Where to find shelter from market volatility

The incoming US administration has had a swift and dramatic impact on markets. Initially, it was thought that President Trump would galvanise the economy, and push markets higher. However, his capricious approach to the introduction of tariffs has set markets on a rollercoaster ride. For investors that would prefer a quieter life, where can they escape the highs and lows of US policymaking? 

Understanding the Trump factor

It is difficult to judge the impact of tariffs. In spite of Trump’s protestations, it is clear that tariffs are neither an unconditional win for the US, nor a definite loss for its trading partners. It depends on where tariffs are implemented, the extent to which they are absorbed by the company, or passed on to consumers. However, all companies that trade across borders are likely to be affected to a greater or lesser extent.

This may hint at one area investors can look at to sidestep the tariff problem – domestically-focused companies. These are companies that don’t need to trade across borders and that sell mostly in their home market. They tend to be smaller companies and, until recently, had been overlooked by investors who were far more interested in larger multi-nationals. 

Read more: How investors can navigate the trade-war chaos 

Nick Sheridan, manager on the Global Smaller Companies Trust, says: “If President Trump does put tariffs on goods globally, then we think that would be very good for 66% of our index, which is US small cap, where there will be a swap of economic growth from one particular area to another. We think that tariffs will accelerate reshoring.

“It is undoubtedly the case that global small-caps are materially underpriced relative to their large-cap brethren. And then if we look at the very top seven companies in the US, which have obviously driven markets, that discrepancy is even wider.”

It’s not just true for US small-caps. Nick points out that small-caps around the world tend to be more domestically-orientated and therefore less vulnerable to tariffs. At the same time, valuations have been very depressed as investors have focused their attention elsewhere. This may be an option for investors who would rather avoid the highs and lows of Trump’s unpredictable tariff regime. 

Adding more defensive equities

Investors haven’t felt much need to look at defensive names in recent years. Why worry about the complexities of the healthcare market when there is faster growth on offer from the US technology giants? Some defensive companies also fell foul of an increasing focus on environmental, social and governance considerations – defence companies were in this bucket. Consumer staples were considered a boring, low-growth option. 

Investors are now reconsidering the need for these types of companies in their portfolio. The MSCI USA Defensive Sectors index is up 7.2% for the year to date, compared with a rise of 1.4% for the MSCI USA index*. Areas such as healthcare and defence have performed relatively well in a difficult environment. 

This creates a better environment for funds such as the IFSL Evenlode Global Income fund, which has struggled in recent years against the headwind of a dominant technology sector. Manager Ben Peters says: “Over the last two years, AI, improved prospects for banks in the rising rate environment, and stellar sales of weight loss drugs have been dominant in moving the market. Over the last two months these themes have been joined by a recovery in Consumer Staples and a reawakening of Health Care as some of the resilience and, perhaps, valuation appeal in these sectors shows through. Geopolitically the outlook for defence spending in Europe and the US is a big theme, as are the prospects for oil and gas prices as the US administration works on domestic production and arresting conflict in Europe and the Middle East.” 

He says it is difficult to distinguish signal from noise in a ‘flood the zone’ era of policy blitzkrieg and he is doubling his focus and attention on corporate performance and valuations. He adds: “Healthy margins, cash flow and return on capital do a lot to protect companies from what might be more stormy seas.”

Consider alternatives

For a lot of the time, it can feel like diversification doesn’t matter very much. The outperformance of US technology has been so persistent that diversification into other sectors and markets has felt like an unnecessary indulgence. However, it is in environments like the one investors are experiencing at the moment that the real value of diversification comes to the fore. 

The performance of funds such as the SVS RM Defensive Capital fund can look pretty dull when stock markets are flying. The fund is up just 6.2% over the past year**. However, it has had a good track record of defending capital during periods of stock-market weakness. The performance of its eclectic blend of assets will bear little or no relationship to stock markets. 

The fund has three main areas of focus. It has a capital preservation and income sleeve (53% of its assets), which invests in areas such as convertible bonds, preference shares or corporate credit. These are typically ‘defined return’ investments, where the long-term payout is clear. The fund also has a capital growth sleeve (30% of its assets), which comprises speciality equity, such as private equity, emerging market equity, or biotechnology, plus discounted growth assets. The final sleeve is ‘diversifiers’ (15% of its assets). These are areas such as commodities, structured notes, hard assets (e.g. industrial equipment, aircraft, shipping) and lower correlation investments driven by idiosyncratic factors. With this blend, the fund should be able to stand apart from the turmoil in mainstream financial markets. 

It is difficult to escape President Trump’s influence on markets completely, but it is possible to sidestep the worst of the volatility he creates. Looking to domestic companies, defensive names, or uncorrelated assets can be options to defend your portfolio through the rollercoaster ride of the next four years. 

*Source: index factsheet, 28 February 2025

**Source: fund factsheet, 31 January 2025