In light of the sweeping tariffs announced by the Trump administration on 2 April and the ensuing market volatility, we wanted to provide you with our view of the situation. We understand that these developments have sparked significant uncertainty for investors, and we aim to cut through the noise, detailing the facts as at the time of writing.
What has happened?
President Trump announced a broad tariff plan with two parts: a 10% baseline tariff on imports from all countries (excluding Canada and Mexico and others who are subject to existing tariffs) starting 5 April, and additional “reciprocal” tariffs on major trading partners from 9 April, including China, India, Japan and the European Union (EU). Canada and Mexico received better treatment than expected, though the previously announced 25% tariffs on some items remain. The Trump administration exempted semiconductors, pharmaceuticals, copper, and timber from these new tariffs, but appears poised to announce investigations into tariffs on these sectors soon. The UK is due to be impacted by the 10% baseline tariffs.
According to market commentators, it is estimated that the “reciprocal” tariff policy, coupled with other tariffs announced this year, will raise the US effective tariff rate by 18.8%, from 2.3% at the start of the year to approximately 21% – the highest level since 1910.
What is the Trump administration trying to achieve?
While the Trump administration has cited several goals for imposing tariffs on its trading partners, it appears they have two broad primary functions. Firstly, they can be viewed as a negotiating tactic to improve trade terms for US goods, with the President going “fast and hard”, carrying out what he had threatened at the earliest opportunity. Secondly, the tariffs may be viewed as a tax generative tool to fund and facilitate Trump’s proposed tax cuts, which the administration insists will stimulate growth.
While not an explicit intended outcome, the application of tariffs has already pushed down the yields on US government bonds as investors allocate to perceived ‘safe assets’. A lower yield sets the level for subsequent issues of government debt, which, given the lower level, means that the serviceability in terms of interest payments becomes less burdensome.
Similarly, a long-term goal may also be the re-industrialisation of the US to stimulate growth. Major semiconductor production plants are being built across the US as part of the ‘onshoring’ plan. Similarly, the UAE’s announcement last month to commit to a US$1.4 trillion investment framework in the US is very much a part of Trump’s plans to ‘rebuild’ the US.
Why has the market reacted so negatively?
The scale, scope and complexity of the tariff announcement has brought considerable uncertainty into the investment environment. Overall, the tariffs exceeded market expectations in both scale and scope. It remains to be seen:
The immediate issue for financial markets is more about faltering investor confidence.
What are the potential economic implications?
The economic effects are hard to gauge. If the announced tariffs are implemented and maintained, they could materially raise growth risks in the US and globally over the coming year, while lifting inflation and potentially complicating the response of central banks to their interest rate policies.
The lasting macro and market implications will depend on various factors, including the duration of proposed tariffs, retaliatory actions, and fiscal support offsets. Assuming there is limited retaliation from other countries, we expect the negative growth impact to outweigh inflation risks outside of the US. This in turn should strengthen the case for central bank easing in economies such as the Eurozone area, UK and emerging markets.
What does this mean for your portfolio?
In an increasingly unpredictable and volatile environment, since December, we have adopted a more defensive stance across our core multi-asset portfolio exposures.
Volatility is likely to persist until (if) there is clarity on the ultimate tariff steady state. There is still a possibility that tariffs may not fully materialise or could be partially scaled back.
We remain nimble and are looking for opportunities that have been created by these market corrections. Despite the noise, our investment outlook for the longer term remains broadly intact. We, like all investors, are now ascertaining the international effects as well as impacts across asset classes. We await clarification on the emergence of new domestic policy initiatives, especially in Europe and China and, ultimately, we wait to observe how trade flows and whether supply chains can adjust or divert.
Although the barrage of news may be unsettling, it is important to remember that market volatility is normal, and long-term investments tend to recover over time. History tells us that it’s best to avoid making impulsive decisions based on short-term fluctuations. Given the high level of uncertainty over the last few days, we have not made any changes to portfolios at this point, seeing things as too binary. We are looking to understand the impact of what the tariffs’ final form may be and the impact on global supply chains, from which we will look to identify any potential opportunities that may arise.
Please do not hesitate to get in touch with your consultant if you have any further questions.
