Follow the trendlines, not the headlines

How should investors think about the impact of tariffs on their portfolios?

The key question we always ask is whether the risk has already been priced into markets. That’s difficult to answer because we know more tariffs are coming — we just don’t know exactly where or how much. Markets don’t like uncertainty, and that’s what we’re seeing play out.

Take market performance year-to-date. Most people would assume the S&P 500 is leading the pack, but in reality, it has been the weakest. The S&P 500 is flat, while MSCI Emerging Markets is up 4%, MSCI Mexico is up 9%, and MSCI China is up 17%¹. Mexico is a great example. Given that 85% of its trade is with the US, you would expect its market to suffer from tariff concerns. Instead, Mexican equities have rallied because investors are looking for a clearing event — a trade deal, even an imperfect one, is better than ongoing uncertainty.

How are companies managing tariff risks?

There are different ways to approach it — shifting supply chains, passing costs to consumers (which rarely works), or absorbing the tariffs. The reality is that most companies can’t adjust overnight. That’s why we look for businesses with built-in hedges — companies that, by design, can withstand geopolitical and economic shocks.

A great example is Arca Continental, one of the world’s largest Coca-Cola bottlers based in Mexico. It has two major advantages. First, a natural hedge—a third of its revenue comes from the US, giving it insulation from Mexico-specific tariff risks. Second, diversified revenue streams — the company used its Coca-Cola partnership to distribute non-Coke products through its delivery network, creating a secondary revenue stream. These strategic decisions have helped the company navigate uncertainty, and the stock is already up over 20% in the first two months of this year despite ongoing tariff concerns. These are the types of businesses we want to own — ones that don’t need to predict the macro environment to win.

Which sectors are most exposed?

Technology is the most exposed sector because its supply chains are deeply globalised. A semiconductor company, for example, might design its chips in the US, manufacture them in Taiwan, and sell them in China. That’s multiple points of tariff risk. The moment trade tensions escalate, these companies get caught in the crossfire.

That’s why, in our China exposure, we focus on domestically driven sectors — businesses that serve the Chinese consumer rather than those reliant on exports. A company selling directly to local households is far less affected by US-China trade disputes than a tech firm reliant on global supply chains.

What about the US? Do tariffs change how we think about US market dominance?

This is a big question, and investors are beginning to ask whether this is the end of US exceptionalism.

There are two competing views. The consensus view is that tariffs are inflationary, raising costs for businesses and consumers, which could limit the Federal Reserve’s ability to cut rates. The contrarian view, however, argues that demand elasticity and deregulation could offset inflation, keeping rate cuts on the table.

Regardless of which view is correct, the key takeaway is that US markets are priced for perfection. If tariffs start to bite, investors will likely reassess their US exposure and begin looking for opportunities elsewhere.

Where are the uncorrelated opportunities if there is a trade war?

In a trade war, everyone loses. The cost of capital goes up, markets become more volatile, and investors start paying scarcity premiums for businesses with pricing power or uncorrelated revenue streams.

A standout example is the UAE, which is moving in the opposite direction of global protectionism. While major economies are imposing tariffs, the UAE has been actively lowering trade barriers. It has signed multiple Comprehensive Economic Partnership Agreements (CEPAs) to simplify customs and reduce tariffs with key trading partners. It also introduced the Golden Visa Program in 2019, which offers 10-year renewable residency to skilled professionals, driving immigration and boosting economic activity.

From an investment perspective, this has created real opportunities. Emaar Properties and Aldar Properties are benefiting from surging housing demand, while Abu Dhabi Commercial Bank and Emirates NBD are seeing increased lending activity as more people move to the region. Consumer demand is rising across the board, driving growth in everyday services like food delivery. The UAE is positioning itself as a business hub in a world that is increasingly closing its doors—making it an attractive place to allocate capital.

What are you watching going forward?

We are evidence-based investors. That means we focus on companies that have the potential to beat expectations, particularly when market consensus appears too pessimistic.

Tariff-driven volatility often creates mispricing — great businesses get caught in the sell-off, and that’s when we step in. When markets overreact, we see an opportunity to buy high-quality companies at discount valuations.

This is a stock picker’s market. Volatility isn’t just risk — it’s also opportunity.

Key takeaways for investors:

• Markets have already priced in a lot of tariff risk — some, like Mexico and China, are even outperforming.
• Look for companies with natural hedges, like Arca Continental, that are insulated from shocks.
• US market dominance is being questioned — inflation and rate concerns remain key risks.
• Look for uncorrelated assets — the UAE’s pro-trade stance makes it an attractive opportunity.
• Volatility creates mispricing — this is a stock picker’s market.

¹ As at 6 March 2025

No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. This is not a buy, sell or hold recommendation for any particular security. For further information on specific portfolio names, please see the Important information.

Specific portfolio names: References to particular investments or strategies are for illustrative purposes only and should not be seen as a buy, sell or hold recommendation. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.

‘Best’ represents our highest conviction ideas following fundamental analysis.