The sell-off in global markets that has followed the ‘Liberation Day’ tariff announcement is historic, in the sense that the speed and magnitude of the falls in markets has only been seen in major economic crises such as in global financial crisis and COVID.¹ The rebound that has followed this, based on the tariff delay announcement, is even more unprecedented.² 

Broadly, the policy stance of the Trump administration has taken most investors, governments and economists by surprise. There is a strong argument that the tariff strategy has not been well thought through. 

Financial markets are currently enduring very high stress levels.³ We expect that active investors like hedge funds have faced forced selling of positions to meet risk management rules.⁴ Some investors might now feel that the market is worth entering, given that many short-term or tactical market indicators hit at historically stretched levels that would indicate a bounce in prices.⁵ However, we believe that the extreme volatility in public markets helps to make the case for investors considering the case for private assets. 

Policy error

The market reaction is complicated by the underlying nature of the sell-off. Unlike the COVID inspired sell-off or the global financial crisis, this episode is man-made and the result, in my view, of a policy error. Simply put, I believe that the undercutting of American wealth and the demand shock that this policy decision may bring about, could vastly outweigh the benefits to the economy of rebuilding manufacturing capacity. 

On the positive side, this ‘error’ can be undone quickly as Wednesday’s tariff delay announcement suggested. Still, there is a great risk now of a two-way China-US trade war, with the potential for this to spillover to supply chains.  With the US earnings season beginning at the end of last week, there is scope for pushback from US corporate leaders on the tariff strategy. It is also worth pointing out, from an foreign exchange point of view, that a policy error is much more difficult for the Federal Reserve to respond to — though other central banks in regions that suffer the imposition of US tariffs may not be as reluctant to respond. 

Two scenarios

From this point onwards, our strategy is conditioned on two broad scenarios. 

Scenario 1 - Status Quo: The first scenario views the Liberation Day announcement as an error (the tariff delay announcement supports this), in composition and communication, and that it is negotiated back with little real change to trading relationships in the short-term. In the longer-term, faith in the administration by US investors and corporates is diminished and there is greater oversight of policy. Markets find an equilibrium between today’s levels and the highs of December 2024. Economically the US may just skirt a recession and we see growth pick up in the last quarter of 2025. 

Scenario 2 - A New Status Quo: Under this scenario the Liberation Day announcement is the ‘short term pain’ of a new world trading order, with the risk that it simply becomes ‘long term pain’ in the fashion of the Smoot-Hawley tariffs of 1930.⁶ In this scenario the reordering of trade relationships will likely be noisy and take some time. 

Compared to the period before the first Trump presidency, China trades much less with the US (because of tariffs), while US supply chains are still very much exposed to China.⁷ ⁸ This scenario may be a highly problematic one for corporates. In our view, it could produce a negative growth shock globally,⁹ and possibly an eventual political backlash in the US. From an investment point of view, it would demand a more cautious stance.  

Implications for private assets

From the point of view of private markets the investment climate is more challenging. We believe that the underlying conditions for private equity to deploy new capital are still there, but the uncertainty around tariffs means that capital markets will likely be more subdued for the next few months. For example, Klarna and some other companies are already delaying their expected IPOs, per Financial Times.¹⁰ On the other hand, periods like this may create significant opportunities for secondary funds who may now have a wide selection of opportunities to choose from — in the LP-led space, particularly, with motivated institutional sellers and those who are less sensitive to discounted prices.

In addition, research from Cambridge Associates and Neuberger Berman¹¹ shows that through major slowdowns (early 2000’s, GFC and COVID) PE saw a less significant drawdown and a faster recovery than public equities. This is corroborated by research from Schroders¹² and Pitchbook¹³ which shows that dot-com and GFC vintages produced above-average earnings for investors, with 2.11x and 1.51x TVPI (total value to paid-in or the investment multiple), respectively, calculated seven years into the lifecycle of the fund.¹⁴ (Note that past performance does not guarantee future results). 

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