Turbulent Trump

Continued changes to policy direction from US President Donald Trump have darkened the clouds hanging over certain parts of the market. Investors are struggling to keep up with Trump’s initiatives let alone interpret their potential second order effects on employment, growth and inflation. During such periods of heightened uncertainty, investors should remember their long-term investment strategy. Our Chief Investment Office explains further.

It has been a volatile start to 2025, with investors buffeted by Trump’s policy announcements. The White House’s official stance on several key agenda items – including tariffs, the conflict in Ukraine and driving greater government efficiency - remains both fluid and opaque.

This uncertainty appears to have taken its toll on the US consumer, as demonstrated by the University of Michigan's recent consumer sentiment survey which showed a significant decline in consumer confidence from 71.1 January to 64.7 in February. The commentary from respondents indicated that this drop was driven by concerns about how the Trump administration’s policy might impact growth and inflation. This was reflected in US markets with the S&P 500 falling 1.4% in February and longer-dated bond yields sliding as weak economic data and uncertainty weighed on sentiment.

US consumer sentiment declined markedly in February

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One of Trump’s other primary focus areas is driving greater efficiency within government, cutting excess spending and driving technology innovation via the newly created Department of Government Efficiency (DOGE). This initiative has drawn wide criticism, ranging from the ambiguous leadership structure – Trump described Elon Musk as being ‘in charge’ despite him not being a government employee – to the potential impact on public services and ethical concerns surrounding mass layoffs of government employees. From an investor perspective, one of the primary concerns is the potential impact of layoffs on US economic activity, with the public sector employing roughly 2.2 million civilian federal workers. US initial jobless claims increased to 242,000 in the last week of February which, while still within the reading’s established range, represents a notable uptick – driven in part by Federal retrenchments.

Trump’s approach to a potential ceasefire in Ukraine has also caused consternation amongst global peers, as he sidelined Ukraine to negotiate directly with the Russian leader, Vladimir Putin. Trump also made controversial remarks about Ukrainian leader, Volodymyr Zelensky, which culminated in an astonishing confrontation between the leaders in the oval office. The intention of the meeting was to discuss a ceasefire arrangement alongside US investment in Ukraine’s rare-earth metals, however the meeting swiftly degenerated into a shouting match between Zelensky, Trump and Vice-President JD Vance. This left global onlookers stunned and added to the sense of fragility surrounding the security agreements that have underpinned the post-Cold War era.

Positively, the response to the stoush from European leaders has been encouraging and suggests that while a deal does not appear imminent, a resolution remains likely — albeit with an increased need for heavy lifting from Europe. This potential for greater defence spending across Europe has further assisted European shares in outperforming US counterparts since the start of the year.

Market rotation

Despite sentiment toward US equity markets turning increasingly sour recently, certain market segments appear to be focusing on the positives. Indeed, there has been a reversal in market leadership from last year, with Europe outperforming the US, value stocks outpacing growth and emerging markets performing stronger than developed. This likely indicates that global equity markets do not see Trump’s actions as significantly impacting global growth (so far).

These notable reversals place the equity market largely at odds with the bond market, which appears more concerned with the growth outlook, as indicated by yields declining over the month. The market has also increased expectations for rate cuts from the US Federal Reserve this year following weaker US data and the tension in US-Ukraine relations.

Weighing up these risks, we maintain our cautious optimism for growth assets, with a mild overweight to global equities within portfolios and a modest preference for US tech related shares. While US Tech stocks have moved markedly since the release of DeepSeek, market darling Nvidia Corporation’s most recent quarterly numbers suggest the AI hype cycle may not be over yet - though investors may need to temper runaway growth expectations over future quarters. Irrespective of this, at this early stage of the trade war, we believe US shares should be better positioned to benefit from Trump’s policy manoeuvring and maintain our modest preference accordingly.

Value stocks have strongly outperformed growth peers

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China trade-offs

Elsewhere, the People’s Bank of China (PBoC) recently announced details of a long-awaited and significant economic stimulus package – seeking to address its slowing growth and deflationary pressures. The measures included cuts to key short-term interest rates as well as plans to reduce the reserve requirement ratio on banks, bringing it to its lowest level since 2018 - marking the first time both measures have been reduced simultaneously since 2015.

Emerging markets responded positively to the news; however, the gains were relatively muted suggesting the market remains wary of the efficacy of the stimulus on Chinese economic activity, particularly against the backdrop of increased global trade tensions.   

As we have previously noted, stimulus from China could benefit the domestic equity market, particularly with respect to resource exports. Nonetheless, uncertainty surrounding the direction and quantum of any US tariffs to be imposed on Australia, and any second order impact from Chinese tariffs could continue to offset this. We are currently underweight Australian equities, predicated on the subdued earnings outlook and rich valuations, and position at benchmark to China. We will reassess both positions should the stimulus gain traction and once there is greater clarity on tariff measures.

What this means for our diversified portfolios

Those segments and regions that lagged last year have shown early signs of outperformance in 2025. Whether this is sustainable under a full implementation of global tariffs remains questionable. For now, we see this as a positive sign of market resilience, but given the strong performance so far, outperforming markets may be vulnerable while Trump’s turbulence continues.

Across portfolios, we maintain our positioning within risk assets this month, seeking to look through short term volatility driven by Trump’s announcements and focus on the potential longer-term impact. Last month, we added to domestic short duration, seeking to increase carry and provide a potential hedge should the Australian economy be impacted by global trade tensions. While Governor Bullock strongly pushed back on market pricing for further cuts from the RBA this year, we are comfortable with some additional duration exposure given some of the headwinds facing markets.

Indeed, since the tariff announcements, rates have continued to face downward pressure as the bond market appears to be focused on the growth impact of any trade tensions. As we have maintained, this has been the key driver of our mild overweight to long-duration in portfolios, with duration remaining an important diversifier for a growth slowdown in a risk-off environment.

An expectation of further trade spats, geopolitical tensions and fiscal uncertainty continue to underpin our decision to overweight gold across portfolios.