SUMMARY
While financial markets appear to be dismissing many tariff risks, we believe trade uncertainty may result in weaker economic growth later this year. We thus seek to add resilience to portfolios.
KEY TAKEAWAYS:
Equities have rallied sharply since early April’s lows
While economic data has held up so far, weakness may lie ahead
We have shifted tactical positioning to increase portfolio quality
Now is not the time to consider raising risk exposure, in our view
Markets have staged an impressive comeback from their April lows.
In the past couple of months, US large-cap equities – in the form of the S&P 500 Index – are up more than 20%. Indeed, this benchmark recently stood at less than 3% below its all-time high.
In our opinion, this move suggests that investors are largely dismissing the potential impact of recent tariff announcements.
The recent ruling of the US Court of International Trade may have bolstered their belief.
The presiding judges decided that the US administration had overstepped the mark by using emergency economic power laws to impose tariffs. However, recent rulings have allowed the tariffs to stay in place for now, likely setting up a Supreme Court ultimate ruling later this year.
Ultimately, there’s now a widespread view that tariffs will be far less severe in scope and scale than what was feared amid the dark days of early April.
So far, economic data has broadly held up too, which has also helped restore investors’ confidence.
True, the US labor market looks to be cooling, but certainly not collapsing. Inflation, too, seems stable enough for the moment despite concern over tariffs increasing prices.
We believe this resilience may also encourage the US Federal Reserve to hold off cutting interest rates further for the meantime.
However, the lack of clarity on trade rules may hit economic growth in the second half of 2025. We expect companies to hold back on capital spending plans, with the probable exception of artificial intelligence investment. Firms are also likely to delay hiring more staff, and we are watching the recent uptick in unemployment claims closely
If growth slows, earnings per share (EPS) gains may be shallower as this year progresses. But this is not reflected in investors’ current positioning or in markets’ pricing.
Citi Wealth’s tactical stance
Citi Wealth’s Global Investment Committee met in the week ending June 6.
We made several adjustments to reinforce our portfolio quality and diversification.
Overall, we remained neutral on global equities, shifted from an overweight to an underweight on fixed income, and stayed underweight cash.
Within equities, we eliminated our position in global small- and mid-cap equities, which we see as less able to manage trade-related rises in expenses, uneven demand, and shifting supply chains.
We distributed some of the proceeds into US large-cap equities, where AI stocks have a significant weighting.
We also allocated more to European equities and Chinese large cap equities. In both markets, there could be a boost from policy and global investors raising their allocations.
Within fixed income, we eliminated our thematic exposure to US preferred shares or “preferreds”. In our view, their valuations are now very rich compared to the likes of investment grade credit. Also, preferreds have been less useful over time for diversifying equity risk amid slowing economic growth.
Lately, equities and fixed income have frequently proved more likely to rise and fall together. So, we have looked for further tools to help seek potential diversification.
In this spirit, we added an allocation to gold. We believe the yellow metal has the potential to deliver positive returns if economic data deteriorates further and/or geopolitical tensions rise from here.
In a world where risk may be underpriced, portfolio reinforcement – rather than adding to risk asset exposure – is our priority.
