The US has sharply escalated its trade protectionism, ratcheting up global tensions and sparking the risk of a global recession. With volatility expected to persist until trade terms are negotiated, we look at how clients can stay invested while reducing risk.
Key takeaways
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01
US equities declined over 10% in a two-day period following US reciprocal tariff announcements, capping off an approximately 20% fall from record highs seen in February and raising the risk of a global recession
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02
While the 90-day pause in reciprocal tariffs has restored some optimism, this major escalation in trade tensions may raise inflation and create prolonged uncertainty in markets
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Portfolio diversifiers such as liquid alternatives and gold, along with defensive exposures such as consumer staples, enhanced yield and low volatility strategies, can help investors build in an element of portfolio resilience until volatility subsides
Tariff-ied markets
Equity investors have been on a wild ride since the announcement of US reciprocal tariffs, which saw the S&P 500 Index drop more than 10% over a two-day period, marking the fastest loss of US equity market value in history.1 While the majority of announced tariffs have now been paused, and US economic data remains strong, the unexpectedly high average tariff rates proposed by the US administration have significantly increased the risk of a global recession.
Unsurprisingly local data tells us that investors have been looking to sell their most US-heavy exposures, with broad US equities, US mid-caps and global healthcare (with a 71% weighting to the US) seeing the biggest outflows across iShares products in the first week of April.
On the inflow side, both broad Australian bonds and global corporate bonds were among the top 5 products on inflow basis in the week following the tariff announcement, while the lower Australian dollar also sparked more interest in hedged products, with hedged US equities the most popular exposure2.
Looking ahead, with several key US trading partners looking to negotiate, China having already retaliated, and an average effective tariff level of 20-25% looking more likely, we think the current volatility will persist and equities are likely to face more short-term pressure.
Here’s a look at some of the implementation options our strategists are recommending to clients looking to reduce downside risks, as well as tactical opportunities for those looking to re-enter the broad equity market.
Stabilize your portfolio
As seen in the chart below, the divergence between US equity performance and other asset classes and markets reinforces the importance of a diversified portfolio. We see value in diversifying across asset classes, as well as a strong case for alternatives to serve as an additional diversifier beyond the traditional 60-40 portfolio.
Source: Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. BlackRock Investment Institute, with data from LSEG Datastream as of April 4, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grace (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S. Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
Implementation options: Gold, Liquid alternatives
As a traditional hedge against economic uncertainty and geopolitical risk, gold has benefited from the volatile macro environment this year (as seen above) and was within the top 20 ETF categories globally on an inflow basis on 3 April, following the reciprocal tariff announcement3. Though we’ve seen some modest declines in the gold price in line with the broad sell-off of risk assets, we think central bank purchases and strong retail demand, as well as an exemption from tariffs so far, are likely to sustain rising prices in the medium term.
Liquid alternatives have also historically improved risk-adjusted returns across a diversified portfolio when equity and bond markets sell off – as seen in the charts below, which show performance during downturns for a growth-focused portfolio that includes a liquid alternatives allocation. Designed with low correlation to traditional asset classes in mind and offering daily liquidity, BlackRock’s liquid alternatives strategy can act as a complement to other defensive exposures like fixed income.
Source: Past performance is not a reliable indicator of future performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. BlackRock, as of 31 January 2025. Returns are shown per month, not annualized. 70/30 portfolio consists of 70% allocation to MSCI World Index and 30% allocation to Barclays Global Agg (AUD Hedged) Index. 70/15/15 portfolio consists of 70% allocation to MSCI World Index, 15% allocation to Barclays Global Agg (AUD Hedged) Index and 15% allocation to Global Liquid Alternatives Fund (GLAF). GLAF was incepted as of September 2023, however, the figures shown relate to simulated performance from February 2022 - Aug 2023 and live performance from Sept 2023 onwards. Returns are gross of fees and costs.
Play defense
In the current environment, we believe a focus on risk management is key, as downside protection for a portfolio is equally as important as potential upside capture. We see two key areas of defense – within equities, and for the portfolio more broadly.
Equity implementation options: Consumer staples, minimum volatility
As a traditional defensive sector, consumer staples has held up well during the current downturn, with the S&P Global 1200 Consumer Staples Index returning 5.31% in the three months to March, compared to the MSCI World Index return of -2.42%.4 The latest data also indicates that consumer spending still remains strong in the US, somewhat dispelling sentiment surveys that say the opposite.5
Similarly, minimum volatility strategies have also historically reduced the impact of losses compared to the broad equity market during key downturn periods such as the GFC and COVID-19 onset.6 As seen in the chart below, the low volatility factor has again outperformed over the last two months as market conditions have deteriorated.
Source: MSCI, Morningstar data as of 15 April 2025. Based on comparative net performance in US dollars from peak to trough during the largest equity market drawdown periods from 2007 - present. Tariff uncertainty period includes 1 February 2025 - April 2025 to date (14 April). Past performance is not a reliable indicator of future performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Broad portfolio implementation options: Enhanced cash, short duration
Cash and short duration fixed income are traditional safe havens for investors during growth shocks. Using enhanced cash and enhanced yield options in this space, investors can get the most out of their cash from an income perspective while maintaining limited exposure to the volatility going on in markets. Both exposures have added significant value as portfolio diversifiers so far this year, as seen in the chart below.
Source: Past performance is not a reliable indicator of future performance. BlackRock data as of 4 April 2025. ISEC refers to iShares Enhanced Cash ETF. IYLD refers to iShares Yield Plus ETF. IOZ refers to iShares Core S&P/ASX 200 ETF. Total return refers to growth + distribution return (gross of fees and costs). 2025 downturn refers to the period where Australian equity markets entered a correction, falling more than 10% from their peak in February.
Depending on risk tolerance, investors can choose from either enhanced cash through exposure to the S&P/ASX Bank Bill Index, or enhanced yield through exposure to a portfolio of short-duration, investment-grade Australian corporate bonds.
Tactical opportunities for when volatility subsides
While investor sentiment remains cautious in the short term, there are long-term opportunities in economies driven by domestic factors. Japanese equities are promising, supported by wage and inflation growth and strong domestic savings, despite trade-related challenges.
Similarly, with more room for negotiation around reciprocal tariffs now shown by the US administration, we have resumed a positive view of US equities on a longer term (six to 12 month) horizon. Hedged exposures may be particularly relevant for Australian investors to consider given the Australian dollar is still trading around historic lows.
With the situation still evolving, we may see an ongoing series of trade disputes in the coming weeks, as well as individual economies pursuing domestic policy support packages. As these developments play out, we think investors would do well to consider their options around both diversification and an element of defensive exposure.7
