How investors can hedge against Trump’s trade wars

When Donald Trump was initially elected, stock and bond markets cheered the news, driven higher by hopes for lower taxes, less regulation and lower inflation.

But sentiment has reversed as Trump pushes ahead with tariffs against the US’ closest trade partners, such as Europe, Canada and Mexico.

Over the past month, the MSCI World index (which is 74% US shares) has dropped 10%, while the S&P 500 index of US shares is down 11%.

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Investors are pessimistic that tariffs will cause a global recession as well as higher inflation, which could mean that central banks are reluctant to cut interest rates.

But among this correction in global shares, not every market is performing poorly. One-month data shows that Chinese shares and European shares have delivered positive returns, and the UK is also performing well this year.

Year-to-date (as at 17 March 2025), the FTSE 100 is up 5%, China is up 14.5%, Europe is up 10%, Brazil is up 4.7%, and commodities, gold and sterling bonds are also in positive territory.

Gold and bonds as defensive investments

Francesco Sandrini, head of multi-asset investment at fund manager Amundi, says that it is key for investors to diversify across different asset classes and equities from different countries.

“The Chinese tech sector has been performing well since the emergence of AI group DeepSeek, but a lot of the rally is linked to ‘fast money’ from US hedge funds. But if we begin to see more Chinese domestic investors buying shares, as well as economic reforms, then this could be good for the sector.

“In Europe, fiscal stimulus could lead to the rally moving beyond defence and financials. Japan could also be interesting once the central bank stops raising interest rates,” he said.

The fund manager also likes gold and US bonds as diversifiers. On US bonds, he thinks that Trump’s longer-term plan is to reduce the cost of borrowing for the US government, which is caused by pushing up US treasury bond prices therefore creating lower yields.

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On gold, his view is that falling bond yields is good news for the gold price, which generally appreciates when yields fall as it pays no income, making it more attractive relative to other defensive assets. Sandrini says that a 5% allocation to commodities is prudent.

Investors can own gold via exchange-traded funds that own physical gold, such as Invesco Physical Gold ETC GBP (LSE:SGLP), which has risen 12% this year. 

ETFs can also track US bonds, such as the iShares $ Treasury Bond ETF GBP H Dist (LSE:GOVP), which owns a diversified basket of US government bonds, with a weighted average yield of just over 4%. This ETF has risen 2% this year and uses currency hedging to eliminate the effect of currency movements, which means that the falling value of the dollar this year has not hurt UK investors in this ETF. 

For Jon Mawby, co-head absolute and total return credit at Pictet Asset Management, the key right now is to look through the “noise” in markets today.

Like Sandrini, he thinks that the rising inflation narrative may not hold and interest rates will ultimately go lower.

In this environment, bonds are a good place to be. Not only are you paid to wait, with yields above 5% on corporate bonds, but bond prices could also rise.

Mawby adds: “We are happy to collect coupons, with yields on corporate bonds where they are. The inflation dynamic isn't too worrying , so we can look through that.”

He prefers short-dated bonds, where prices will be less volatile than longer-dated bonds. This gives him more flexibility: “If yields are higher for longer, we can redeploy cash at higher yields. We also get more protection from volatility.”

Popular short-dated bond funds include iShares $ Treasury Bond 1-3yr ETF GBPHDist (LSE:IBTG), iShares UK Gilts 0-5yr ETF GBP Dist (LSE:IGLS), and Royal London Short Duration Credit. The year-to-date returns of these ETFs are 1%, 1.2% and 1.7%.

How some equities can protect a portfolio

Also looking through the noise is Alex Watts, senior investment analyst at interactive investor. His view is that US companies could do well as Trump looks to support domestic businesses, such as through a reduced corporate tax rate for domestic producers.

However, he adds that the effects of US-imposed tariffs and retaliatory tariffs could well be a menace for costs and sales volumes of many businesses – and the market has been focusing on this fact.

“When considering the impact of tariffs on domestic US companies, some relevant questions to consider will be: who are their competitors and where are they based? Are their suppliers based in tariffed regions? Will their exports be subject to retaliatory tariffs from the likes of China or Canada?” he said.

Trump’s protectionist policies may have scope to harm US businesses, with Goldman Sachs predicting that every 5% increase in US tariff rates has the potential to reduce S&P 500 earnings per share by 2-3%.

But nonetheless, among the broad US market, Watts says that a skilled investor or active manager may be able to seek out those domestic companies that could benefit from reduced foreign competition and government incentives.

One fund idea he has is Neuberger Berman US Multi-Cap Opportunities. The fund is unconstrained in being able to seek opportunities from large/mega-cap down to small-cap.

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While still able and willing to selectively invest in mega-cap stocks, the portfolio also houses businesses of varying scale and from a diverse and differentiated set of sectors to capitalise on the breadth of the US market. It’s notable that the fund has a slightly higher revenue exposure to the US (circa 68%) than its S&P 500 benchmark (c.60%).

He also thinks that UK equities could do well under Trump. Watts says: “As markets fall in the wake of the materialisation of tariffs that were interpreted as just rhetoric in the months since Trump’s election, it may be worthwhile considering those regions that simply are less affected. One such region could be the UK. It’s no wonder that UK equities have significantly outperformed US and global equities year to date. Fundamentally, Trump has targeted countries with which the US suffers a trade deficit. The US does not have trade deficit with the UK.”

His fund pick here is Fidelity Special Values investment trust, an all-of-market approach to finding out of favour UK equities.

Managers Alex Wright and Jonathan Winton look for companies that are undervalued by the market, and are also permitted a small overseas allocation.

The portfolio typically holds companies trading at lower valuation multiples than the wider market. This valuation and contrarian focus makes for benchmark differentiation, and typically leads the managers to allocate heavily to small/mid-cap, with FTSE small-cap and FTSE 250 making up 67% and 38% of the portfolio respectively.

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Own the world, without the US

For investors who favour global passive funds, but are worried about the dominance of US firms in popular indices such as the FTSE All World and MSCI World, they could look at the Xtrackers MSCI World ex US ETF.

For just 0.15% in annual fees, the £1 billion ETF invests 19.6% in Japan, 12.7% in the UK, 10.4% in Canada, 10.1% in France and 9.4% in Switzerland, with the remainder in other developed world countries but excluding the US. The ETF has risen 8% so far this year.