The global investment landscape has taken a sharp and unexpected turn following the recent announcement of sweeping U.S. tariffs—changes that were both faster and more extensive than markets anticipated. As of 7 April 2025, we’re facing the largest tariff regime since before World War I, with wide-reaching implications for inflation, economic growth, and financial markets. For advisers and clients invested in managed accounts, it’s a moment to pause, recalibrate, and reaffirm the principles of disciplined portfolio construction.

What just happened?

The newly imposed U.S. tariff structure marks a dramatic shift in global trade policy. The average tariff rate has jumped from 2.5% to over 22%, largely targeting Chinese imports. A simple example tells the story: A washing machine that once landed in US ports at $100 now lands at $154 due to a 54% tariff. While the policy aims to make local manufacturing more competitive and reduce trade deficits, the immediate effect is akin to a tax hike on consumers and businesses.

This is not a theoretical impact. It’s a $700 billion tax shock, equivalent to roughly 2.6% of U.S. household income. Inflation is the first casualty, with core inflation expected to rise from 2.2% to above 4%, well beyond the U.S. Federal Reserve’s 2% target. Growth projections are equally sobering: U.S. GDP could lose up to 1.5 percentage points, potentially dragging growth close to zero and flirting with recession.

How we’re positioning portfolios

At Zenith, we remain committed to proactive and diversified asset allocation. Our approach is informed by fundamental analysis and risk assessment, and our portfolios are structured to navigate periods of uncertainty and dislocation.
Here's how our portfolios are currently positioned:

  • Bonds: Over the past 18 months, we've gradually increased our exposure to bonds. We’re now closer to a neutral allocation and importantly, bonds are once again offering genuine diversification benefits amid heightened volatility.
  • Alternatives: Managed futures have helped cushion the impact of falling share markets. While not necessarily positive year-to-date, they’ve avoided the steepest declines and continue to serve as a defensive anchor.
  • Global Listed Infrastructure & Property: Infrastructure, with its relatively low share market sensitivity, has delivered positive returns year-to-date. Meanwhile, global property—recently lifted within our portfolios—has outperformed broad share markets, even as they posted modest declines.
  • Currency exposure: The depreciation of the Australian dollar—especially after holding up for much of the year—has provided a helpful offset to losses in global shares, reinforcing the value of maintaining FX exposure in international holdings.
  • Active management: Many of our underlying active managers have taken a more cautious stance, with some raising cash levels to buffer against market shocks and exploit future opportunities.

Assessing the road ahead

Markets are currently pricing in a 50-60% probability of a U.S. recession. In a more optimistic scenario—where recession odds fall to 20-25%—the S&P 500 could rebound toward 5,700, but this would require a catalyst such as a signal from the US Fed that rates were about to be cut or a rollback of tariff hikes—neither of which appear imminent.

On the downside, historical averages suggest that share markets could fall another 10% in a typical recession scenario. That would take the S&P 500 down to around 4,600. Credit markets are key indicators here. So far, spreads have widened but are not yet at crisis levels. Should they deteriorate further, we expect the Fed to respond—either through rate cuts or through targeted credit market interventions.

Key unknowns & watchpoints

We're closely monitoring several uncertainties that could shape the investment landscape in the months ahead:

  • Policy clarity: Negotiations behind closed doors may result in tariff exemptions or adjustments. Retaliatory tariffs from China and Europe are also in play.
  • Capex & corporate behaviour: Will companies ramp up U.S-based investment to sidestep tariffs? Could prolonged uncertainty stall hiring and capital expenditure?
  • Inflation vs. Margins: The extent to which tariffs are passed onto consumers versus absorbed by corporate margins will influence share market performance and central bank responses.
  • Central Banks: For the RBA, the backdrop is shifting. Monthly inflation data is encouraging, with core inflation appearing to drop below 3%. While the market is pricing aggressive cuts to below 3%, our view is more measured—but we do see rate cuts on the horizon.

Diversification doing its job

In times of crisis, correlations can spike and traditional diversification can break down. However, in the current environment, our multi-asset portfolios continue to find ballast through bonds, FX exposure, alternatives, and select real assets.

For Australian investors, the depreciation of the Aussie dollar—often 10-15% during major global drawdowns—serves as another line of defence. Historically, this currency effect has supported portfolios during market corrections, and we see this dynamic at work once again.

Staying the course with active oversight

Our base case remains a soft landing, albeit one now under pressure from evolving trade dynamics and rising inflationary headwinds. While soft data—like consumer sentiment and inventory pressure—are flashing amber, hard economic data continues to suggest resilience. That said, vigilance is essential.

At Zenith, our portfolios are actively managed and under constant review. We’re prepared to act swiftly as the situation unfolds—whether to manage risks, undertake rebalancing back to strategic targets or take advantage of tactical opportunities. As always, diversification, discipline, and dynamic asset allocation remain our guiding principles.

Conclusion: Calm in the storm

Markets are navigating a period of elevated uncertainty, driven by policy surprises and macro cross-currents. For advisers, these moments underscore the value of partnering with an experienced asset allocation team and offering portfolios designed to weather volatility.