From the desk of the CIO: Staying invested pays off
Staying invested has paid off in 2025, but with tariffs rising and policy shifts ahead, diversification is key.
Key takeaways
- Staying invested pays off
- S.A pay-to-play policy becomes more prevalent
- Tariff impacts ahead
- Dig deeper and diversify
Investors have benefited from staying invested this year as markets climb a wall of worry. Returns year to date are above long-term averages vs inflation rates and cash returns. As we’ve noted before, the global economy has turned out better than feared, with a rebound in today’s Artificial Intelligence leaders and big gains for the perceived beneficiaries of President Donald Trump’s reign. Stock prices have also risen in response to better-than-expected corporate profits in the face of potential slowing growth. Investors, like us, that look through the nose have benefited handsomely from this environment.
What next? Well, we think investors should expect US government action to continue to surprise and add to market volatility, now that ‘pay-to-play’ policy is being applied more broadly. What started with trade has spread to defence and now the treatment of individual companies.
With trade, foreigners pay Uncle Sam higher tariffs for the privilege of selling into the world’s wealthiest country, though in many cases this catches US companies too because their supply chains are global. Closer to home, the Australian government must now think of its policies not only in the context of what will benefit Australians, but also how they may be perceived in the US. Australian companies are being impacted in ways not comprehended even a year ago. News this week that Australia Post will no longer deliver their goods to the US market, due to the complexity and cost of managing the administration of tariffs on small goods has shaken small Australian exporters, with one major sales channel all but disappearing.
With defence, the price is the cost of buying US manufactured weapons that might have been provided by the US directly via alliances. For example, $1bn will be spent by Netherlands, Sweden, Norway and Denmark to support Ukraine1. In Australia the cost of purchasing US submarines may or may not become more expensive.
With companies, there is now the precedent of explicit payments to get around existing restrictions. Examples include Nvidia (NAS:NVDA) and Advanced Micro Devices (NAS:AMD) paying 15%2 of their revenues from sales of chips and semiconductor exports to China. It’s an echo of the shift away from rules-based global trade, so backroom bargaining may matter more, though it can of course also be rapidly reversed.
For investors, this is not good news, as it reduces transparency and increases uncertainty, but it does not fundamentally change the longer term economic and market outlook. The biggest impact of ‘pay-to-play’ is the higher tariffs that will, mainly in the US, weaken economic growth and boost inflation, given just how much tariff rates have risen (from 2.4% in 2024 to 18.3% as at August 1 2025 based on US weighted average tariff rate3). But effects are diluted by exemptions and exclusions, the offsetting disinflationary impact of AI adoption and the impacts of changes in interest rates and tax rates. Morningstar’s base case is 1.3% economic growth and 3.2% inflation for the US in 2026, followed by higher growth and lower inflation.
After the mid-year rally, emerging markets still offer better prospects than most developed markets though there are pockets of value such as US smaller companies, beaten up healthcare and consumer staples companies, communication services and the UK. We have been taking profits on China as share prices have risen on the back of firmer economic and profit fundamentals and growing interest from foreign investors. Latin America and Korea both continue to stand out as undervalued opportunities that are in the earlier stages of their recovery. Australia, not unlike the US, looks expensive in aggregate, mainly driven by financials. However, there are some opportunities beneath the surface.
Overall, investors are well served in this environment by digging deeper and diversifying to generate and hold onto returns. We continue to leverage heavily on Morningstar’s bottom-up company research to assess the most likely impact of abrupt changes in US government policy and finding where value lies. Portfolios remain broadly diversified to reduce the risk that come with highly concentrated markets and the potential for shocks from policy changes.
Source: (1) Financial Times, (2) Morningstar Equity Research, (3) Morningstar
