Adriaan Pask | Chief Investment Officer | PSG Wealth | mail me |
Markets are unpredictable, and 2025 has started with extreme volatility. Aggressive tariffs and abrupt national announcements have forced investors to navigate constant surprises.
These events have increased uncertainty and volatility across financial markets. However, uncertainty can create opportunities for active managers with a long-term investment horizon.
Market surprises are not anomalies but part of the investment landscape. Recent geopolitical and economic shifts have reinforced this reality.
The impact of Trump’s tariffs
The latest tariffs imposed by US President Donald Trump exemplify this trend. The immediate impact appears simple: higher import costs drive inflation. While this is theoretically correct, the reality is more complex.
Businesses paying higher taxes on imports may struggle to maintain import volumes. This can cause supply chain bottlenecks. Consequently, importers may seek alternative suppliers, shifting trade patterns. At the same time, consumers, facing higher prices, may also seek substitutes.
This shift could enable more manufacturers to compete at similar price points. As a result, previously dominant suppliers may lose their advantage. Meanwhile, retaliatory tariffs from affected nations add another layer of uncertainty.
Navigating policy uncertainty – GNU’s budget delay
Investors must consider whether negotiations will follow. Almost certainly, they will. The situation remains highly dynamic and requires close monitoring. Careful portfolio adjustments may be necessary.
Similarly, unexpected government policies, such as the recent budget delay, can trigger sharp market reactions. Last-minute delays weaken credibility, particularly for the finance minister.
A strong reputation is crucial for foreign direct investment. Control and stability are essential, but some reputational damage has already occurred. However, the delay also signals that the Government of National Unity (GNU) is functioning as intended. In the broader context, this could prove positive for markets.
Market shocks often produce unpredictable second- and third-order effects. Therefore, diversification is essential. When tariffs disrupt trade, some sectors suffer while others benefit. A diversified portfolio spreads risk, reducing the likelihood of extreme losses.
Managing market volatility ensures long-term stability
Economic cycles are generally shorter than typical investment horizons. Recessions and economic contractions are part of natural business cycles. However, these downturns are temporary.
Trade wars, political uncertainty and market downturns do not last forever. Focusing on fundamentals remains crucial during market volatility. Businesses with strong cash reserves and high operating margins are best positioned to endure economic shocks.
Short-term volatility creates pressure, but strong companies tend to prevail over time. Adjusting a portfolio after market surprises can be challenging. The decision depends on investment mandates and time horizons.
Conservative portfolios with short-term mandates, such as three years, may require active adjustments. However, long-term investors can afford patience. They can allow their portfolios to withstand turbulence.
One key strategy to managing market volatility is prioritising assets resilient to macroeconomic disruptions. If two stocks have strong fundamentals and attractive valuations, sector exposure matters. A manufacturing stock faces trade pressures. In contrast, a service-oriented or intellectual property-driven company may be more resilient.
Identifying opportunities in mispriced markets
Market participants often misprice risks in uncertain environments. This creates opportunities where stocks become overly discounted, benefiting long-term investors. The challenge lies in balancing short-term caution with a long-term outlook.
When managing market volatility, protective strategies help mitigate downside risks without sacrificing long-term gains. For instance, a stock with strong value may face volatility due to tariff exposure. Adding protection can limit short-term risks while preserving long-term upside.
Passive investing offers cost advantages but introduces risks in volatile markets. A “wait-and-see” approach carries an opportunity cost. Investors may become vulnerable to market swings and reactive decision-making.
Managing market volatility through agility
Uncertainty drives market fluctuations. Even large companies can experience 10% daily swings. Managing market volatility actively is about responding dynamically to these movements. Tracking fluctuations in real-time allows investors to seize emerging opportunities.
Agility is crucial in volatile markets. Active management ensures strategic responses to market shifts rather than reactive decision-making. This approach is essential in the current environment.