The first year of the second Trump era promises to be one of both turbulence and opportunity. The stock markets rallied at news of the former president’s re-election, hoping for a slate of tax cuts and pro-business deregulation that will have global ripples. Plans for new tariffs may soon dampen this enthusiasm, though – especially in Europe and Asia.
The new administration will also seek a quick settlement to the conflicts in Ukraine and Gaza, though the outcomes of negotiations like these are of course very hard to predict, much less price in. And despite Trump’s victory, the anti-ESG backlash of the previous two years is now expected to ebb, with appetite for sustainable investing set to increase in 2025. s
One-size fits all approach no longer viable
Navigating both the opportunities and the pitfalls of this new era will demand prudence and dexterity from financial advisers if they are to help their clients to effectively cope with this new market backdrop. The traditional approach in the financial advisory sector towards risk, which has been heavily driven by regulators, has been a very generalised “one-size fits all” policy.
However, the past five years of continual market volatility have highlighted the flaws in what was a commonly accepted approach across the market. What we now know, is that optimal portfolio construction requires components which are truly uncorrelated. In practice, this means both a reconfiguration of portfolios as well as a change in attitude – shifting from more restrained investment strategies to those that ape the approach of hedge funds to dynamically respond to rapidly changing conditions.
Nex year will be marked by uncertainty, but financial advisors can still plan for the headline changes that the second Trump era is likely to bring. For instance, the dollar is likely to strengthen off the back of good US economic performance and an improving balance of payments due to new tariffs. This should prompt something of a rebalancing in favour of US-domiciled assets, which will soon benefit from a more favourable exchange rate when selling in local currencies. By the same token, assets denominated in currencies that will weaken relative to the USD will be ripe for some opportunistic acquisitions by US-based investors.
Financial advisers can also take action to mitigate the effects of new tariffs on their clients’ portfolios. The vast majority of these levies are expected to fall on advanced manufacturing and other durable goods – with the export of services less affected. Shifting allocations towards assets that will be less exposed to these tariffs would be a prudent step. For instance, much of Wall Street expects a banner year for UK stocks as the British economy is more reliant on services than its European counterparts.
Inflationary tariffs are also likely to increase yields on US Treasuries. In advance of this, financial advisors should consider short-dated gilts and Treasury Inflation Proof Securities (TIPS) to avoid getting locked into lower rates. If President Trump’s inflation-busting measures prove effective in spite of the tariffs and yields do not rise much further, then these instruments have the added benefit of allowing advisors to quickly reallocate capital elsewhere.
Search for true diversification
heading into 2025 there are signs that traditional approaches no longer giving clients enough downside protection for clients. Listed equities have underperformed in recent years relative to the private market, which has expanded precipitously since the crash of 2008. According to a recent study by Cambridge Associates’ U.S. Private Equity Index, private equity has had an annual return of 14.6%, compared to 6% in the S&P 500 over the same period.
Building a portfolio that is truly de-correlated from the market increasingly means allocating more to alternatives. Assets found on the private market are, generally speaking, much less affected by market conditions than other types of assets. Other alternatives like gold rise in value during periods of inflation and geopolitical uncertainty. Gold prices fell after Trump’s victory in anticipation of inflation-busting measures, but it remains an excellent hedge against adverse market conditions.
Real financial resilience in 2025, then, will mean integrating a large and diverse set of de-correlated assets into portfolios. This, rather than the traditional safe harbours, is the best way for financial advisers to shield their clients’ capital and grow their wealth amidst volatile market conditions.
Diverse and decorrelated approach is best
Aside from portfolio allocations, 2025 will also require a change in approach among financial advisers. Conditions are likely to change very quickly throughout the year. One can easily see, for example, how inflation from tariffs might soon give way to de-inflation from the Trump administration’s inflation-beating policies – or vice versa. The best financial advisers will be able to respond in kind.
This is why many financial advisory firms such as Coleman Wealth are now integrating hedge fund strategies into portfolios – either through direct allocation towards hedge funds, or by adopting these methods themselves. Long/short equity strategies that mimic hedge funds, for example, are one way that financial advisers can respond dynamically to changes in policy and their second order effects; along with wider events in Ukraine, Gaza, and the Indo-Pacific.
Coleman Wealth’s approach involves overlaying a core portfolio of treasury bonds and high-grade corporate bonds with advanced strategies from investment banks that offer the clients a variable level of protection, diversification, and non-correlation, at times when the equity markets are dovish or bearish, while continuing to capture attractive risk-adjusted returns through some performance front-running global equity funds. This offers the prospect of above market performance through well-chosen equities and significant downside protection through non-correlated diversifiers and core protection
A diverse and de-correlated portfolio that can reallocate quickly is the best way to give clients downside protection and upside potential in this era of profound turbulence. The next few years will be one of challenges as well as opportunities; it is only fitting, then, that the traditional ‘one size fits all’ approach of static investment should now give way to a more dynamic and diversified approach.
By Ronan Kearney, Co-founder of Altium Investment Management
