Looking through the noise: Why market turbulence calls for disciplined strategy

Whenever the market drops sharply, you can expect that the investment industry will tell investors to avoid making knee-jerk decisions.

This is, for the most part, good advice.

There is plenty of research that shows investors tend to earn lower returns than what is available in the market over time, and that poorly timed investment decisions, often driven by fear and greed, are a key driver of this outcome.

And indeed, after President Trump announced a 90-day pause in tariffs, the S&P 500 Index soared to close the day up 9.5% on 9 April after a series of steep declines – again providing a strong indication that trying to time markets is dangerous.

However, while we think poorly considered decision-making remains the number one enemy of investors, we believe it is also a dangerous time to assume that everything will carry on after the current market turmoil as it had before.

We believe we were already starting to see an overdue recalibration in markets, driven by clear long-term fundamentals, before the extreme noise associated with the recent geopolitical uncertainty and changes to the global status quo not seen in decades.

The current 90-day pause in the implementation of trade tariffs is unlikely to completely reverse the multi-level impact of weeks of uncertainty and the damage that has been done to global relationships.

Signs of strain in global marketsAs we highlighted again in our PSG Asset Management Outlook presentation in January 2025, we have long argued that drivers of portfolio returns were likely to look appreciably different into the future, as we believed the placid period of benign interest and inflation rates following the Global Financial Crisis (GFC) had drawn to a close. However, markets continued to under-appreciate the risk of inflation being stickier than generally anticipated. We were also worried that traditional safe-haven assets may not behave as expected into the future, driven by growing US fiscal strain and other factors that could potentially erode the US exceptionalism narrative. And we had concerns about the extended capex-driven rally and elevated valuations we saw underpinning the exceptional performance of the mega-cap tech shares, which continued to drive markets to unprecedented levels of concentration. Despite our concerns, we noted high levels of complacency in markets in late 2024/early 2025, with the CBOE VIX Index (known as the fear indicator) remaining relatively range bound at historically low levels, and saw several reasons to believe the drivers of market returns would look considerably different into the future.

Market recalibrations happen from time to time, with profound impacts for investorsAn often-neglected truth is that periodically, markets reach inflection points and that the returns that follow that period can look wildly different those that preceded it. The investment experience in global markets from 1998 to 2008 compared to that from 2008 to 2024, underscores this experience, with drivers of market returns looking completely different during the two periods.

Our research led us to position ourselves differently

Based on our independent thinking and in-depth research, our portfolios started to pivot away from US markets and mega-cap technology shares over time, as we saw fewer opportunities to invest in quality assets in these areas at a discount to fair value. As indices became ever more concentrated and valuations increasingly extreme in popular and over-owned sectors of the market, we sought to diversify into industries characterised by supply constraints and added unconventional portfolio hedges that have the potential to fare well in more inflationary environments. We added gold as a valuable portfolio diversifier. While no-one – including ourselves – could have anticipated the level of chaos that has unfolded in markets following on Trump’s ‘liberation day’ and the wholesale sell-off in the market, our differentiated positioning has helped us to avoid some of the areas characterised by the worst fallout – like the mega-cap technology stocks and overpriced areas of the US market.

What now?

Markets have been and are likely to remain very volatile for some time: they have reversed course several times based both on accurate and fake news flow, and as market participants digest some of the less obvious implications of the US policy changes. We may still see several more changes in market direction before all is said and done. While a full-blown tariff war (other than between the US and China) may have been narrowly avoided for now, second and third order impacts of changes in US policy are still being digested, and the longer-term consequences of recent developments are still unclear.

Despite elevated levels of uncertainty and volatility, the hallmark of markets is that they recover in the long run. Companies adjust to new business realities, or find workarounds, even if there are cost implications in the short run. Supply chains rejig. New alliances form. Consumer preferences shift, substituting some items and foregoing others. While there are sure to be many losers from what is likely to be a painful process as global trade continues to digest the impact of recent events, there will certainly also be some winners – companies who will see an opportunity and excel where many others will fail.

Similarly, capital flows to where it is welcome, and where it earns a decent return. It is impossible to predict what the endgame will be for US markets, or global ones for that matter. We have yet to see any evidence that Trump’s policies to date have addressed the budget deficit or stabilised the US’s fiscal predicament. And while tariffs could potentially be rolled back completely or stabilise at far lower levels than announced on ‘liberation day’, the damage from the erosion of trust will have long-lasting effects, not only on trade relationships, but also on capital flows and geopolitics.

Amidst all this noise and uncertainty, it is easy to forget that the challenge for investors fundamentally remains unchanged: finding ways to reliably protect and grow their wealth.

This means not only that they need to focus on avoiding a permanent loss of capital, but also to reliably outpace inflation and meet their investment objectives over time. This is why we remain focused on helping our clients achieve their key objectives. As responsible stewards of our clients’ capital, we continue to patiently apply our proven, globally integrated 3M investment process, identifying overlooked gems that have the potential to thrive in tomorrow’s environment. This approach has served our investors well to date.

Our thorough research and independent thinking have succeeded in finding opportunities even in some of the most challenging conditions – like in the midst of the Covid-19 pandemic – and we believe that we will continue to do so into the future.

As always, we remain true to our motto that some of the best investment opportunities present themselves at the most challenging times when markets are driven by fear, and we have no doubt it will also be the case this time around.

John Gilchrist, Chief Investment Officer PSG Asset Management. 

BUSINESS REPORT