Source: US Bureau of Economic Analysis 9bea0, Goldman Sachs Global Investment ResearchThe start of 2025 has been somewhat of a whirlwind ride which peaked on the 2nd of April when U.S. President Donald Trump finally revealed a list of “reciprocal tariff” rates that applied to more than 180 countries and territories. This new chapter in history was dubbed Liberation Day by Trump himself. Many grew concerned that a broader trade war was evolving, however markets have since bounced back, many which have surpassed their 2nd of April levels (and at the time of writing). In this note we look at the events following liberation day and the risk and opportunities which may present themselves now and in the future.
Markets and its participants tend to overshoot on positive and negative news, and on this occasion, the introduction of tariffs by the U.S. was seen as strongly negative and a significant shift in the powers of world trade. Many had forecasted the commencement of a broader trade war, increasing the downside risks to growth and upside risk to inflation, meaningful economic slowdowns on a global scale and a general feeling of pessimism.
As the world digested the news, global equity markets reacted in kind, falling 10% in the week following the announcement with U.S. markets (the S&P 500) skirting bear market territory, falling approximately 19% since its February highs. A 20% decline officially defines a bear market. This rapid deterioration shocked investors as everything from aerospace parts to toys and video games was to become instantly more expensive for US consumers. Governments began to scramble, companies began to recalculate their expected costs, and the whole world started to look at the global impact of these reciprocal tariffs. What was clearly evident in the immediate days following was the level of uncertainty that had clouded markets. Again, this was evident in the movement of equity market volatility, known in markets as the VIX. It jumped an astonishing 143%, from 21.5 to 52.3. These levels had not been seen since the GFC in 2008, which further emphasised the panic that had engulfed the market.
Whilst the initial shock was understandable given significantly large breadth and depth of the tariffs announced, the panic in markets that ensued can largely be explained by the change in market structure over the past 20 years, whereby most trading is executed by computer systems using sophisticated and very short-term momentum signals. In addition, most recent trends have only compounded the sharp and significant movements including substantial shifts to passive investing and the surge in retail investing in the US. This is negative in that it encourages panic, but also positive for more patient and opportune investors.
It has been a remarkable five weeks since the initial shock. Trump’s “America First” policies, the subsequent sell-off and rising volatility and uncertainty saw countries across the world begin to re-examine their relationship with the U.S, and question whether they would continue to be the global steward. More importantly, perhaps it was the kick they needed, governments globally started to plan for a future without a dominant U.S. trading and defence partner, and made decisions to get their houses in order to ultimately become more independent or forge relationships elsewhere. Outside of retaliating with tariffs of their own, many countries took countermeasures to protect their own interests and to shore up confidence amongst their people. China and the European Union, namely Germany, announced significant stimulus packages to boost growth at least in the near term; several other countries announced government emergency packages to support those industries most at risk, whilst those with limited room to manoeuvre have entered into negotiations with the U.S. in order to hash out a better deal.
As all this was taking place, Trump unveiled a stunning reversal on tariffs, pausing most country-specific tariffs (for 90-days) but at the same time, ramping up duties on China imports. This sparked a market rally which was further boosted more recently with announced trade deals with the UK and China. This has ultimately led markets back up to their pre-liberation day levels and beyond. A timeline of market movements can be seen below.
| Name | 2 April 2025 to 8 April 2025 | 8 April 2025 to 18 May 2025 | 2 April 2025 to 18 May 2025 |
|---|---|---|---|
| MSCI ACWI NR | -7.01 | 11.31 | 4.11 |
| MSCI World NR | -7.14 | 11.41 | 4.13 |
| MSCI Europe NR | -5.15 | 11.99 | 3.86 |
| MSCI AC Asia Ex Japan NR | -6.60 | 11.15 | 4.26 |
| S&P 500 NR | -7.89 | 10.72 | 3.88 |
| NASDAQ Composite TR | -8.89 | 15.79 | 8.09 |
| S&P/ASX 200 TR | -5.23 | 13.99 | 5.63 |
| FTSE 100 TR | -5.82 | 10.99 | 2.03 |
Source: Morningstar Direct. Performance (%) in AUD.
We see this as a great opportunity. Perhaps the shock the world needed to realise the golden opportunities non-U.S. equities, in this instance, hold. Could this, for example, be the start a of European renaissance? Investors had become obsessed and over-invested in the U.S. off the back of the ‘Magnificent 7’and the valuation gap with other markets had gone way too far. Europe generated much better-than-expected earnings in Q4 2024 and the economic prospects for Germany have notably improved and are on the up. Momentum driven markets over the past two years are slowly abating, and fundamentals are beginning to once again be the drivers of company performance. This further opens the door for the under-valued European markets (relative to the U.S. market) which have experienced numerous headwinds since the GFC.
This strong U.S. policy response has perhaps acted as a catalyst for other major economies, and therefore policymakers not only in Europe but Asia, and elsewhere to accelerate their own stimulus measures and economic reforms to avoid being left behind competitively. It has also triggered a renewed focus on domestic growth initiatives which can spur further innovation.
Arguments can also be made for the relative underperforming global emerging markets regions of Asia and in particular, Latin America. Valuations gaps relative to large cap U.S. equities and developed nations in general have persisted for quite some time. Emerging markets account for approximately 10-15% of global markets and with far more flexibility in regard to monetary policy, companies which can cut costs and/or find new markets, can be expected to undergo positive re-rating. Importantly, emerging market growth continues to be underpinned by favourable demographics, urbanisation, and a rapidly expanding middle class, leading to higher consumption and investment opportunities.
As a result, investors are increasingly diversifying away from U.S. equities, both to manage risk and to seek better value and growth opportunities abroad. As noted above, for over a decade, U.S equities - especially a small group of dominant technology stocks - outperformed global peers, leading many investors to concentrate their portfolios in U.S assets. This was largely driven by momentum, and particularly in post Covid period, the macro environment. With heightened volatility and uncertainty, investors now need to reassess risk and shift their focus back to company fundamentals, such as earnings, balance sheet strength, and operational resilience, rather than relying solely on macroeconomic trends or speculative growth.
Source: J.P. Morgan Asset ManagementOutside of equity markets, real assets and private markets such as infrastructure, real estate, private equity etc, also offer attractive opportunities. As we enter a new phase of opportunity in 2025 and beyond and with long-term strategic themes such as digitisation, deglobalisation, energy transition and the ever-changing geopolitical landscape, sectors and strategies that are aligned with long-term structural trends and resilience will become more important.
Rather than pessimism, perhaps Liberation Day can be seen as a trigger for opportunity rather than a deterrent. As with any market shock, uncertainty and volatility will dominate markets in the short and medium-terms, however it could prove rather fruitful in the long-run as new and dormant markets attract new capital, plus provide valuation and diversification benefits.
Although equity markets have recovered from the post-Liberation Day sell-off, primarily due to the rollback and delay of tariffs and the progress in trade negotiations, the post-Liberation Day environment for global equities can possibly be seen as the commencement of a new paradigm in global trade and international investing. Although initially characterised by heightened uncertainty and volatility, the need for a more selective and considered approach could be paramount for future success. While risks are elevated, especially from trade disruptions and policy unpredictability, there are also opportunities arising from sector rotation, regional divergence, and attractive valuations outside the United States. Diversification, adaptability and risk management will be key for investors navigating this potentially new era.
To discuss the impact of the above information on your portfolio, please speak with your PSK adviser.
The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
