Q1 2025: A Volatile Start in a Changing Trade Landscape

15 Apr. 2025

Dear investors,

The first quarter of 2025 delivered a turbulent start to the year. Markets initially entered January with optimism—fuelled by expectations of deregulation and improving corporate margins in the U.S. However, that narrative was quickly overturned by the reintroduction of aggressive trade policies.

February brought fresh tariffs on imports from Mexico, Canada, and China, soon followed by expanded duties on steel, aluminium, and automobiles. The pressure peaked on April 8th with a sweeping announcement of global tariffs affecting dozens of trade partners. Market sentiment deteriorated rapidly, as investors began to question the United States’ reliability as a stable economic player. Major equity indices responded accordingly, with sharp declines across the board.

In this risky environment, expensive growth stocks underperformed value stocks by a considerable margin. As volatility spiked, investors sought safety in low-beta sectors—particularly Utilities, Consumer Staples, and Real Estate—which acted as relative havens.

Although tariffs are typically seen as an issue for major exporters, their impact runs deeper. In a world of globally integrated supply chains, few companies remain untouched. Even seemingly “local” products rely on imported inputs. Take, for instance, Florida-grown oranges. A consumer may assume they’re avoiding tariffs by buying local, but the packaging materials, harvesting equipment, and logistics—all often sourced globally—are likely subject to duties. In this climate, true insulation from trade friction is rare.

Nevertheless, major exporters or companies with substantial presence outside of the USA might still be under more market scrutiny. As such, we examined whether companies with greater exposure to foreign markets—measured via the share of foreign sales and assets—have underperformed more significantly since the inauguration of a very different kind of "orange": President Trump.

To explore this dynamic, we analysed S&P 500 returns between January 20 and April 8, just before the U.S. announced a 90-day tariff reprieve for “well-behaved” countries. The performance divergence across sectors was stark. Utilities, Pharmaceuticals & Groceries, and Food & Beverages performed strongly, while Banks, Chemicals, Technology, and Energy experienced significant losses. This dispersion correlates closely with sector-level risk: in periods of broad market stress, low-beta sectors tend to outperform. However, a second trend also emerged—one tied directly to export intensity.

Sectors with the highest export exposure—like Chemicals, Automobiles, and Banks—materially underperformed. Conversely, more domestically oriented sectors—such as Utilities, Real Estate, and Insurance—outperformed the benchmark. Statistically, the correlation between a sector’s export score and its alpha during this period was 57.5%. Even when controlling for volatility in a multiple regression, the export metric remained significant at the 1% level.

While sector-level insights are helpful, we also wanted to explore whether export exposure matters within sectors. To test this, we constructed a sector-neutral export signal by adjusting each company’s export score relative to its sector average. We then created a long-short portfolio—long companies with the lowest sector-adjusted export exposure and short those with the highest. Over just 56 trading days, the long-short strategy outperformed by 10.7%, suggesting that even within sectors, companies with less foreign sales and assets fared better during this period of heightened trade tension.

Admittedly, this factor is likely to be more effective in the U.S., which stands at the centre of current trade disputes. A Belgian exporter, for example, may show high foreign sales but conduct most of its trade within the EU—largely avoiding U.S.-imposed tariffs. This adds noise to the signal when applied globally. Nonetheless, when we normalize for regional trade dynamics, the export factor continues to show meaningful predictive power internationally.

Incorporating insights like these into an investment strategy won’t eliminate downside risk in a broad market correction, but they can provide an edge. As always, the most effective strategy remains staying disciplined and avoiding panic-driven decisions. For those still seeking perfect market timing cues, there’s always Truth Social—though we suggest approaching that route with a healthy dose of scepticism. More reliably, Vector Navigator has weathered the turbulence well, limiting losses to just –3.4% by the end of March, a result that compares favourably to global benchmarks.

Best regards,
Werner, Thierry & Nils