A turbulent first quarter is followed by Liberation Day Tariffs that sent the markets tumbling and the VIX soaring. What is the global outlook amid these trade wars, and how should portfolios be positioned to protect investor wealth?
Review of Markets Over the First Quarter of 2025
The first quarter of 2025 certainly has been a very bumpy ride and at this stage it appears unlikely that the next quarter will be any less choppy. With the January Effect going strong this year, global equity markets traded at all-time highs through the month until the second half of the quarter saw elevated uncertainty stemming from the volatile nature of US trade policy. This has dampened growth expectations for global trade and sent equity markets tumbling (Chart 1).
Chart 1 – Global Equities Tumble
1-Year Price Index Performance
Source: FactSet/Lipman Burgon & Partners
The ASX200 Index fell 2.8% over the first quarter while the US NASDAQ took a 10% dive for the quarter, posting one of its worst quarterly performances since 2022. The S&P 500 also saw heavy percentage drops in the quarter as President Donald Trump rolled out a swathe of new tariffs which raised fears of a global trade war that would hurt economic growth and spur inflation. Amid this selloff, investors have flocked to Chinese and European stocks with the German DAX climbing 11.32% in the quarter in response to an influx of stimulus spending. The Eurozone’s composite PMI (Purchasing Managers’ Index) remained at 50.2, unchanged from January, but up from the previous quarter that was driven mostly by a pickup in Germany’s manufacturing sector.
Amid this mixed equity market performance, commodities were the top performer over the quarter, boosted by a 19% rise in gold prices – the best quarterly performance since Q3 1986. Sovereign buyers increased their gold holdings to diversify away from the US Dollar as economic and geopolitical uncertainty are two additional tailwinds that will remain in place. Gold continues to be the best defensive commodity given its minimal exposure to the global industrial cycle and interestingly, the correlation between its price and real yields has flipped since 2022.
Historically, real yields and the price of gold have tended to be negatively correlated as high real yields prompts investors to move their money into assets like bonds to earn a real return (Chart 2). The 2022 rate hike saw increased accumulation of gold reserves, with emerging market central banks remaining at the forefront of net buying (18t net purchases in January).
Chart 2 – Gold Divergence from Fundamentals
Source: BCA Research
Meanwhile, long term global bond yields ended the quarter mixed, with most regions posting increases in long term yields while 10-year US Treasury yields fell 36 basis points. The fall in US yields could reflect softening growth expectations for the economy as they are priced for an environment with 2% GDP growth and 2%-plus inflation. The fall is in line with the three rate cuts towards the end of 2024, however further rate cuts are doubtful through a tumultuous period of trade uncertainty and the threat of a spike in inflation from aggressive tariff policies. Recent data showed signs of a spending pullback as consumers brace for tariff-related price increases. Consumer credit fell US$0.8bn in February driven by a US$0.9bn decline in nonrevolving credit (Chart 3), and the recent stock market selloff could further dampen consumer confidence.
Chart 3 – US Consumer Credit Growth Declined in February
Source: Oxford Economics/Haver Analytics
Liberation Day and the Global Outlook
April 2 did not liberate us from uncertainty – the reciprocal tariffs were more aggressive than even the most extreme trade scenarios Oxford Economics laid out after the election, highlighting the difficulty in assigning odds to potential policy outcomes in the second Trump presidency. One thing is certain though; global tariffs will rise (Chart 4). Over the week following the announcement, the VIX (CBOE Volatility Index) surged 143% to 52.33, a level that has not been reached since 2020, highlighting the intense market fear.
Chart 4 – Global Tariffs Will Rise
Source: BCA Research
To recap, on April 2, 2025, President Trump proclaimed, “Liberation Day” and the administration announced the most extensive tariff hike since the Smoot-Hawley Tariff Act, the 1930 protectionist law best remembered for worsening the Great Depression. A universal 10% tariff on all imported goods (bar Canada and Mexico) has taken effect from April 5, followed by further tariffs of up to 50% based on each country’s trade barriers which were set to begin on April 9.
Trump’s agenda is to correct decades of open US markets being met with asymmetrical foreign tariffs and other barriers, to pull manufacturing back onshore. Raising import prices will tilt the cost-benefit calculus of multinational production, nudging firms to reshore manufacturing capacity and re-anchor supply chains within US borders. Tariffs are also a revenue-raising mechanism that can finance the proposed tax cuts, though not without significant economic deadweight loss.
The aftermath of Liberation Day saw global equity markets reprice sharply with the S&P 500 losing 10% in two days and the Dow Jones down over 10% since the announcement. US credit spreads widened with average high-yield spreads widening 119 basis points to 461 bps, the widest level since June 2023. Companies are struggling to issue bonds at the price they want, causing a halt in new bond issuance for three consecutive days.
The global outlook is highly uncertain at this stage, and the full extent of foreign retaliation, negotiations and the long term effect on global supply chains remains to be seen. The European Union is urging negotiations with Trump as several country officials stress that the tariffs are “fundamentally wrong”, “brutal” and will weaken the global economy. Europe has prepared countermeasures to the tariffs and will not stand idly by. Modelling from Oxford Economics suggests that the economy is poised to weaken over the next few quarters, US GDP will grind to a near halt in Q2, decline in Q3 and may find its footing thereafter before staging a gradual recovery. They have revised growth projections down to 1.3% for 2025, down from the 2% March baseline. The secondary effect of American corporates passing on cost increases to consumers will lower real disposable incomes and increase inflation and unemployment (Chart 5).
Chart 5 – Oxford Economics Modelling
Source: Oxford Economics/Haver Analytics
The Australian Dollar further dipped to a new low of US$0.59, with this weakening largely linked to fears around China’s economy and how President Xi Jinping will retaliate against the 34% slapped on all imports of Chinese goods, on top of an existing 20% levy.
This aggressive action has deepened the trade war between the world’s two largest economies and Beijing has vowed countermeasures as this policy will cripple global supply chains and Washington’s own interests. China’s Commerce Ministry said in a statement “There are no winners in trade wars, and there is no way out for protectionism”. According to Beijing’s customs data, sales of Chinese goods to the US last year totalled more than US$500bn; 16.4% of the country’s exports, with US duties threatening to harm China’s already fragile economic recovery post its struggles with the property sector debt crisis. With China accounting for approximately a third of Australia’s total exports, the outcome of the negotiations China has with Trump will indirectly impact the local economy and its currency.
On April 9, markets rebounded sharply with US equities up 9%, after President Trump paused most reciprocal tariffs for 90 days and signalled a reduction in the blanket tariff to 10%. China was not included in the pause, with US tariffs on Chinese goods rising to 125% following Beijing’s retaliation, which had lifted its own levies on US imports to 84%. The European Union also announced coordinated countermeasures on the same day, escalating global trade tensions. This policy shift followed a violent bond market selloff, with yields surging amid forced deleveraging and panic selling. The scale of market stress, particularly in fixed income forced a rethink, as the risk of stagflation and a self-inflicted recession became too great. While immediate crisis was averted, risks remain elevated, and markets are likely to stay volatile as trade negotiations evolve.
On a more positive note, local inflation is firmly in its target band now (2.4% annual change in the December quarter), and unemployment remains low. RBA governor Michelle Bullock has made comments that the central bank is ready and able to cut interest rates if needed to shield the economy from a damaging global trade war and Treasurer Chalmers believes Australia is in good shape to weather the looming storm. Oxford Economics also has a cautiously optimistic view on Australia as we are a low cost producer of the key exports sent to China, so demand for our exports should be steady even if China’s economy does take a hit.
Portfolio Positioning
How dramatically the investment landscape has changed since the end of 2024. The new year began with supportive market conditions and a clear “risk-on” sentiment, particularly pronounced within U.S. equity markets. Now, Trump’s recent tariff announcements have roiled markets across the globe, triggering a wave of revisions to market forecasts—proving yet again how much risk is embedded in attempting to time markets. This reinforces our conviction in maintaining a strategic, disciplined, and long-term perspective rather than reacting impulsively to short-term market volatility.
At this juncture in markets, it may be helpful to touch on some of the work we have done in terms of manager selection and portfolio design over the last 18 months, when we began to see that a new investing paradigm was available to investors through the increasing availability of private market evergreen funds and sophisticated portfolio risk tools.
We outlined the implications of this new paradigm and its benefits to investors in our Wealth Strategy Playbook at the time.
Today, our dependence on public equities to drive portfolio outcomes is drastically reduced—the average client portfolio has seen their allocation to public equities diminish by approximately 20% since we began this journey, with a corresponding increase in alternatives and real assets, which can offer equity-like returns but with low correlation. In theory, if we can maintain the expected return of the portfolio whilst increasing the number of uncorrelated sources of return, then we should deliver superior risk-adjusted returns to our clients. Portfolios designed this way will exhibit resilience to most market environments and have a distinctly lower need to make portfolio changes in reaction to market events.
It may be premature to make any conclusions, but since April 2nd, it seems that our approach has received some vindication: the reduced listed equity exposure has insulated client portfolios relative to other, more equity-reliant allocations. That said, we remain cautious as the impact on less-frequently priced private assets lags public markets. Despite this, we expect our carefully diversified exposure across private equity, private credit and private infrastructure to position us well to absorb and manage future market impacts effectively.
Looking forward, we recognise that the most substantial threats to portfolio stability and wealth preservation arise from behavioural errors—specifically decisions motivated by emotional reactions such as entering the market prematurely or exiting investments at market lows. We emphasise the importance of adhering to the carefully constructed long-term asset allocation plans developed in collaboration with your advisor. Periods of market turbulence are an inherent aspect of investing; disciplined adherence to a robust investment strategy remains critical to achieving long-term financial objectives. Caution must be exercised when rebalancing too, as the aforementioned lag in valuations of private markets could lead to buying or selling investments with stale valuations. Ultimately, it is remaining invested through the cycle that will product the best outcomes (Chart 6).
Chart 6 – Time in Market Beats Timing the Market
S&P 500 Index Performance 1990-2023
Source: Dimensional Fund Advisors
This information is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation and does not constitute financial advice. Before acting on this information, you should consider its appropriateness in relation to your personal situation. This information is current as at 09/04/2025.