The sweeping tariffs unveiled by president Donald Trump on 2 April 2025, dubbed ‘Liberation Day’ by the administration, have significantly impacted financial markets, seemingly disrupting decades of economic norms, at least in the short term. We discuss the details and initial market reaction elsewhere in this magazine and it’s only natural as an investor to be somewhat shaken by these developments.

However, the best advice is not to overreact to short-term volatility in stocks and shares. It is very hard to time the markets and therefore you should avoid making major changes and stick with your long-term plan.

Doing as little as possible doesn’t mean doing nothing entirely. Consider running a health check on your portfolio. It may be a good time to sell any more speculative investments as sentiment towards them might not improve in the near term.

Cash generated from these sales could be used to buy quality shares affected by the sell-off. We plan to explore some of these opportunities in an upcoming issue of Shares.

Think carefully about diversification in your portfolio and consider broadening your horizons to other asset classes if you haven’t already. In the remainder of this article, we examine some options for those looking to dial down risk and an examination of the sectors which have demonstrated resilience during previous corrections.

IN SEARCH OF RESILIENCE

Some years ago, we ran an exercise using the FTSE 350 stock universe to see which sectors fell the least during market sell-offs and which gained the most in the subsequent bounce-backs.

The aim was to see which sectors, if any, fulfilled both criteria, that is protecting your wealth by falling less than the index on downswings and compounding your gains by going up more during upswings.

This was in December 2019, just before the pandemic, and we discovered there were two sectors which stood out – beverages and software and computer services.

During sell-offs, beverages only suffered on average around 40% of the downside experienced by the index, but during rebounds they gained roughly 25% more meaning they had an upside to downside ‘capture ratio’ of more than three times.

Software and computer services stocks on average suffered around 50% of the index’s loss, but when the market rebounded they overshot, gaining 60% more than the index, giving them a ‘capture ratio’ of around three times.

No other sectors came close – classic defensives such as food producers, utilities, general insurers and fixed-line telecoms protected you during sell-offs, losing between 25% to 40% of the losses inflicted on the index, but they lagged badly during rebounds.

Conversely, the sectors which performed best during rebounds – metals and mining, industrial engineering, electronic equipment and IT hardware – were some of the worst performers in the sell-offs.

Since 2019, the FTSE 350 has suffered three more significant setbacks – during the pandemic in 2020, following the invasion of Ukraine in 2022 and when inflation began to soar in 2023, so we have also looked at those three periods.

In a sense, we are looking at a clear ‘before’ and ‘after’ situation, as the sectors which gave you some degree of protection during sell-offs up to 2019 haven’t worked nearly as well since 2020.

Beverages, for instance, performed poorly during lockdown due to the closure of pubs and hospitality venues, and today consumption is falling plus they are in the firing line in terms of US tariffs and health legislation, so they aren’t likely to provide any protection.

Software and computer services were a mixed picture, losing less than the index in 2020 but falling by the same extent in 2022, and in 2023 the world was in the grip of artificial intelligence, so they streaked ahead even while the market was falling.

Intriguingly, there was one sector which went up each time the index sold off – consumer services, which comprises asset-light companies such as Auto Trader (AUTO), Mony (MONY) and Trustpilot (TRST).

Another sector which did a good job of protecting your wealth was personal care and drug providers, which curiously includes Sainsbury (SBRY) and Tesco (TSCO) alongside Reckitt Benckiser (RKT) and Unilever (ULVR). [IC]

DIALLING DOWN RISK WITH BONDS

With so many uncertainties facing investors it is easy to forget that for the first time in nearly two decades, high-quality, low-risk government and corporate bonds may offer more income and capital appreciation potential than stocks or cash.

For example, two-year US treasuries yield around 3.8% and 10-year treasuries yield 4.2%. In the UK the equivalent rates are 4% and 4.6%, reflecting higher inflation expectations.

In other words, the opportunity to dial down risk while still earning a decent income has rarely been as easy. You might think well that sounds good, but what if rising tariffs pushed up inflation and consequently interest rates?

Let’s do the maths to find out. We use the US Bloomberg Aggregate Bond index to demonstrate the effects because it is a very diversified index of investment grade government and corporate bonds.

The duration of the US Bloomberg Aggregate Bond index is around six years which means, if interest rates were to go up 1% tomorrow, the price of the index would fall by roughly 6%. Duration is a measure of interest rate sensitivity.

Even if that unlikely scenario were to happen, the fall in price would be clawed back by the annual 4% coupon in around one and a half years, while holding the bonds to maturity means no capital loss is realised.

What this tells us is that bond yields are currently providing a lot more protection against rising interest rates than they did before the pandemic. It also demonstrates that, like any investment, the starting price is important.

Bond fund manager Michael Plage at Fidelity reminds investors: ‘The all-important starting yields are higher than they’ve been for a long time and the Federal Reserve is reducing interest rates. That’s the combination I’ve been waiting for.’

The flip side of the rising inflation scenario is economic slowdown or even recession, prompted by an all-out global trade war.

Under this scenario, bonds can provide good protection as investors traditionally flock to bonds, sending their prices higher (yields fall). This is not a guaranteed feature of owning bonds as we saw in 2022, when bonds fell more than stocks, but this time around central banks are likely to be reducing official interest rates, rather than increasing them as they were in 2022.

Despite the macroeconomic uncertainty, Plage believes the Fed should be able to lower rates to 3.75% by the end of 2025.

‘With the Fed now cutting rates, the big headwind of uncertainty that previously hung over the bond market should now be a modest tailwind over the next 12 months,’ explains Plage.

Under this scenario, bonds may offer better returns than cash as official rates are reduced, removing the attraction of money market funds.

Getting exposure to bonds through an ETF which tracks one of the global or regional benchmark indices is easy and relatively cheap.

For global exposure the Vanguard Global Aggregate Bond GBP ETF (VAGS) tracks the Bloomberg Global Aggregate Float Adjusted index for 0.1% a year.

For US exposure there is the iShares Core Global Aggregate Bond USD ETF (AGGU) which invests in more than 17,000 investment grade US bonds for 0.1% a year.

For the UK, the Amundi UK Government Bond ETF (GILS) seeks to track the FTSE Actuaries UK Conventional Gilts All Stocks index for an annual cost of 0.05% a year. [MG]

CAPITAL PRESERVATION FUNDS

Another way to dial down risk and add more defensiveness while remaining invested is to consider capital preservation funds. The general principle behind these funds is that they aim to protect investors capital while increasing its value over time.

As Capital Gearing’s (CGT) Peter Spiller puts it: ‘The trust’s primary objective is not to lose money.’

Looking at the historical track record of capital preservation funds such as Capital Gearing, Ruffer Investment Company (RICA), Personal Assets Trust (PNL) and Latitude Horizon (BG1TMR8), shows they have successfully protected investor’s capital during the biggest bear markets.

Troy Asset Management, which manages Personal Assets says it aims to ‘protect investors’ capital and increase its value over time.’

The equity portion of their portfolio is focused on investing in high-quality businesses which can compound earnings sustainably over time. Holdings include Unilever (ULVR), Nestle (NESN:SWX) and credit card company Visa (V:NYSE).

In contrast, Capital Gearing invests its equity portion almost exclusively in investment trusts trading at a discount to NAV (net asset value).

Latitude Horizon looks to invest in companies which can grow earnings per share sustainably faster than the market average, trading at a discount to the market.

Ruffer takes a contrarian approach to investing and attempts to minimise risk by avoiding the points of material capital loss in financial markets.

The trust offers investors access to some strategies not widely available to retail investors such as derivative protection and non-traditional assets like commodities and the Japanese yen. [MG]

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