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- Short term bounce can’t be ruled out as investors will be looking to get their ‘shopping lists’ ready
- Bearish stance on US dollar remains
- Equity risk premium remains tight
Mark Richards, Head of Dynamic Multi Asset at BNP Paribas Asset Management:
“The US administration’s attempt to reset the global trade framework through tariffs is causing a vol shock through markets. Now the question is which utility curve Trump is trying maximise: one, bring revenues or two, bring jobs back home or three, negotiating tariffs & trade barriers. The situation is tricky given that the three curves are mutually exclusive.
Signing trade deals could be ahead, but the range of outcomes is wide. Our flexible strategies and portfolios went into tariffs with relatively low equity exposure given our base scenario of a slowing US economy ahead. The recent price action has been more about discounting further US exceptionalism and exuberance in asset prices, especially within the equity complex. At this stage, we don’t think we have a full capitulation and pricing of left tail risks. Against this backdrop, we keep a bearish stance on the US dollar: it is still expensive versus interest rate differentials and on a valuation basis, while the rotation out of US assets should continue.
Tactically though, we can’t exclude a short-term bounce given the extent of the move, and if we start to have headlines on trade deals – we want to get a shopping list ready. On the equity side, in order not to get hammered by left tail risk scenarios and given that the equity risk premium (UST role as a portfolio cushion is compromised as long as stagflation fears are hanging around) is still tight, we think it is better to get an upside exposure through option structures. China remains portfolio diversifier with fiscal support on the way to boost consumer demand. We also want to add duration tactically whenever we see attractive levels. And finally, we are looking at Latam FX where the region has been ex-MXN relatively spared such as BRL, where the high carry still could add a layer of protection and attractiveness.”
