Uncertainty reduces risk appetite

• Equities: agile during volatility
• Bonds: shift to safety
• Commodities: a golden opportunity?

Stock markets around the world have seen a strong recovery after Trump hit the pause button on the announced tariffs and recession fears faded. Before that, the US stock indices had declined more than 20% from their highs. Official bear market territory. Now, most of the main stock indices worldwide are back in the green in their own currency and are close to the highs for the year. The recovery is largely fuelled by hopes for trade deals and by the fact that the US economy was strong before the tariffs were announced.

However, we believe that there is a bit too much enthusiasm in the current recovery. The economic outlook remains less rosy than before ‘Liberation Day’. Although an initial agreement with the UK has been reached and the trade war with China is on a 90-day pause, the 10% universal tariffs are still in effect and much can happen in the 90-day negotiation period. Additionally, the trade policy uncertainty could lead companies and consumers to cut back on their spending, which can hurt the overall economy. While we believe that the US and world economy are resilient enough to avoid a recession, we also believe it is naïve to assume the market volatility has subsided entirely. Therefore, we are reducing our equity positioning from a slight overweight to neutral. In doing so, we are reducing the risk exposure in our portfolio.

In line with our lower risk appetite in equities, we also see reasons to reduce our credit risk in our bond portfolio. Specifically, we have identified an opportunity to reduce investment-grade (IG) corporate bonds within our high-quality bond portfolio. The credit spreads within this part of the portfolio have come down substantially since the Trump administration retracted its ‘Liberation Day’ tariffs, but we expect these to rise again as the economy slows down. Consequently, we see this as an attractive moment to take some profit.

Additionally, we have identified safer covered bonds to reinvest the proceeds. This is a safe and liquid asset class with a comparable level of safety to government bonds. Moreover, in periods of economic slowdown or recession, these have historically outperformed IG credit. Our expectation of an economic slowdown makes this a sensible shift to safety. After the trade, our positioning in IG credit is reduced to neutral, and we now have a strong overweight position in covered bonds.

Over the past few years, the gold price has been in a strong uptrend, and we expect the factors driving this uptrend to persist. Firstly, central banks around the world are increasing their gold reserves, leading to higher demand. Secondly, gold is seen as a hedge against uncertainty, making it particularly attractive in the current market environment. Despite the significant rise in gold prices, we anticipate further upside in the remainder of the year. After our recent portfolio changes, we have an increased amount of available cash. We are putting a portion of this cash to work by investing in gold for some of our client portfolios. Specifically, we recommend this for clients where gold matches the objectives from their investment portfolio.

Both equity and bond markets around the world have seen a strong recovery in recent weeks. However, the economic outlook has worsened and uncertainty remains high. Therefore, we expect volatility to persist, and we want to use the recent rally to reduce the risk in our portfolios. Specifically, we reduce our equity positioning to neutral and swap IG credit for safer covered bonds within our high-quality bond portfolio. Finally, we also take a position in gold to benefit from the diversifying effects and current tailwinds of this asset class.