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.

Source: Asset Management Tareno

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.