The introduction of draconian tariffs on US imports initially caused stock markets and the USD to plummet. After the postponement of the tariffs, markets rebounded. Will there now be deals leading to a relaxation of geopolitical tensions, or is a recession inevitable? In our Asset Allocation Update for May, we remain cautious on US equities but are constructive on other equity regions.
Text: Nicola Grass
What a month! The drastic tariff announcements by US President Donald Trump on April 2 caused global stock markets to collapse. The maximum loss in global stock markets in CHF reached 20%. This is more severe than the median of the past 13 corrections of over 10% this decade. Nevertheless, prices quickly recovered as the US government was forced by the market to postpone its plans. However, the demands are still on the table, and time is running out. If negotiations drag on too long, this is likely to be reflected in weaker growth figures (our economists now forecast US GDP growth of 1.4% in 2025, down from 2.8% in 2024). Therefore, we are sceptical about the market rally and stick to our main scenario of a difficult compromise. Consequently, and because we consider consensus expectations for US corporate earnings to be too optimistic, we have only increased global equities to the strategic quota.
This vulnerability and the newly inadequately priced political risk premium in the stock market lead us to a cautious stance on the USA. At least the concentration in Big Tech has decreased, with financials benefiting as a counterbalance. We are neutralising our positioning at the expense of the latter group and in favour of the former. Outflows from US assets are likely to continue despite geopolitical easing, and the clear goal of the US government remains a currency devaluation. Therefore, we remain underweight in the US dollar, but only to a lesser extent due to the above-average interest rate advantage (see chart) and a plausible technical pause. On the currency side, JPY and AUD remain our favourites.
We see potential in emerging market equities. The advantages of these regions lie firstly in their often dynamic domestic economies, secondly in historically low inflation and the associated potential for low interest rates. Thirdly, the diversification of countries and sectors in aggregate delivers rising corporate profits. Risks include geopolitical tensions, which, in contrast to Trump's first term, are less focused on the region. Another risk is an unexpected, renewed setback in the Chinese real estate market. Other preferred markets remain the UK and sectors such as pharmaceuticals or semiconductors. All of these are attractively valued and have solid earnings.
We are making no changes to bonds and expect lower yields and rising credit spreads. We hope for higher returns from convertible bonds with a focus on IT mid-caps and again from emerging markets such as Brazil (plus 8% BRL to USD and 14% interest rates). Additionally, we remain overweight in alternative investments such as insurance-linked securities and private equity at the expense of commodities.
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