Jupiter Merlin team react to tariffs and market volatility

The so-called ‘Reciprocal Tariffs’ announced by Donald Trump, President of the United States of America, on Wednesday 2^nd April after US equity markets had closed has sent shock waves through financial markets.  It is said that markets detest one thing more than anything else, that being uncertainty.  Although some form of tariff was expected on ‘Liberation Day’ those enacted seem to only have increased the uncertainty about the future and how the plumbing of our globalised economy will operate in this new world.

What is being enacted?

Looking at the basics behind what has been announced, they may be tariffs but they are in no way reciprocal.  When the world was expecting thorough analysis of trading restriction on an item-by-item basis, country-by-country, it got neither.  Instead, what was announced were measures to deal with the US trade imbalance.  The blanket measures take the US’s trade deficit with each country, divides that by the total value of their imports from said country, then halves it.  This essentially produces a tariff rate which, on an all-else equal basis, assuming trade carries on as before, will see the US receive tariff payments which would neutralise the trade deficit. 

However of course all is not equal and these measures could dramatically change the flow of traded goods.  Furthermore, countries where no trade deficit exists, such as the UK, are being hit with a 10% tariff regardless, reciprocal of nothing in particular.  The one thing that Donald Trump was totally clear about was that there would be no tariffs on US manufactured goods, looking to encourage businesses around the world to relocate manufacturing facilities to America.  Many companies had already promised to do so, but changes like this to the global industrial complex do not happen overnight.  There remain question marks for global companies on whether these tariffs will remain in place under any new US administration, calling into question whether they should bite the bullet and build facilities in the US or opt to wait out the trade headwinds on the view that they will be rolled back in due course.

How enduring will they be?

This is really the million (shall we say trillion?) dollar question.  Viewing himself as the arch negotiator, one can take the view that this is all a means for Trump to gain the upper hand in trade negotiations, indeed, Treasury Secretary Scott Bessent over the weekend was quoted as saying that Trump had, “created maximum leverage for himself”.  It certainly appears that countries around the world are lining up to negotiate trade deals with the US and if any of these start filtering through then this will likely be viewed very positively by markets. 

Having said that, there are likely more specific tariffs still to come on individual products which Donald Trump would like to protect so we are a long way from the end point.  Whether some countries decide to take a more combative approach remains to be seen, but Trump has tended to respond poorly to aggressive tactics from counterparties.  The one country which has so far significantly riled Trump with their response has been China which has met these tariffs with further tariffs of their own, to which Trump has levied a further 50% tariff in response.  If these measures are not retraced they could result in the major cessation of trade between the world’s two largest economies and risks further measures and spillover effects to surrounding nations.  China may look to divert goods through lower tariff nations, but the US is alive to this risk so expect any trade negotiations to include measures to address this.

Economic impact

The increased uncertainty and implications these tariffs could have on trade flows, company earnings and other macro-economic variables are not to be underestimated.  Typically, tariffs raise prices in the country where they are enacted as importers of good pass on at least a portion of the tariff cost in the prices of their goods, increasing costs and inflation for US domestic consumers.  The friction this creates to trade increases business costs and the higher costs impede consumer spending, dampening growth while inflation runs hotter than it would otherwise be, pushing the US closer to a ‘stagflationary’ scenario (where economic growth stagnates, but inflation is high) which tends to be negative for most asset classes.  A recession may follow if growth is impeded to such an extent that the economy contracts.  This however is not just a US issue, America is a major export market for many countries around the globe, as the largest consumer market in the world, so greater trade frictions will dampen growth globally.  The US has also been the major source of economic growth across the developed world so anything which dampens their growth will hit economies the world over. 

Market response

Thursday 3^rd April and Friday 4^th April saw markets start to try to price the probabilities of the multiple potential futures that these tariffs present, with many just selling and asking questions later.  This resulted in meaningful falls in equity and commodity markets around the globe.  This was followed up by falls across Asian markets on Monday 7^th, which rolled into European markets and were reflected early on in US markets, but the US bellwether index, the S&P 500, finished the day down less than a quarter of a percent.  Somewhat surprisingly the US Dollar sold off versus global currencies in the wake of the tariff news.  Traditionally, countries applying tariffs tend to see their currencies appreciate which helps absorb some of the tariff cost, but the concentration of global capital in US markets may have undercut this dynamic.   Within bond markets we have also had quite a wild ride, with ‘safe haven’ government bond¹ yields² falling (which means their prices rising) but then the reverse happening this week as markets potentially start focussing on the risk of higher inflation.  Clearly the situation is dynamic and fast moving and staying abreast of developments is crucial.

Jupiter Merlin Portfolios

We have made no changes to the positioning of the Jupiter Merlin Portfolios in response to the news and volatility which we have seen across markets over the last week.  As detailed above, there is much that could change from here and many opportunities to make changes which in hindsight may transpire to be poorly timed or ill advised.  The Merlin Portfolios hold many assets which have held up relatively well during the selloff in risk assets, but also holds other assets which have been more exposed to the drawdowns.  All of the portfolios also hold gold which is arguably the asset which has best stood the test of time.  In fast moving markets, such as those we have recently experienced, it is also worth mentioning that when the Jupiter Merlin Portfolios price each day they incorporate the pricing movement of the underlying holdings that day, whereas many peers incorporate data from the previous day. This means that at times the performance of the Portfolios will look sometimes better, and at times worse, on individual days than the reality compared to our peers.

Being wholly invested in actively managed strategies allows our underlying managers to continually assess and reposition their portfolios during volatility such as that we have experienced, taking advantage of prices which they believe have fallen too far and also upgrade the calibre of company in their portfolios where indiscriminate selling has taken place. Furthermore, during times of heightened uncertainty, we take a great deal of solace from the character of the managers who populate the Jupiter Merlin strategies and are pleased to have a bias towards quality companies, with relatively low leverage and enduring franchises which have tended to endure challenging times in the past.

We in the Jupiter Merlin team continually monitor the changing backdrop to identify opportunities to either enhance returns or improve the resilience of the portfolios and stand ready to make changes as appropriate.  The portfolios are constructed and managed for long-term investment and we see no reason why they should not be able to do so in the future.  We have been through a period of somewhat indiscriminate selling across markets and a great deal of uncertainty still lies ahead.  In that environment, being invested in well diversified portfolios of talented active managers who have the potential to make astute and timely portfolio changes we believe is the most prudent approach.

Sources

¹Government bonds are issued by governments.  Bonds are a type of fixed interest investment, in which a company, government or other institution borrows money and, in most cases, pays a fixed level of interest until the date when the loan is due to be repaid. 

²Yield is the rate of interest or income on an investment, usually expressed as a percentage.

Fund specific risks

For a more detailed explanation of risk factors, please refer to the “Risk Factors” section of the Scheme Particulars.

All of the Jupiter Merlin portfolios carry the following fund risks:

• Currency (FX) Risk - The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
• Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
• Derivative risk - the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund.
• Counterparty Risk - the risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the Fund’s assets.

Additionally, Jupiter Merlin Conservative Select, Jupiter Merlin Monthly Income Select, Jupiter Merlin Moderate Select, Jupiter Merlin Income Portfolio, Jupiter Merlin Balanced Portfolio and Jupiter Merlin Income & Growth Select have the following fund risk:

• Interest Rate Risk - The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates e.g. the value of a bond tends to decrease when interest rates rise.
• Credit Risk - The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.

Furthermore, Jupiter Merlin Conservative Select, Jupiter Merlin Monthly Income Select, Jupiter Merlin Income Portfolio, Jupiter Merlin Balanced Portfolio and Jupiter Merlin Income & Growth Select have the following fund risk:

• Charges from capital - Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.