As his second term began, even Donald Trump’s most ardent detractors recognised that it could be good news for the stock market. A bonfire of regulation, pro-growth economic policies and lower taxes would combine to super-charge markets. The risks appeared to be around inflation, rather than economic turmoil. It hasn’t quite worked out as planned.

Although some tax cuts and deregulation are in progress, Trump has also shown himself committed to a range of market-unfriendly policies, including tariffs and military excursions. He has picked fights with business leaders and the Federal Reserve chair. Policymaking has been unpredictable. This has proved disruptive for stock markets. It is the mantra of any active manager to look through the noise and focus on company fundamentals, but there have been real world implications for companies.

For trust managers forced to navigate this unpredictable environment, the solution has been to look at where volatility might create opportunities, while also avoiding the most vulnerable sectors. In emerging markets, for example, US policymaking has delivered a wild ride. They sailed through ‘Liberation Day’ to deliver a strong return in 2025, with the MSCI EM index up 33.6% over the year[1]. China proved itself a wily adversary in the trade negotiations, while India eventually saw its onerous tariffs lowered.

However, the Iran crisis has brought another set of challenges, particularly for countries such as India that are reliant on fossil fuel imports. South-East Asia has been particularly hard-hit. Philippine government officials have been put on a four-day week, while Thai government workers have been told to work from home. Vietnam has called on companies to encourage home working and for citizens to limit fuel usage.

Chris Tennant, manager on the Fidelity Emerging Markets Limited (FEML) says volatility has created opportunities on the short-side of the trust’s book, though it has made diversification even more important. Dollar fluctuations have been important from a sentiment point of view, but Tennant says this is changing: “The dollar is a driver for emerging markets, but it’s less important than it was in the past…there are large local currency debt markets and almost all domestic corporates have refinanced in local currency. There isn’t the same transmission mechanism.” He says the transmission mechanism is now via commodity prices.

He has taken steps to insulate the portfolio against volatility: “One of things we did prior to the attack was to buy call options on oil and gas producers. That helped insulate us against higher oil prices because it wasn’t a sector where we had a lot of exposure.” He has also been avoiding certain areas: “If high oil prices are going to inflict pain, it will be on consumers in these countries and some of the industrial companies that use oil as a feed stock. Those are areas where we don’t have exposure.”

For countries like Vietnam, the problems are harder to escape. Vu Quang Thinh, manager of Vietnam Holding says the problems of the war have drowned out the good news over Vietnam’s upgrade to secondary emerging market status from FTSE Russell from September. Nevertheless, he says the country has handled the crisis well: “For investors, the key takeaway is stability, particularly in the areas that matter most: economic growth, foreign investment and international integration. Foreign direct investment continues to show strength, reinforcing Vietnam’s position as a preferred destination for global manufacturing and supply chain diversification.”

Even companies that should be relatively defensive struggled in the immediate aftermath of the Iran attacks. Jacqueline Broers, joint portfolio manager on the Utilico Emerging Markets Trust, says that while the cash flows of the underlying infrastructure assets in the portfolios were sound, the trust was hit by a general weakness in sentiment and worries over the cost of capital.

Nevertheless, in the longer-term, she believes there may be opportunities in the volatility created by US policymaking. It is likely to see countries push harder for energy independence and resilience, while other countries could be beneficiaries of tourism moving away from the Middle East. They have some small exposure to ports in the Middle East, but have maintained it, believing that cargo is likely to be “delayed rather than denied”.

Europe had weathered the tariff storm, only to be knocked again by the Iran war. Cedric Durant des Aulnois, CEO of Montanaro Asset Management, which manages the Montanaro European Smaller Companies Trust, says this has stalled a nascent recovery in smaller companies. Not only have they been hit by concerns over domestic economic growth, European small caps also have a greater exposure to industrials than larger companies, which has led to increased concern around their sensitivity to any economic slowdown.

“However, it is important to distinguish between short-term macro shocks and the underlying fundamentals of the asset class. Many European smaller companies continue to deliver solid operational performance, supported by structural growth drivers, strong balance sheets and leading positions in niche markets. Consensus expectations point to earnings growth of over 15% for both 2026 and 2027. Combined with still-attractive valuations, this reinforces our view that the current environment is more likely to delay rather than derail the recovery.”

He says recent history offers some perspective on why investors shouldn’t necessarily react to short-term noise: “While last year’s tariff announcements had tangible economic implications, European companies demonstrated greater resilience than anticipated. The European small cap market recovered its losses relatively quickly and went on to deliver a return of c.29% in 2025 (in GBP terms), significantly outperforming the c.5% return from the Russell 2000. Similarly, small caps have already recouped much of the initial drawdown following the latest escalation in the Middle East.”

He has taken the opportunity to add selectively to positions where share prices have been impacted by macro concerns rather than any deterioration in fundamentals. “In particular, we are increasingly identifying opportunities in the software sector following the indiscriminate sell-off earlier in the year.”

Nick Brind has taken a similar approach on the Polar Capital Global Financials Trust, looking for areas that can benefit from volatility. “That includes companies such as IG Group and Plus500,” he says. “Volatility creates opportunities for people to make and lose money, people trade more. It’s good for these platforms.” It’s also been good for some of the large investment banks. JPMorgan reported record trading revenues in its latest set of results[2]. In contrast, for wealth managers, if markets go down, they are likely to see less fee income, so Brind has been backing away.

He has also been taking down risk in the portfolio, particularly in the wake of the Iran conflict. “The retail banks got hit hard and if this continues, and there’s a downturn, people will lose jobs and you’ll see more loan losses. We put money into insurance stocks, which tend to be much less economically sensitive.”

Volatility has become the new normal for investment trust managers. While it can be unwelcome, it can also create opportunities, as markets over or under-react to the noise. Managers are keeping calm and carrying on.

[1] https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd56781…

[2] https://www.reuters.com/business/finance/jpmorgan-profit-rises-volatile…