What’s been announced?
Donald Trump yesterday announced the details of his tariff policy – described by the White House as ‘Liberation Day’ – introduced to address perceived trading imbalances and benefit the US economically by protecting American jobs and manufacturing.
Imposed by executive order, these included a “baseline” 10% levy on all imports to the US from 5 April and specific reciprocal tariffs on around 60 of the "worst offenders" including the EU (20%) and China (34%), who will face these higher customised tariffs from 9 April.
There are no additional tariffs on Canada and Mexico, which have already been targeted by Trump, and he confirmed 25% tariffs on all foreign made automobiles, which went into effect at midnight local time.
What has been the market reaction?
The timing of the announcement was already known and the countries and industries likely to bear the brunt of the tariffs were largely expected. Trump’s tariff agenda has weighed on global stock markets for much of the first quarter – the MSCI All Country World Index fell 1.7% in USD and the S&P 500 index closed March down 4.6%, its worst quarter in almost three years. A lot of potential ‘tariff pain’ was also already priced into the areas of the market expected to be worst hit, such as countries like Canada and Mexico, and industries like autos.
That said, stock markets have reacted negatively to yesterday’s news, which many see as worse than anticipated. In Asia, the Japanese Nikkei is down 2.8%, the Korean KOSPI in 0.8% lower and the Shanghai Composite has fallen 0.2%. The STOXX Europe is 1.3% lower, although still remains in positive territory year-to-date with a gain of 3.7%.
In the US, futures tracking the S&P 500 and Nasdaq indices are down 2.9% and 3.1%, respectively.
What do you think will happen next?
The announcement can be seen as an ‘opening bid’ from Trump, which is why the latest tariffs don’t come into force immediately. There will now be a period of negotiation between the US and other countries, with the White House describing the proposed tariffs as a ‘high watermark” for further discussions. So far overseas governments have been measured in their responses and no retaliatory tariffs have yet been announced.
Trump may also face domestic pressure if US tariffs prove to be inflationary, as many expect. The Republicans won a strong mandate in the 2024 election primarily to curb the cost of living and so any step-up in the rate of inflation is likely to be received negatively both inside his own party and by voters, particularly if the US stock market continues to underperform.
From a broader macro perspective, yesterday’s announcement and subsequent negotiations risk slowing down global economic activity, particularly if retaliatory tariffs cause trade wars. A significant slowdown may lead to further interest rate cuts to stimulate growth, although the ability of central banks to do this may be hampered by any inflationary impact of tariffs.
What do you expect the longer-term market implications to be?
We view the tariff situation as a temporary market dislocation, where everything related to global trade sells-off. As with most market dislocations, this creates uncertainty but also provides opportunities to make good long-term investments at knock-down prices.
While it is too early to tell what the exact long-run impact will be as we await negotiations and countermeasures, it is important to remember that companies are generally resilient, adaptable to different trading regimes and often adept at finding new markets and customers. There will also likely be some relative winners, such as the pharmaceuticals sector which is exempt from tariffs, and companies that already produce in the US.
One thing we can be more certain of is that we are entering a period of heightened market volatility as we await the response of other countries and the likely introduction of retaliatory measures. This will probably see some above-average market swings in the period ahead.
What are the portfolio managers doing about it?
Our portfolio managers are very experienced in navigating periods of uncertainty and volatility. They build and manage diversified portfolios to withstand dislocations such as this and are in close contact with our holdings to understand how the tariffs may impact them.
We are also looking for opportunities, both short-term from the market volatility which may allow us to invest at attractive prices, but also longer-term from companies that may stand to benefit from new trading environments in different countries.
What should I do about it?
In periods of market dislocation and volatility our advice is always to stay calm and stay invested – there is a lot of evidence that missing out on even a few of the best days of stock market gains can make a big difference to long-term portfolio returns. The same is true now – there are likely to be some big market swings in the near-term while trade negotiations take place.
Try to ignore the short-term noise – which will probably be significant in the days and weeks ahead – and focus on the long-term. If you are unsure or have further questions, then seek advice from your client adviser.
Watch a recording of our recent CIO Webinar which covered US tariffs here