Overview
Key takeaways
- We have been here before, but this is not an economic crisis yet
- Tariff fallout questions traditional US safe havens
- Gold, gilts, cash may be better safety plays, be patient for opportunities
Caroline Shaw and Talib Sheikh have been here before. They are familiar with the red screens, the search for safe havens for their clients’ money, and the tests of patience to grab opportunities that crises bring. Recent weeks have brought just that volatility and the latest Fidelity Answers episode deals squarely with how they knuckle down and deal with the situation, day by day, hour by hour, week by week.
It's early April, and both are talking with Fidelity fixed income director of portfolio management Rosie McMellin, several hours before President Trump calmed markets briefly by announcing a pause in the tariffs applied to most of the United States’ trading partners. The volatility quickly resumed.
“It’s these moments where we hopefully can deliver some value for our clients,” says Talib.
“Can we look forward one year and have confidence on where earnings are in the equity market, have confidence on where GDP and inflation are likely to be? The answer is: I don't think I can.
“So we need to think about how we build a portfolio that's resilient across a number of outcomes. Some of them are going to be positive. Some of them are going to be negative. And with this level of volatility, you have to be incredibly careful.”
Both Talib and Caroline are long-term investors in multi-asset strategies - aimed at smoothing out returns for investors by using a diversified range of assets, from equities to fixed income, gold to real estate. That may not always return as much as, say, a pure equities portfolio, but they aim to deliver healthy returns with lower volatility and less overall risk.
Both are also veterans of other periods of market turmoil, such as the bursting of the dotcom bubble in the early 2000s and the Global Financial Crisis in 2007-8.
“This is not there yet … for me,” says Caroline. “Of the crises I've been through as a portfolio manager, the Global Financial Crisis still stands out as the most tricky. It was long. It was relentless. It was red screens every day. If this ends up being like that, we are just at the start. But I think there are exit opportunities here.”
“For now, this is a manmade crisis,” adds Talib. “If it morphs into an economic crisis, then we're playing a different game.”
Safety bid
In the meantime, many in the markets have spent recent days searching for new safe havens for their money, at a time when two of the most traditional market destinations in times of stress - the dollar and US Treasuries - have also been falling hard.
“The Japanese yen, and also the Swiss franc, look interesting,” says Talib. “Cash here is also very different to the Global Financial Crisis. You can get 4.5 per cent on cash quite quickly. In my portfolios, we have about 10-12 per cent in cash at the moment.”
“Gold has been an obvious safe haven,” adds Caroline, “despite the recent increased correlation with the equity market sell-off, which we think was probably down to hedge fund losses being covered and people having to sell liquid assets.
“UK gilts [also] look quite interesting, because we think that the rate cuts will be coming from a higher level.”
Next steps
Where are the trigger points for more volatility? Caroline points to concerns over the US government bond market and the softness of demand at some primary debt auctions.
“It will be interesting to see what the demand for US Treasuries is. Are people simply reluctant to lend to the US? Or have Chinese buyers backed away because of the trade issues on the tariffs?
“That's something that could materially indicate how tricky it's going to be for the US to fund itself if that demand wanes. And that's a big deal for Treasury markets and global markets.”
Is there a question mark over the reserve currency status of the dollar? That’s a step too far, says Talib.
“But […] we've had 10 to 20 years of capital being sucked into the US. Huge, huge amounts. Now, we're not saying all of that is coming out, but clearly at the margin, when that starts moving, that's going to weaken the dollar.”
Both stress again, however, that so far this is a crisis created by policy, and one that can be solved with policy. Recession risks have risen but are not cut and dried.
The thing about a bear market, says Talib, is that it tires you out. Not immediately. Rather with the slow drip of relentlessly red-screen days, as prices fall and the regular dashing of hopes that, yes, maybe today is the turning point.
“I don’t think we are there yet.”
A new world
So where does that leave us?
“We do think this is a new paradigm for trade policy and US economic policy, but not necessarily a new paradigm for investing,” says Rosie, summing up the discussion.
“We are revisiting all our investment assumptions, but not necessarily changing our process. And we're trying to take advantage of tactical opportunities where they arrive. We were expecting a slowdown in major economies and now we find ourselves possibly teetering on the edge of a recession environment.
“Volatility is not going to go away any time soon.”
