Building a resilience portfolio in times of uncertainty

By Raj Singh
Portfolio Manager, Multi-Asset

Over recent months, markets have fluctuated between fear and optimism. Tariff noise is likely to persist over the coming months while escalation in geopolitical tensions in the Middle East added to the uncertainty. Trade tensions have undoubtedly taken a toll. Escalating tariff uncertainty has delayed corporate investment, frozen hiring plans, and weighed on both business and consumer sentiment. And yet, despite this, the U.S. economy has so far avoided recession, supported by the continued resilience of household and corporate balance sheets as well as the lingering momentum from a strong first quarter.

Moreover, two growth-friendly policy measures may help mitigate trade-related headwinds. First, renewed deregulation in the energy and financial sectors could stimulate economic growth. Second, modest fiscal expansion may also be on the table. Together, these measures could help offset the negative impacts of tariffs.

However, ongoing trade uncertainty poses risks for monetary policy, especially as inflation runs above target and is expected to rise further due to tariffs. At its June meeting, the FOMC decided to keep its benchmark policy rate unchanged as expected. Some analysts have argued that the Fed should re-start rate cuts immediately. However, the current environment of persistent uncertainty is ripe ground for a policy misstep keeping FED in “wait and see” mode.

Looking ahead, volatility is likely to persist amid unresolved decisions from the U.S. administration and a Federal Reserve waiting to get clarity from data before cutting rates. For investors, it may create both uncertainty and opportunity.

Equity markets have almost entirely recoupled their losses from earlier in the year with US equities markets hovering near historical highs, although the recovery seems at odds with the lingering policy uncertainty. Indeed, with the effects of earlier tariff uncertainty likely to begin manifesting in economic and inflation data over the coming month, volatility may increase as these tensions play out. However as with any shock, there are winners and losers, along with sector and industry bifurcation.

Investors can focus on equities with pricing power, strong margins, and strong balance sheets, especially in sectors benefiting from deregulation or insulated from trade frictions. Large-cap firms are generally less vulnerable, thanks to their diversified supply chains and ability to manage inventory swings while the structural AI theme and solid fundamentals should keep supporting U.S. Large Cap Technology. At the same time, Financials may benefit from a domestic focus, as well as potential upside stemming from market volatility.

Recent fiscal concerns and improved growth forecasts have put upward pressure on term-premium, pushing long-term U.S. Treasury bond yields higher. By contrast, the slowing economy and the prospect of Fed rate cuts later in 2025 should maintain downward pressure on short-term Treasury yields. Against this backdrop short duration credit can provide income and stability while investors wait for more clarity on the U.S. spending and U.S. treasury’s updated issuance plans.

Another notable shift in markets has been the sharp decline in the U.S. dollar, which has defied both interest rate differentials and the traditional rush for safe havens, making real assets such as Gold as good portfolio diversifier during heightened volatility.

While there is cyclical risk associated with the U.S., the structural investment case—which has driven outperformance in recent years—remains compelling. The long-term drivers—technology leadership, innovation, deregulation, and productivity—are still in play making. However, global diversification is crucial to hedge against dollar weakness and access growth opportunities outside the U.S. including select EM countries such as India, Taiwan, Korea and China which will benefit from supportive domestic policy mix and AI related tailwind.