Since 9 April and the postponement of US trade tariffs, most markets that suffered in the aftermath of Liberation Day have enjoyed a remarkable recovery. Typically after such a large and rapid rally, the inevitable question arises: what now? We all remember 2020, with markets bottoming at the end of March followed by strong performance in April and May. Is today comparable?
“Today’s decline and recovery has been similar to 2020. However, the current situation differs in several critical ways”.
Echoes of 2020
During the Covid crisis, markets recovered as the primary risk factor receded (albeit with lingering uncertainty) and as large fiscal packages financed at sub-1% rates propelled markets higher – combining lower rates with better earnings outlooks. Today, we have witnessed a similar decline and recovery. However, the current situation differs in three critical ways:
- The cost of capital is now substantially higher than during the post-Covid period
- Valuations are already elevated relative to earnings
- The full impact of trade tensions has yet to materialise, so uncertainty lingers.
These factors should make navigating the summer complex, as opposing forces push and pull different market segments: long-term rates remain volatile (especially as debt sustainability comes into question), though attractive; equities face the tension between retail investors driven by ‘FOMO’ (fear of missing out) and deteriorating fundamentals; and cash rates remain attractive in most regions outside Switzerland and Japan.
These variations from 2020 could potentially provide active portfolio managers with a significant edge in navigating this challenging environment.
Tariff uncertainty
Since 9 April, markets have bounced back to their starting points after having lost about 15%, with US stocks recovering especially quickly. The pattern suggests the contribution of retail money, particularly in the US. Now, while markets may be acclimating to the trade war, and we seem to have more clarity on the level of tariffs (between 10% and 30%), the future impact on the economy and profits remains unclear.
With markets rallying and sentiment improving, we end up in a situation where uncertainty remains high while perceived risk is low. This represents a solid measure of complacency, showing how markets increasingly hold as certain something that remains difficult to predict. For now, FOMO clearly dominates and continues driving credit spreads lower and equity prices higher – and fighting the tape is painful.
FIG 1. Performance, risk and uncertainty indicators1
Read also: What Liberation Day’s reciprocal tariffs mean for investors
Bonds look cheap
Markets at the moment are worried about the volatility and level of bond yields. The situation is exactly opposite to stocks: stocks look expensive for now but are trending up. Bonds look cheap but are trending down, as a consensus has emerged that long-term yields should continue rising. The reasons for this outlook are (1) tariffs leading to inflation, (2) policy unpredictability, (3) foreign investors leaving the US bond market and (4) US fiscal numbers, which are hard to reconcile for now.
This consensus could be wrong-footed by valuations: yields currently offer an appealing entry point, especially when looking at the details of what makes up their level:
- When differentiating long-run policy rates from term premium, term premium is now at 75 bps, a recent high, while long-term policy rates have room to decline with tariffs hurting growth
- When breaking down yields between inflation premium, real rates and fiscal premium, inflation premium could rise, but real yields are at about 2% – a high level – while US CDS also reflects the current fiscal hesitations.
We see value today in long-term yields, especially as deregulation could help banks bring liquidity to this market.
FIG 2. 10-year Treasury yield decomposition2
Read also: Could high-yield bonds become a more important asset over the next decade?
High-yield exception
After the recent rebound in equity markets, investors now face a large imbalance in terms of expected returns when using asset class yields as a measure. In the US, earnings yields for equities are generally below cash rates, while yields for investment grade and high-yield bonds stand above them. This implies that for US investors focused on domestic assets, risk premia are mostly small to negative, except for high yield.
The current appeal of high yield as an asset class comes from the mixed effect between government bond yields and credit spreads. The larger part of US yields reflects Treasury yields, which have room to decline should the US economy experience a slowdown, potentially protecting high-yield holders from the widening of credit spreads. The past three recessions in the US provide perfect examples of this phenomenon: for now our preference between equities and high yield still favors high yield in this context of uncertainty and apparently stretched valuations.
FIG 3. Yield by asset type, excess and total return3
Our positioning across asset classes
The current market environment clearly comes with uncertainties and risks, but also opportunities (such as credit markets, considering their total yield, or European and Chinese equities). Balancing these elements, our investment teams maintain a mix of selected risk-on exposures (some of which have been trimmed) alongside a neutral positioning, depending on their asset class and investment opportunities.
Multi asset. The All Roads team has increased its market exposure to about 105% from about 60%, with 8% allocated to tail-hedging strategies. It reduced the allocation to protection assets to 60% from 80%, while increasing cyclical assets to 40% (rebased to 100%).
Fixed income. Our Global Fixed Income team has reduced sovereigns to neutral from overweight, while increasing emerging market (EM) hard currency to neutral from underweight. It holds a preference for Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries, and for investment grade (IG) over high yield (HY), with a defensive and selective tilt. Our Asia Fixed Income team remains overweight India, commodities, insurance and EM HY sovereigns.
Convertible bonds. The team is positive on Europe and China and neutral on the US and Japan. It is rebalancing from domestic and defensive names into exporters and more cyclicals. It continues to favour quality names with pricing power in the consumer-discretionary sector.
Equities. The team remains overweight technology, media and telecommunications (quality growth), consumer discretionary and consumer staples, and has selectively taken profits in China and Europe to increase cash exposure. Our Swiss Equities team has re-risked by decreasing cash exposure, and is selling real estate and buying industrials. The Asia Equities team remains overweight China/Hong Kong and equal weight India.
To learn more about our All Roads multi-asset strategy, click here. 
