Bridgewater Associates co-chief investment officer Karen Karniol-Tambour warned that many investors have built up significant vulnerabilities in their portfolios over the past 15 years, which is a period defined by steady growth and US market exceptionalism.
However, the Liberation Day tariffs and resulting market action exemplified how the world is shifting to a new economic paradigm that is much less favourable for traditional portfolios, and investors who fail to address these vulnerabilities face significant risks.
The shift is caused by what Bridgewater calls a pivot to “modern mercantilism” where countries treat the accumulation of national wealth, pursuit of geopolitical strength and economic self-sufficiency as priorities.
“This shift is a very direct threat to what a lot of people hold,” Karniol-Tambour told the Top1000funds.com Fiduciary Investors Symposium at Harvard University.
Specifically, a lot of portfolios aren’t well-equipped to handle weak growth, tightening liquidity from the Federal Reserve, an equity bear market or US stocks underperforming the rest of the world.
While these vulnerabilities existed 15 years ago, investors are a lot more sensitive to them now, with huge US concentration in their portfolios and coming out of a strong equities bull market run. “Naturally, people invest with market cap and so whatever the winners are, you end up holding more and more of them,” Karniol-Tambour said.
“But the environment we’re in today very directly goes at these vulnerabilities and puts them in the limelight for us to stare at and think, how resilient am I to these vulnerabilities going forward?”
US companies are more exposed to risks created by the Trump administration’s volatile trade policies than the direct impact of tariffs would suggest, and the fact that a lot of US corporates are global companies makes them “uniquely vulnerable” in many ways, she said.
“We’re seeing countries get very sophisticated about how to target US companies specifically; how to specifically deal with their market access; how to specifically reduce buying US goods; and how to go after antitrust against these companies.”
This is combined with the fact that negative impacts tend to be more outsized on US equity market earnings compared to positive impacts. According to Bridgewater’s modelling, US-imposed tariffs and retaliation from other countries are likely to be a downward pressure on US earnings that won’t be offset by reshoring and a lower corporate tax.
The beginning of the second Trump administration has also caused the unravelling of the US’ relationships with allies and prompted them to quickly reassess their reliance and investment exposure to the world’s largest economy.
“I think it is somewhat underappreciated by policymakers, at least, how much the flip side of the trade deficit is – of course, the fact that so much capital is coming into the United States,” Karniol-Tambour said.
With the dependence of US dollar and assets on foreign inflows, even just a slowdown in foreign purchases could turn into huge risks to US market performance and currency.
“We’re starting at a point where 80 cents, 90 cents on the dollar that cross any border around the world are coming into the United States, just because of the high market cap and liquidity,” she said.
“All it takes is some reassessment [of US allocation]… to get US underperformance, to get a dollar issue.
“I think we’re in the early stages of that, given how long it takes for governments to shift, for places to reassess and for that money to actually move.”
For asset owners who are looking to address their portfolio vulnerabilities, now is the time to consider the toolkit available. For one, Karniol-Tambour said investors need to “treat the geographical diversification question as urgent”, looking at places like Asia.
“You could take out China with all of its own geopolitical and governance issues, and still say that there’s a lot of places around the world that look a lot less like the United States, and have a lot more of their own drum beating to determine what will happen there, where investors are radically under allocated,” she said.
Other measures worth considering include revisiting the currency hedging position, focusing on maintaining liquidity, and building a portfolio resilient to different economic scenarios.
“The biggest takeaway I have from just the broad shift we’re in in the world, is that when things change, almost inevitably everyone is set up to the world that used to be,” she said.
“And people set up more nimbly, able to take advantage of the world as it is and the changes in it, end up doing better when the world looks different than it used to.”
