The Looming Trade War: Why Investors Should Prepare for a Volatile 2025
The market’s recent optimism feels increasingly detached from reality. While stocks have rebounded from the initial shock of potential tariffs signaled by a shift in US policy, a leading portfolio manager at DWS Concept, Christoph Schmidt, warns of a significant correction looming – particularly in the summer months. This isn’t simply about reacting to headlines; it’s about recognizing a fundamental shift in the global economic landscape and positioning for a future defined by escalating trade tensions and a potentially weakening US economy.
The Return of Protectionism: A Defining Risk for 2025
The consensus among seasoned investors is clear: a full-blown trade war represents the single greatest risk facing markets in 2025. Geopolitical conflicts add another layer of uncertainty, but the unpredictable nature of US commercial policy is the primary concern. The initial market reaction to the possibility of new tariffs – often referred to as “Liberation Day” following the announcement – served as a stark reminder of the fragility of global trade. While sentiment has since improved, Schmidt cautions that this optimism is premature. The full impact of potential tariffs hasn’t yet been felt, and early economic indicators are already pointing downwards.
Dollar Vulnerability and the Case for Diversification
A key element of this evolving risk landscape is the US dollar. Historically, a strong dollar has benefited from its status as the world’s reserve currency. However, a more protectionist US stance, coupled with concerns about the nation’s fiscal health, is eroding investor confidence. Schmidt’s team proactively reduced their US exposure in March, anticipating a climb in tariffs, and have significantly decreased their dollar holdings – from 35% at the beginning of 2025 to just 13% currently. This strategic shift highlights a growing belief that the risk of holding a substantial dollar position now outweighs the potential rewards, especially given increased volatility.
This isn’t about abandoning the US market entirely, but rather about mitigating concentration risk. Many investors, particularly those based in Europe, are heavily exposed to the US dollar through broad market indices like the MSCI World, which has a 70% weighting in US equities. For Schmidt’s team, this presents an opportunity. Their fund maintains a more balanced regional allocation, dividing exposure between the US and Europe, offering a natural hedge against dollar fluctuations.
The Euro’s Potential and European Bonds
As the dollar faces headwinds, the euro is poised to strengthen. While a short-term appreciation is already underway, further gains are likely as investors begin to re-evaluate their asset allocations. Many haven’t yet fully adjusted their exposure to dollar-denominated assets, creating potential for a rotation towards European investments.
This shift also benefits European bonds. DWS Concept has been increasing its duration – a measure of interest rate sensitivity – in its fixed income portfolio, moving from around two years to approximately six years. They are particularly focused on investment-grade European corporate bonds, anticipating increased demand and favorable yields. The recent European defense financing plan is also contributing to the attractiveness of European sovereign debt, though its full impact will likely be felt over the long term.
Strategic Flexibility and the Role of Gold
In this uncertain environment, flexibility is paramount. Schmidt emphasizes the importance of being able to quickly adjust asset allocations in response to changing market conditions. Maintaining a higher liquidity position – currently around 20% after increasing from 10% in February – provides the team with the dry powder needed to capitalize on opportunities and navigate potential downturns.
Gold continues to play a crucial role as a strategic portfolio pillar, representing approximately 8.8% of the fund’s holdings. Despite recent price increases, the team isn’t engaging in tactical trading, recognizing the metal’s enduring value as a safe haven asset, particularly with central banks, especially in Asia, continuing to accumulate gold reserves. The World Gold Council provides detailed data on central bank gold purchases.
Beyond Sectors: A New Approach to Portfolio Construction
DWS Concept is moving away from traditional sector-based portfolio construction, recognizing that many companies now operate across multiple categories. Instead, they categorize holdings into three groups: growth companies (predominantly US-based), stable companies (healthcare, telecommunications, insurance – often European), and cyclical companies (banks, industrials – also largely European). This approach allows for a more nuanced understanding of risk and return potential.
A Cautiously Optimistic Outlook
While not adopting a strictly defensive strategy – variable income remains around 32%, slightly below its historical average of 35% – DWS Concept is clearly prioritizing risk management. Their success, as recognized by Morningstar’s performance data, stems from this unwavering commitment to flexibility and a willingness to deviate from conventional wisdom. The key, Schmidt argues, is to start from the perspective of a euro-based investor and build a portfolio that is resilient to the challenges of a changing global order.
The coming months will be critical. Investors who remain complacent in the face of escalating trade tensions and a potentially weakening US economy risk significant losses. Proactive diversification, a focus on European assets, and a strategic allocation to safe havens like gold are essential steps to navigate this volatile landscape. What adjustments are *you* making to your portfolio to prepare for a potential trade war?
