I have a rule of thumb that investors shouldn’t “do politics”. Our job is to be acute observers of the world so as to achieve the best possible returns for our clients.

As we watch the global ramifications of “Liberation Day” unfold, what are we to make of it all? We have no precedent for such sweeping tariffs in living memory. No reference point, outside of history books, to help work out where this may go, even for those of us with a few grey hairs.

Faced with increased uncertainty, investors might be tempted either to reduce risk quickly and sit on the sidelines until the dust clears, or assume it is a game of charades that needs time to play out and do nothing.

That is not a bad tactic. As long-term investors, the knee-jerk reaction is not a helpful tool. I remember in 1987, as Black Monday saw world markets crash, my boss at Mercury Asset Management, James D’Albiac insisted all screens be switched off, we block out the noise and return to our research. The FTSE 100 was up 2% that year.

The reality is that we do not know how this will play out. However, there are some things that we do know.

Firstly, how we think of the US as a market is changing. The end of the Second World War (WW2) marked a transformative period. The post-war “Golden Age of Capitalism” was a period of unprecedented economic growth as the US transitioned from wartime production to peacetime manufacturing.

“A common characteristic of big spends on defence is the remarkable innovations it spawns”

Saker Nusseibeh is CEO of Federated Hermes

The US instituted a new world order that combined rules-based foreign relations and rules-based trading. This helped increase its power while bringing stability to the world, a further stimulant to investment and growth. With its economic and technological power, the US was able to end the Cold War in its favour.

While it is by no means clear where the US is heading today, one possible interpretation of the US president’s “Liberation Day” press conference, coupled with his earlier announcements, is that he no longer believes that the post-WW2 system the US helped build is the best fit for its interests. Another interpretation is that it is merely an aggressive negotiation tactic.

In some ways it does not matter because, either way, our old assumptions about the US are now being strained.

Countries will still trade with the US, but its actions are already pushing them to find new markets and new trading blocks. China, Japan and South Korea have held their first economic dialogue for five years, seeking to facilitate regional trade. As an investor, you are then looking at those countries and their companies to work out which horse to back.

Investors and companies will also continue to work with the US. After all, it will remain an economic powerhouse. But they may just think a little differently. They are used to the capriciousness of certain governments and build in a margin of additional discount rate to make up for the uncertainty.

But this sense of US unreliability extends beyond just trade to established alliances and common defence pacts. Hints by the US administration that support will not necessarily be forthcoming, if allies are in need, has caused alarm in Western capitals. That, and explicit pressure by the US president, has forced a very different attitude towards defence spending most clearly illustrated by Germany’s massive, planned investment in the sector. Others, like the UK, are also committing big sums.

This is something that gets investors interested. A common characteristic of big spends on defence is the remarkable innovations it spawns. So far, the US (and in a much more specialised extent Israel) have seen the greatest advantage of investment spend in defence morph into industrial and technological advantage.

The rest of the Western powers have been content to allow that premium to go to the US. However, ramped-up spending by Germany, France, the UK and others will slowly pay industrial and technological dividends, as it has begun to do to China. We have already seen some challenges to US technological hegemony from Deep Seek and BYD’s new EV battery.

As defence spending ratchets up, and tariffs get entrenched, investors will have a keen eye on those companies and sectors emerging as the likely winners.

For several decades – Covid aside – markets have moved largely in unison. While investing has never been easy, it has, until recently, operated within a relatively stable framework. But today’s market stress marks a turning point. In this environment, active share, stock picking, and asset allocation will once again become differentiated sources of alpha.

Many global portfolios remain heavily weighted toward, for example, US equities, often through passive exposure to benchmarks like MSCI World or ACWI. While US companies continue to play a central role in global innovation and performance, there’s value in reassessing whether index-driven allocations still reflect the realities of a more fragmented global economy.

This doesn’t suggest abandoning US exposure, but rather approaching geographic diversification with greater nuance.

This doesn’t suggest abandoning US exposure, but rather approaching geographic diversification with greater nuance. Indeed, the same applies for allocation within the US market where index exposure does not allow for nuance or price discovery.

In a less synchronised world, thoughtful allocation – grounded in fundamentals rather than formulaic index construction – may become increasingly important. Investors who are willing to reassess, recalibrate, and look beyond familiar patterns may be better positioned for what comes next.

Sands shift over time. The tectonic plates of geopolitics do alter, but the job of the investor does not. Knowing your market, understanding how and where the world is moving (and where it has come from) and then picking the right stocks is still the game.

Saker Nusseibeh is CEO of Federated Hermes