Adviser-to-client template: Staying the course through tariff volatility

For financial advisers to use with clients.

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Dear Client,

We choose patience over panic.

By now, you’ll have heard of President Trump’s sweeping new tariff regime, which has sent global markets into a tailspin, with the Australian market not immune. Uncertainty has reached new levels as policymakers, businesses, and consumers are dealing with how to adjust to the new US trade policy.

During these uncertain times, our investment manager, Morningstar, sticks to timeless investing truths that have guided long-term investors over many decades:

• Don’t panic: It’s crucial to avoid overreacting and selling assets during market downturns. Periods of heightened uncertainty often lead to sharp recovery rallies; missing these can significantly impact investment outcomes.
• Avoid overconfidence: Recent developments have increased the range of potential outcomes. Recognising this heightened uncertainty underscores the importance of measured and well-considered action.
• Stick to a time-tested playbook: During significant asset declines, Morningstar’s initial response tends to be rebalancing portfolios back to their targets, maintaining the intended portfolio exposures. Next, they conduct a rigorous assessment of how the events have impacted fair values, looking for potential areas of mispricing. Lower prices often create fertile ground for attractive investment opportunities.

Preparation is everything

Morningstar believe that preparing for inevitable crises is foundational to a good investment process. It starts with diversification and an acknowledgment that the future is inherently uncertain. Few people, for example, expected the U.S. economy to slow heading into 2025—but being able to navigate this uncertainty is key to maintaining robust portfolios.

Diversification is essential for navigating potential market outcomes that are unknowable ahead of time. Morningstar’s strategies are diversified across economic sectors, regions, and types of securities such as stocks and bonds. By not putting all your eggs in one basket, we can ensure you’re prepared at a foundational level.

Morningstar also routinely stress-tests your portfolios against various growth and inflation scenarios, in different economic environments, further underlining the importance of a robust portfolio construction process.

Why it matters today

The period leading up to the current market volatility did not reward this kind of preparation. A handful of big tech firms dominated much of the market narrative and propelled markets to new highs. Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Though uncomfortable, periods of market turmoil do reveal the benefits of preparation. And, as a result of Morningstar’s portfolio construction process, many of their portfolios weathered the storm better than the market because they’d factored in a wide range of possible paths.

Charting a path forward

The current market environment remains highly uncertain, setting a high bar for any portfolio adjustments. The economic backdrop remains fluid with many unknowns on how businesses, consumers, and policymakers will respond to the new trade policy, including the room for negotiating trade terms. This environment calls for a patient and measured approach, which Morningstar is confidently implementing.

It bears repeating that markets have faced challenges before, and that history is littered with periods of significant drawdowns. Though it’s completely understandable to have concerns, our advice is to tune out the noise and trust the process.

And as always, if you have any questions, I’m more than happy to set up time to chat.

Signoff

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.