Jochen Breuer
“At a time where market narratives are being dominated by heightened uncertainty amidst tariffs and the potential of a trade war, investors face a critical challenge: how to generate attractive total returns while managing risks.
The imposition of tariffs will have a negative impact on economic growth, both in export-oriented markets as well markets that consume those goods such as the US. Over the next few months, it will be important to monitor the potential knock-on effect on the US and other economies, which could pose a problem for general global demand. However, it is typical for opportunities to present themselves in volatile markets. The impact of tariffs will vary between industries and specific companies. Not all US revenues earned by companies from tariff targeted countries will be impacted. An example are service revenues generated in the US by ex-US businesses which are currently nor proposed to be subject to tariffs. In turbulent times where markets are moving at a rapid pace, three fundamental building blocks of long-term investment performance remain key – sustainable dividends, earnings resilience, and valuation discipline.
Companies with a history of maintaining and growing their dividends through different market cycles typically exhibit lower volatility and smaller drawdowns during market corrections. This resilience reflects both the financial strength required to sustain dividend increases and the stability of the underlying business models, providing a natural buffer against market instability. For example, the MSCI AC World Index “Dividend Aristocrats,” which focuses on companies that have grown their dividend each year over the last 10 years, has outperformed the MSCI AC World Index with lower volatility over the past decade.
While dividends provide a tangible and direct component of total returns, the sustainability and growth of these dividends ultimately depends on the quality and resilience of a company’s earnings. The future path of a company’s earnings is also the key driver of the price return investors can expect from the stock.
In challenged environments, a focus on earnings resilience becomes crucial. This does not simply mean a top-down allocation to classically defensive industries. Rather, it involves identifying companies with resilient business models across a broad range of sectors through detailed bottom-up analysis. It is this combination of owning resilient businesses that are diversified across a range of industries which results in consistently higher earnings persistence compared to broader market indices.
It is important to combine this focus on high-quality businesses with a valuation discipline so as to prevent ‘overpaying’ for businesses and to reduce potential drawdowns in the portfolio. For example, the widely held view of US exceptionalism at the start of the year has led to larger declines in those more richly valued US stocks since the announcement of tariffs at the start of April. By contrast, many companies within Europe have outperformed their respective US peers, partly reflecting their lower starting valuations.
It is typical for opportunities to present themselves in volatile markets. This is a rapidly moving environment and there will be second order impacts to consider that aren’t immediately obvious. For example, it is interesting that the US dollar (USD) isn’t providing its usual flight to safety benefits. This is the first time in at least 15 years where the USD has depreciated at the same time as equity markets have fallen more than 10%. The current volatility underscores the importance of staying active and selective in managing investments, as the effects of tariffs will continue to play out over the next few weeks and months.
By Jochen Breuer, portfolio manager
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