After US President Donald Trump hiked tariffs on US imports, sending shock waves across stock markets, and agreed yesterday on a 90-day pause for all countries apart from China, Geneva-headquartered Pictet Wealth Management, UBS GWM and UK wealth manager St James's Place discuss the economic impact and implications for asset allocation.

After US President Donald Trump announced sweeping trade tariffs this month, causing China to retaliate, Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management highlighted that the risk of recession in the US has increased substantially.

The new tariffs on US imports were more severe than expected and represent the biggest trade shock the world has seen in 100 years.

China has already announced retaliatory action, levying 84 per cent on US imports, after Trump imposed a 104 per cent tariff on Chinese goods entering the US, which has just been increased to 125 per cent. Yesterday, the EU also voted to impose tariffs on US imports from 15 April, in response to the US decision to impose 25 per cent tariffs on EU steel and aluminium exports. More goods will be hit in May and December. 

However, on social media, Trump has just announced a 90-day pause on the new reciprocal tariffs for countries that have so far refrained from retaliating, apart from China, causing the S&P 500 to climb 9.5 per cent yesterday. This includes the EU's reciprocal tariff rate of 20 per cent but the US steel and aluminium tariffs that have been in force for some time will continue to apply. The EU will also continue to face a baseline tariff of 10 per cent that took effect on 5 April. Nevertheless, Trump's post opens the door to potential tariff reduction deals for many trading partners.

This is happening at a time when a tectonic shift is underway in the global economy. “The existing architecture – in which the US delivered economic stability, security guarantees and superior returns in exchange for foreign capital – is faltering as US policies undermine trust in the world’s largest economy,” Perez Ruiz said in a note. “Given the scale of foreign holdings of US assets, amounting to around 90 per cent of GDP, capital repatriation from the US is a growing risk. At the same time, Germany’s new readiness to engage in fiscal spending is a potential “game changer” moment that could spill over across Europe, where lending growth and easing monetary policy are supporting a broader structural revival,” Perez Ruiz continued. “And in China, innovation has disrupted markets such that Chinese tech companies now appear more competitive against their US peers. What is more, China has all the tools – in terms of infrastructure, talent and computer power – to scale its innovation in artificial intelligence across other industries, even if the impact of tariffs is yet to be felt fully.” 

Asset allocation
Perez Ruiz said that it is very hard to gauge a floor to the stock market, given uncertainty about the full impact of tariffs, or how much US exceptionalism will be challenged. “Markets will remain volatile and, with the probability of recession looming, global equities will be under pressure. Given that in the event of a recession, there will be no decoupling from the US, Europe and China will also be challenged,” Perez Ruiz said.

Selectivity is key. Perez Ruiz recommends holding onto safe assets such as gold and keeping some dry powder to reassess how to position strategically once the dust settles. Mark Haefele at UBS Global Wealth Management also believes that the recent weakness in gold prices offers investors an opportunity to build exposure to an asset which he thinks will continue to offer portfolio diversification benefits. The composition of the MSCI World index could structurally shift over time from 72 per cent US stocks today to about 62 per cent, with Europe being the main beneficiary. This could also impact the dollar and appreciate European currencies. Perez Ruiz is negative on global high yield as the market is not taking the risk of a US recession adequately into consideration. In the sovereign bond market, he favours European government bonds, especially for Europe-based investors.

Meanwhile, Justin Onuekwusi, chief investment officer at St James’s Place, favours a defensive stance on bonds. “While remaining generally positive on the asset class, we have been revisiting the stance on credit, particularly at the riskier end of the spectrum,” Onuekwusi said. “Although credit conditions still look good and defaults are not on the rise, the latter is a lagging indicator. This means any defensive positioning in this area must be proactive. The riskier end of the bond market also looks quite rich in terms of pricing. Eyeing the short end of the market, we’re exploring more defensive options in this space.”

Within fixed income, Onuekwusi believes that it’s important to remain globally diversified to help insulate portfolios against policy decisions, which look increasingly unclear.

Equities
On equities, Onuekwusi is planning to increase regional equity allocations outside the US. “Leaning into diversification calls, equity holdings have moved towards UK equities, smaller companies, emerging markets and Japan,” he said. “The UK may still be lacklustre from a growth perspective, but it remains an attractive market right now for many reasons. The UK stock market itself is diverse but made up of large, defensive, value-oriented companies that look cheap from a valuation perspective. It is particularly light on technology companies, which instead dominate the US market. Tech is one of the more vulnerable areas in global markets, alongside the US dollar. It is the influence of the former that has them maintaining a wary and underweight position in the US market.”

“Long before the tariffs pressure unravelled, the concentration of the US market was becoming concerning,” Onuekwusi continued. “Expensive and dominant, the seven largest companies – all tech-based – are close to extremes. If markets become more volatile from here, it’s these types of consensus trades that have done well over the last few years that are likely to be the most vulnerable.”

“Meanwhile, Europe, led by Germany, appears to have much more positive momentum,” Onuekwusi said. “The German fiscal package announced in late March is the largest in a generation. This could increase European prospects considerably. Emerging market equities look attractive and may benefit from the stimulus package recently unveiled by China.”

While uncertainty is rising, Onuekwusi believes it is important for investors not to stand still. He is positioning portfolios to remain resilient, with a greater focus on defensive assets and diversified opportunities outside the US.

“As always, maintaining a long-term perspective is key – staying diversified through market cycles can help investors benefit from the opportunities that emerge along the way,” Onuekwusi concluded.