Opportunities amid trade truce uncertainty

By Raj Singh
Portfolio Manager, Multi-Asset

The recent developments on trade front especially tariff truce between US and China marks a significant, albeit temporary, de-escalation in trade tensions, reducing recession risks and stabilizing near-term investor sentiment. This development has recently boosted risk assets as recession fears ease, leading to surges in both U.S. and Asian markets. The positive news is also lifting European markets, while U.S. Treasury yields have risen as investors shift away from safe-haven assets.

However, this truce offers relief rather than a resolution, and policy uncertainty is likely to continue causing volatility. While peak pessimism regarding trade policy may have passed, the path beyond the 90-day window remains unclear. Business investment and hiring decisions may remain cautious due to ongoing uncertainty, and elevated tariffs will continue to pressure margins and consumer prices.

With tariffs still high compared to earlier this year, an inflationary impulse may emerge in late Q2. This impact might be mitigated quickly—especially for core goods prices—if container traffic resumes promptly following the reduction in U.S.-China tariffs. As a result, a clear understanding of the inflation trend may take months to develop which will keep Federal Reserve on pause.

Another key takeaway for investors is that while the Trump administration aimed to restructure the global trading system, it did not intend to implement a de facto trade embargo that led to a wholesale decoupling between the U.S. and China. This implies that the worst-case scenario has been avoided, and provided the economic scars from the past two months are not too deep, the U.S. economy should not face a recession this year. A critical question remains: Will discussions around ending U.S. exceptionalism cease? If the U.S. is not seeking to redraw trade lines at the expense of near-term economic strength, renewed confidence as an investment destination may emerge.

For China, without rerouting goods through other economies, the impact on China’s economic growth would have been severe. However, lower tariffs are expected to lessen this impact. China is likely to increase exports to the U.S. over the next 90 days to capitalize on this reprieve, reducing pressure on policymakers to provide further stimulus.

As the policy path ahead remains highly uncertain, the long-term implications for global trade and portfolio positioning are unsettled.

As global economies work to strengthen their foundations, the importance of diversification grows. We continue to believe U.S. large-cap tech holds value, being resilient and well-positioned for long-term success, despite short-term regulatory risks and reduced AI spending. India's demographic story remains intact, offering significant potential for growth. The Chinese government is working to attract long-term capital, with domestic savings expected to re-enter the markets, particularly in tech and high-dividend sectors. Both US large cap tech and Indian equities are expected to perform well over the next 5–10 years but avoiding concentration risks in geographies or sectors is wise.

Within fixed income, spread widening in investment-grade and high-yield bonds presents attractive entry points for adding income in the portfolio. The recent rating downgrade of the U.S. credit rating by Moody from Aaa (negative) to Aa1(stable) moved longer dated US Treasuries and other major economies govt bond yields higher bringing debt sustainability concerns to market focus. However, the rating action by Moody’s was largely expected and similar rating events in the past had little impact on the U.S. Treasury yields beyond short-term volatility. With higher term premiums on long-term bonds, adding some duration in portfolios may be beneficial to hedge against potential economic slowdown.

It is crucial for investors to stay invested. Timing the market and policy announcements is nearly impossible and risks missing significant opportunities. Volatility is a normal part of investing and often presents opportunities for long term investors.