The investment Committee that runs our Core portfolios met on Tuesday.
Having made changes on the portfolios only a couple of weeks ago (see post of 19 May), the committee was generally happy with the portfolios and the funds held within them. However, there were two conversations that had remained ongoing since those recent changes, namely whether to go underweight equities and/or whether to reduce our US exposure.
There was some support for maintaining the position of being neutral on both equities as a whole as well as specific geographies, with it remaining hard to have any clarity around who will turn out to be the winners and losers of Donald Trump’s attempt to re-shape the global trade order. However, the committee noted two important points that argued for a different stance.
Firstly, in recent months, the US has become the most volatile of the main equity markets, and most sensitive to developments in the trade situation. There is a logic to why that would be the case. Trump’s tariffs potentially effect 100% of US imports, but only a proportion of any other country’s exports. Therefore, US companies and consumers could be expected to feel more pain from his grand plan than those elsewhere.
Secondly, potentially significant changes are happening in Europe. The decision by Germany to shake off years of fiscal discipline to invest heavily in defence and infrastructure could be a game changer if it triggers a similar reaction from other European governments. With NATO discussing new targets for defence spending at levels not seen for many decades, as Europe wakes up the fact that the US may no longer be relied upon to come to its aid militarily, the potential stimulatory effect of these changes to the European economy should not be underestimated. Of course, as always with Europe, the rather fragmented nature of its politics could get in the way. However, the committee felt that there was real potential for governments to follow through this time.
Having debated all of the above, the committee decided to move a limited amount from US equities to European equities, the aim being to reduce portfolio volatility a little and take advantage of the improved prospects within Europe. It did not feel that going underweight equities was advisable, because, whilst there may well be increased volatility as we approach the end of the various 90 day pauses that President Trump has placed on many of his tariffs, a positive resolution in trade talks could be helpful to equity markets. With little ability to know that outcome, the committee felt that maintaining a neutral position overall was appropriate.
Away from equities, we decided to retain our overweight to Absolute Return funds and our underweight to Fixed Interest, as the prospects for the latter remain uncertain in a world where tariffs could meaningfully increase inflation.
