c.10-15bps month-to-date), and more so in high yield bonds (spreads c.180 wider from their tights and c.100bps wider month-to-date). The credit new issue market had effectively closed as potential issuers re-evaluate market appetite and is now only very selectively open to higher quality issues, while secondary market liquidity is dispersed, again favouring higher-quality names, and this is likely to continue as markets remain volatile.

Recent absolute returns for credit have been positive as a result of falling government bond yields, but in the short term, we would expect areas such as supranationals (where we are underweight) to be perform better than the wider market, while economically sensitive industrial and consumer sectors (where we are also underweight) feel more likely to underperform. In our portfolios, we believe that continued emphasis on diversification and towards secured and collateralised debt will help mitigate default risk, and on income, will support returns in the medium term and through the current environment of volatile yields and potentially wider spreads.

*Source for spread moves Bloomberg, as at 7 April 2025

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.