Our positioning: Uncertainties remain high

Last month was marked by unparalleled ups and downs. The VIX index, a measure of uncertainty on the US stock market, reached more than 50 index points, a high last exceeded at the beginning of the coronavirus pandemic. The trigger was the announcement of huge tariffs on “Liberation Day” in early April, when the US government said it would levy a basic tariff of 10 percent on its trading partners, along with additional, country-specific reciprocal tariffs. For most countries, this resulted in punitive tariffs in the range of between 10 and 50 percent. These tariffs were significantly higher than expected by the financial markets, which responded accordingly with a flight to safer investments.

Turmoil on the financial markets

Within a few days, the stock markets recorded losses of more than 10 percent, while investments such as bonds, which are considered safer, made gains. In turbulent times like these, this is a typical pattern of investor behaviour. However, these gains didn’t last long, at least in the US government bond market, which again lost a great deal of value, while European government bonds maintained their price gains. It’s an unusual picture, which, besides a loss of confidence, gave rise to fears that the financial system could be under substantial stress. A sharp sell-off of investments considered a safe haven in a turbulent environment is fuelling fears that speculative positions in the financial system could become unstable and will need to be covered by selling off government bonds. 

Pause in tariffs triggers countermove

These developments seem to have left even the US President feeling somewhat perturbed. On the day the reciprocal tariffs came into force, US President Donald Trump announced a 90-day suspension for a large number of countries – with the exception of China. In an spiral of escalation, the US government increased its tariffs on China to no less than 145 percent, while China has now imposed tariffs of 125 percent on the USA. Nevertheless, the pause brought about something of a recovery on the financial markets. The stock markets reacted with an appreciable countermove although they have yet to recover from the slump. More importantly, however, the US government bond market has now calmed somewhat. Our cautious positioning, particularly with regard to the US stock market, has therefore proven to be correct.

Cautious positioning maintained

However, the uncertainties on the financial market remain high: the threat of further tariffs has not been averted. Additionally, the basic 10-percent tariffs, the tariffs on aluminium and steel and the increased tariffs on China remain in place. The fact that, before the announcement of massive tariffs, sentiment among US service providers had already fallen to its lowest level since the coronavirus pandemic is fuelling concerns about the economic impact of current US economic policy. In this context, the risk of recession has increased even further. We therefore remain underweighted in the US stock market and the equity market as a whole and continue to prefer Swiss real estate funds, which have proven their worth in these volatile times, and the Japanese yen, which is considered a safe haven.

Performance of asset classes

Our positioning – Swiss focus