Liberation Day and Its Consequences…
The past month was clearly marked by the so-called Liberation Day on 2 April, when Donald Trump presented his extensive tariff table to the world in the Rose Garden of the White House.
The list, which many economists and financial experts considered to be poorly constructed and ill-conceived, had significant consequences for the capital markets—effects that will likely stay with us for a long time:
- The U.S. Dollar Index, as measured by the DXY, fell by almost 7% over the course of the month against all major trading currencies, including the euro.
- American equities were sold off indiscriminately, regardless of sector or company size. (“Sell America” instead of MAGA!)
- Many global stock markets suffered substantial losses and experienced something akin to a temporary crash on 7 April.
- The VIX volatility index climbed above 60 again, illustrating the level of panic that had set in.
- High-quality government bonds posted notable gains, while corporate and high-yield bonds weakened.
- Gold once again proved to be a safe haven, while commodity markets broadly declined.
I believe the severe correction on 7 April occurred in part because many market participants assumed that, although Trump tends to act erratically, he would still care about rising stock prices. However, the announcement of these poorly designed tariffs—and Trump’s insistence that he would not back down—gave the impression that America could be moving away from its capitalist principles and drifting toward a new kind of “dictatorship of the underexposed but overweight white man.”
Such a scenario would be extremely detrimental to global financial markets, which likely contributed to the sharp sell-off. While valuations for U.S. tech stocks were certainly stretched and due for a correction, Trump’s behavior clearly unnerved many investors.
Fortunately, on 8 April, he “blinked” and showed that he is ultimately heavily reliant on U.S. business interests—thank goodness.
Otherwise, we would have been forced to ask: how do we construct a global portfolio that excludes both America and China?
By the end of the month, most of the market disruptions had already normalized. This was somewhat surprising to me, given that the real impact of the tariffs won’t be felt until the second and third quarters of the year. But that’s how markets work—it’s usually best to remain invested!
In any case, Liberation Day has led many international investors to question the role of America and the U.S. dollar as a stabilizing force.
We should therefore prepare ourselves for lasting shifts in global asset allocation trends:
The slogan “Make America Great Again” has morphed into “Sell America” and “Make Europe & the Liberal World Great (Again).”
In practical terms, this means investors should reduce their U.S. exposure and instead focus on other developed markets with reliable legal systems. In addition to most of Europe, this includes Canada, Australia, Japan, South Korea, Singapore, and Taiwan.
Emerging markets that are economically liberal and likely to thrive regardless of U.S. or Chinese developments should also be considered. I would currently include India, South Africa, Vietnam, and most of Latin America in that category.
While we already have a broadly diversified investment universe, we have responded to these developments by adding further building blocks that can complement existing portfolios.
In addition to a highly regarded Latin America fund and an MSCI Latin America ETF, we have added new factor-based ETFs in Europe (MSCI Europe Quality, Momentum, and Value).
Despite my initial hesitation, we also decided to include an MSCI World ex-U.S.A. ETF. This offers our community immediate diversification away from U.S. markets with a single addition.
Over the very long term, the MSCI World ex-U.S.A. has delivered returns similar to the MSCI U.S.A., and we can expect risk premiums in the range of 6–8% p.a. here as well.
That said, last week’s strong recovery makes it clear that excluding America entirely would be a mistake. Our goal remains to build portfolios that reflect the best companies in the world.
We will therefore continue to maintain significant exposure to the U.S. and remain committed to working with leading global quality managers. David Dudding, one of my preferred managers (CT Global Focus – O11), made this point clearly in a recent webinar.
There are simply too many high-quality companies in the U.S. that are able to operate with relative independence. Why exclude them?
Nonetheless, even these companies must prepare for a changing world order. Based on this outlook, he reduced his fund’s U.S. allocation from nearly 80% to just under 60%, though he likely won’t go below 50%.
This may serve as a guidepost for our own approach and for our clients.
Still, I would advise gradual portfolio adjustments rather than hasty changes. Any reallocation should be based on individual circumstances and market valuations—not emotion.
In my view, the best guide for building a portfolio remains the valuation of its individual components. A compelling entry point often leads to a good investment outcome.
That’s why we’ve added the valuation traffic light to our skyscraper charts. This tool has performed well so far, as high valuations (red) have consistently posed a greater risk of drawdown than normal (yellow) or attractive (green) ones.
Indeed, the market segments with higher valuations suffered more on 7 April than those with more reasonable prices. Please use this traffic light as a guide for your future decisions!
For fresh capital, we recommend our established FairHorizons concept. Developed using time-tested allocation models, it offers a straightforward way to build portfolios that outperform inflation and generate attractive risk premiums.
