Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Global Head of Investment Strategy
Here’s an unsettling thought experiment: Imagine you wanted to deliberately tip a thriving economy into recession. I asked ChatGPT about how to do this. This exercise playfully laid out five moves you’d make—start a trade war, sharply hike interest rates, slash government spending, undermine consumer confidence, and trigger geopolitical turmoil.
Ironically—and worryingly—Donald Trump seems intent on checking almost every box. With these latest tariffs, he's done four out of five, skipping only an aggressive hike in interest rates. This realization is sobering, suggesting Trump may unknowingly follow a perfect recipe for recession.
Trump’s new tariffs are broad and aggressive: a baseline 10% tariff globally, but much harsher levies on crucial trade partners—China (34%), Taiwan (32%), and Europe (20%). Read more in this article.
The global reaction has been swift and severe:
History offers a cautionary tale. Trump's tariffs recall the 1930 Smoot-Hawley Tariff Act, widely considered to have deepened and prolonged the Great Depression. Today’s protectionism surpasses even those notorious levels, sparking fears of similar economic self-sabotage.
In a significant twist, Trump recently signalled openness to negotiation. He indicated he could consider rolling back tariffs if trading partners offered something "phenomenal" in return, suggesting his stance might soften if substantial concessions are made. However, he simultaneously hinted that more tariffs—particularly on pharmaceuticals and semiconductors—may be on the way, leaving investors with cautious optimism at best.
Trump's tariffs already raised the spectre of stagflation—a dangerous cocktail of slowing growth and rising inflation. With China's sweeping retaliation—imposing 34% tariffs on all US imports—the global economy edges closer to a tipping point.
Markets have reacted sharply to China's response, deepening recession fears. Stocks extended their sell-off, bond yields tumbled as investors sought refuge, and major banks like JPMorgan now see a 60% likelihood of a global recession this year, significantly up from previous forecasts.
This dramatic escalation underscores how Trump's tariffs—and the responses they provoke—could push economies into uncharted, turbulent waters, forcing central banks into difficult decisions about interest rates and economic support measures.
Tariffs aren’t isolated to the US. Europe faces renewed recession threats; Canada warns its relationship with the US "will never be the same"; Japan calls it a "national crisis"; Switzerland scrambles to respond to unexpectedly harsh tariffs.
China's rapid and sweeping retaliation further amplifies these global recession risks, threatening severe disruptions to global supply chains and trade relationships. Beyond immediate volatility, these tariffs might also prompt long-term shifts away from US economic leadership, weakening dollar dominance and reshaping global markets.Market turbulence is unsettling—but it's also a moment of opportunity. Here's how you can respond effectively and strategically right now:
1. Stay calm—avoid panic decisions
Emotions are the enemy of good investing. Markets thrive on confidence and crash on fear, but historically, panic-selling during volatility rarely pays off. Now is the time to hold steady, stick to your investment plan, and avoid emotional decisions.
2. Diversify and rebalance
Certain sectors are highly exposed to tariff fallout, notably automotive, technology, and industrials. Take this moment to reduce exposure to highly vulnerable stocks or sectors.
Rotate toward more defensive sectors such as healthcare, utilities, and consumer staples. Increase geographic diversification, reducing reliance on heavily impacted regions.
3. Seek out safe havens—quality is crucial
High-quality bonds and stable dividend stocks offer protection in volatility. Government bonds have rallied amid market uncertainty—consider adding or increasing your holdings. Moreover, gold and defensive stocks remain reliable shelters during economic storms.
It’s easy to panic when dramatic news hits markets. But history teaches us that even severe shocks tend to fade, and disciplined investors emerge stronger. Trump's tariffs will continue to create short-term volatility, but they also underline the necessity of diversified, resilient portfolios built for long-term success.
In stormy seas, steady hands win. Stay calm, diversify strategically, embrace quality assets, hedge inflation risks, and look for new opportunities. Turbulent markets are tough, but prepared investors don’t merely survive—they position themselves to thrive.
The tariffs are Trump's gamble. Your job as an investor is simpler: remain clear-headed, informed, and strategic. Remember, every storm eventually clears. Your preparedness and patience today will set the stage for tomorrow’s gains.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)