Article
Tariff pain relief but not the full cure
12 May 2025
Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.
The US-UK trade deal was far from "full and comprehensive" but its importance may be more what it symbolises: a willingness on the part of the US to row back from the reciprocal tariffs announced on 2 April 2025.
However, it did seem to set the 10% tariff as the new reference, which suggests there is no way back to the tariff situation that existed at the start of the year. As shown in the chart, a 10% uniform tariff could still damage the US economy (based on our estimates).
US stocks have underperformed so far this year (see chart) but the downside has been limited. Perhaps too limited given some of the tariff scenarios that are still possible (in my opinion). I am happy to remain underweight US stocks within my Model Asset Allocation.
Catch up on the last few editions:
FAQs
The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon.
We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important.
Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model.
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