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Investing.com -- Global markets have been deeply wounded this week as the trade war threatens to strangle economic growth, but MRB Partners warns the real test for risk assets lies ahead.
"The risk-off investment climate will persist as global growth dangers escalate in response to the building global trade war," MRB Partners said in a report on Friday. "Risk assets have already experienced a sizeable correction, but the real test for investors lies ahead."
The U.S. tariffs announced earlier this week have sent shockwaves through global markets, dampening growth expectations and disrupting supply chains.
The real economic impact of tariffs will become more evident in the coming months as companies slow hiring and capital spending, potentially dragging down household incomes and spending.
Companies are expected to pass cost increases onto inflation-weary consumers, while corporate earnings face downgrades in the months ahead.
The gloomy backdrop of earnings will likely deal a significant blow to equity prices, particularly in the U.S., where valuations are relatively elevated compared to other regions.
MRB urged investors to maintain below-average risk exposure and overweight cash in multi-asset portfolios. "Global equities face further downside as corporate profits get downgraded," MRB said, adding that U.S. equities are particularly vulnerable due to their higher valuations.
"The investment climate will remain challenging in the near run and likely over the next 6-12 months given the potential global growth fallout from U.S. tariffs and general policy uncertainty," MRB said.
The flight to safety is expected to keep government bonds bid, but that will prove fleeting as the stagflationary, MRB added, pointing to pressures from tariffs that will likely weaken "the fundamental appeal" of bonds over the longer term.