Sell-off offers oppor­tu­ni­ties

Donald Trump’s announce­ment of import tariffs last Wednesday triggered a stock market crash on the global finan­cial markets, as uncer­tainty about the progress of the trade war and its economic damage is high. Follo­wing the sell-off, we see more upside oppor­tu­ni­ties than downside risks and recom­mend staying invested. In mixed portfo­lios, we recom­mend gradu­ally bringing the equity alloca­tion back to the strategic level by making additional purchases. We see buying oppor­tu­ni­ties parti­cu­larly in quality stocks in growth markets.

Panic mood on the finan­cial markets

In the last three trading days, the global capital markets have been hit by a major wave of selling. Global equities lost 13% in Swiss franc terms and are now trading 20% below their mid-February high. The losses were parti­cu­larly heavy in cycli­cally sensi­tive stocks and highly valued growth stocks. Market senti­ment has fallen to an extre­mely low level, which is reflected in record trading volumes and a sharp rise in the volati­lity index, among other things.

Source: Asset Management Tareno

What happened?

The basic tariffs of 10% and higher country-specific tariffs announced by the US Presi­dent on April 2 have exceeded the worst fears.

With the intro­duc­tion of these tariffs, the effec­tive tariff rate will rise from 2% last year to around 20%. At the time of Donald Trump’s election victory, experts were expec­ting tariffs in the region of 5%.

The prospect of high tariffs and a further escala­tion of the trade war has signi­fi­cantly increased the likeli­hood of a reces­sion in a short space of time. The finan­cial markets are now antici­pa­ting a slump in growth, as can be seen from the slump in commo­dity prices and the sharp rise in risk premiums on high-yield bonds.

Exagge­ra­tion?

We believe it is likely that the country-specific tariffs, which exceed the general tariff rate of 10%, will soon be weakened again. The pressure on the US govern­ment from the finan­cial markets, its own compa­nies, voters, politi­cians and the judiciary is growing by the day.

Against this backdrop, we believe there is a good chance that the economic damage can be limited. Accor­ding to estimates, a US tariff of 10% would impact US economic growth by around 0.5% and increase infla­tion by the same amount. Even if such a scenario appears somewhat optimi­stic from today’s perspec­tive, the current crisis does not neces­s­a­rily have to end in a deep reces­sion, even if it takes a less favorable course, especi­ally as the global economy is starting from a solid level of 2% US growth and 3% global economic growth.

If a deep reces­sion – as we assume – can be avoided, we see signi­fi­cant upside poten­tial for equities, not least in view of the low valua­tions in many places.

What to do?

The most important thing for investors after such market distor­tions is to remain calm. Those who sell after such events also miss out on the recovery and often the re-entry. In hindsight, sharp stock market correc­tions and pessi­mi­stic investor senti­ment often prove to be good buying oppor­tu­ni­ties.

The market correc­tion offers oppor­tu­ni­ties for long-term investors with suffi­cient liqui­dity and risk tolerance. In the knowledge that share prices may fall again, we recom­mend planning purchases in several stages.

Quality stocks in growth markets currently appear parti­cu­larly attrac­tive to us. In the long term, quality and growth are decisive criteria for success. In turbu­lent market phases, however, these criteria take a back seat as investors’ horizons become extre­mely short-term. Accor­dingly, growth and quality stocks have suffered above-average losses. We see the greatest oppor­tu­ni­ties in the health­care, finan­cial and techno­logy sectors.

Source: Asset Management Tareno

Publisher: Tareno AG, Garten­strasse 56, 4052 Basel, Tel. +41 61 282 28 00, info@​tareno.​ch, www.tareno.ch. We welcome feedback on our publi­ca­tion. This content is for infor­ma­tion purposes only. The publi­ca­tion does not contain any legal or invest­ment advice or invest­ment recom­men­da­tions and does not consti­tute an offer or solici­ta­tion to invest.