Transcript: Latest challenge for investors: navigating tariffs, politics and volatility

What’s behind this unparalleled tariff strategy?

JM: I would say that we should think of these tariffs as something of a negotiation tactic, as a means to an end, as a way to achieve some sort of policy goal. It may just be shrinking the trade deficit between the United States and whatever the receiving country may be. It may be reducing trade barriers. And then there are more political policy goals. Immigration policy, narcotics policy, maybe trying to slow down Chinese investment into emerging markets. Maybe it’s about bolstering defense spending in the European Union. There are a lot of different potential policy goals here, but I do think that is the intention behind these tariffs. I think it is impossible to know the timetable for when this strategy starts to prove successful or starts to prove a failure. I would imagine that the administration is looking for trading partners to capitulate quickly. But so much policy out of Washington right now has proven to be unpredictable. And so trying to ascribe a probability to any of these things is very, very challenging at the moment.

What kind of response investors should have

JM: I think there is an enormous temptation to run for the hills and hide out. But we’ve done some research, and we’ve found that the benchmark here, when it comes to allocating your assets, should not be whether the market is up or down. It should be, rather, whether or not that risk asset that you have invested in outperforms cash. How does cash stack up against the performance of traditional asset classes like stocks and bonds? Markets have been plenty volatile in in the past. And there have been a number of extremely interesting and disruptive forces that have led to volatility, right? A pandemic not that long ago. A fundamental shift in the interest rate regime even more recently than that. A global financial crisis 15 years ago. And over the course of all this the overwhelming majority of the time, risk assets outperform cash. So, the first thing I would say to investors is you don’t want to be over allocated to cash right now. You just want to take risk a little bit more cautiously, which I know kind of sounds like an oxymoron, but in a world where there are so many different flavours of risk, I think it actually is quite possible. The way that you would take risk in fixed income cautiously is by stepping out of cash and maybe taking a little bit more duration exposure. When it comes to investing in the equity market, it is a lot harder for a big company to go out of business than it is for a small company. And large-cap companies are a little bit more insulated from short-term disruptions. And then the component I guess where there is argument is where you go geographically. Is this still a period of U.S. exceptionalism? That’s what everybody’s asking. I am a U.S. bull even today, and the reason for that is that in this new uncertain world, we will either be experiencing a year where all this tariff stuff does exactly what it’s supposed to do, and actually ends up being long-term positive for U.S. GDP growth. Or we are living in a world where the U.S. drives its trading partners into a recession, ends up in a recession itself, and then becomes the best house in a bad neighbourhood. That’s my view on this market right now.

Is this an existential risk to the global economy?

JM: I believe, short term, there is a real risk to the global economy. And at the end of all this, there may be a pretty fundamental shift in the way that economies are connected to one another. But this too shall pass. And there have been plenty of instances where it feels like nothing will ever be the same, and yet markets still end up moving higher. Markets learn to adjust. As long as we keep our noses to the grindstone, focus in on the long term, and maintain a disciplined approach toward asset allocation, we will be able to weather this storm, provided we don’t make any emotional decisions that could then end up negatively impacting portfolio performance.

Well, those are today’s Soundbites brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jack Manley of J.P. Morgan Asset Management. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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