Trump's Tariffs And Budget Delays Spark New Market Strategies

The ripple effect of market surprises

Recent geopolitical and economic shifts have reminded us that market surprises are not anomalies; they are part of the investment landscape. The impact of these surprises, however, can become quite complex. The latest round of tariffs imposed by US President Donald Trump is a prime example.

At this stage, the immediate impact appears straightforward: increased import costs drive inflation. While this is not incorrect in theory, the reality may be more nuanced. Businesses forced to pay higher taxes on imported goods may not be able to maintain their current volume of imports, leading to supply-chain bottlenecks.

This, in turn, may force importers to source from other countries, shifting trade patterns. At the same time, consumers buying from these businesses may also seek alternatives, especially if prices become too high. This could open the door for a broader range of manufacturers to compete at similar price points, eroding the advantage of previously dominant suppliers.

Meanwhile, retaliatory tariffs from affected countries add another layer of uncertainty. Investors must ask: will there be further negotiations? Almost certainly. It’s a highly dynamic situation, requiring close monitoring and deep consideration of how to navigate these shifts at a portfolio level.

Similarly, government policy surprises, like the recent budget delay, can trigger sharp market reactions that evolve over time. Announcing delays at the last minute weakens credibility, particularly for the finance minister, whose reputation is critical for foreign direct investment. A sense of control and stability is crucial, and unfortunately, some damage has already been done. That said, in the bigger picture, the delay signals that the GNU is functioning as it should, which may ultimately prove positive for markets.

When it comes to market shocks, second- and third-order effects can be difficult to predict or fully grasp in terms of impact. This is why diversification is essential. For instance, when tariffs disrupt global trade, some sectors will suffer while others will benefit. A diversified portfolio ensures that risk exposure is spread out, reducing the likelihood of extreme losses.

Fundamentals remain key

It’s important to remember that economic cycles are generally shorter than our typical investment horizon would be. Recessions and periods of economic contraction are part of the natural business cycle, but they also pass. Similarly, trade wars, political uncertainty, and market downturns are not permanent.

Focussing on the fundamentals is therefore a crucial part of navigating market uncertainty. History has shown that businesses with solid cash reserves and high operating margins are best positioned to weather economic shocks. Volatility may create short-term pressures, but over time, companies with strong fundamentals tend to prevail.

Building resilience into a portfolio

It can be difficult to know whether to adjust your portfolio or stay the course after a market surprise. The answer depends on the investment mandate and time horizon. For conservative portfolios with shorter investment periods – such as three-year mandates – some level of active adjustment may be necessary. In contrast, longer-term investors can afford to take a more patient approach, allowing their portfolios to ride out short-term turbulence.

One key strategy in such periods is to prioritise assets that are better sheltered from macroeconomic disruptions. For instance, if two stocks have attractive valuations and strong fundamentals, but one is tied to the manufacturing sector – where import and export dynamics are under pressure – while the other is more service-oriented or intellectual property-driven, the latter may be a more resilient choice in the face of macroeconomic uncertainty.

Active vs. passive management in times of uncertainty

In uncertain environments, we know that some market participants fail to accurately price in risks. This creates opportunities where stocks are overly discounted, which is ideal for long-term investors. The key is balancing short-term caution amid volatility with a long-term perspective that allows you to capitalise on emerging opportunities.

Protective strategies can be particularly useful in this regard. For example, a stock with strong long-term value may experience volatility due to its exposure to tariff-impacted sectors. In such cases, adding protection can help mitigate short-term downside risk while still allowing participation in long-term gains—an advantage often missing in passive investment approaches.

While passive investing has cost advantages, adopting a “wait-and-see” approach in such a volatile market carries a significant opportunity cost. It leaves investors vulnerable to market swings and introduces additional behavioural risks, as decision-making becomes reactive rather than strategic.

By nature, uncertainty drives significant market fluctuations, with even large companies seeing daily swings of 10% or more. Active management is designed to respond dynamically, tracking these movements and identifying opportunities in real time. This agility is precisely what’s needed in the current environment.