Trump’s tariffs: trading into the unknown

Clearly, the news this week dominated by the press conference that took place in the Rose Garden of the White House, focusing on tariffs that the US is going to apply on imports from pretty much everyone around the world. It ended up being a case of the baseline tariff applied to imports of being 10% and with plenty being more than that. So if you ended up with a 10% number being applied on a given geography, it's fair to say you did pretty well with some very high numbers, even in the 40s, being applied in some instances. So you'd have seen lots of superlatives in the news, referring to the fact that the level of tariffs or trade friction or you know import duties, however you want to think about it, the level of those in the US going back to being the highest level in aggregate that we've had since the 1930s. And clearly you've also seen some pretty nervous sounding headlines associated with the stock market result. What's really been going on there I suppose is, we've had a surprise in the sense that the tariffs were on average larger than what was expected. That has created some uncertainty. Uncertainty as ever, particularly negative surprises in stock markets, reflect themselves in losses. And of course, market losses are always seized upon by commentators and news outlets and reported in a fairly breathless way. So words like 'plunge' referring to stock markets have been banded around a lot today but actually the moves have in many ways been relatively modest. And perhaps that's a testament to really the fact that we've been drip fed this information with respect to tariffs in a sort of progressive way over the last few weeks and clearly expectations have increased over the last few weeks in terms of how big those tariffs would be. But even then, what was announced was probably greater than most people were expecting. So to give you some context in terms that; even a few weeks ago there was an understanding that tariffs were to be expected but the order of magnitude would be nearer at 10%. Then we got the news a week or so ago about tariffs on autos, which made market participants' expectations move up to around about 15% in terms of aggregate tariff levels. And I've seen an estimate today coming out that implies it's around about 18% actually in terms of the overall tariff levels in aggregate across all those imports that the US currently make. It's not a sort of one size fits all approach though, there's a big range between 10% entry level tariffs, which economies like the UK have been exposed to, into the 20s for Europe and up into the 30s for China and even around 40% for Vietnam. So there are some significant impacts in terms of the overall amount of tariffs that consumers and businesses in the US are going to have to pay to bring things into the US. And essentially, I suppose, the conclusion that many are drawing from that really is that the US is essentially building very material walls or barriers to imports with the plan being ultimately, to reduce the trade deficit that the US currently has, reduce reliance on imports from overseas, and presumably also an attempt to try and foster domestic production and domestic industries in time as well. But clearly, on that latter point in particular, that could be many years away. If you think about replacing these very intricate global supply chains that you have, it can take many years really to build up the necessary infrastructure, the necessary machinery, and indeed expertise. And also, of course, you've got to bear in mind that a lot of these goods that are having tariffs applied on, that the volume of them is clearly very big, looking at the numbers involved, but the value of them isn't necessarily very big on a line-by-line item. There's a lot of low margin and low value goods like clothing, for example, that currently are brought in largely, predominantly in fact, from overseas that you'd have to now build a domestic supply base and upskill domestic workers for a relatively low margin items, or there may be some other adjustment that takes place. And what that could be is for example currency depreciation from the countries that provide these goods. We certainly saw that to a lesser extent when we had the first round of tariffs in the original Trump presidency, we saw the Chinese currency for example reset in value pretty much identically to the impact of the tariffs and therefore that came out in the wash fairly quickly. Now clearly these scale of tariffs will require a very aggressive move in the currency base and so again it's not presumed that that will necessarily all happen. I've been on calls with various strategists and learned people in this regard and the first thing obviously they will tell you is they don't really know what the long-term impacts will be. They will tell you that these tariffs are if not quite unprecedented, they're very unusual from a historical context and they'll tell, you that ultimately the pain will be felt in terms of the consumer and will be felt in terms of the inflationary level and the growth level. So you've got significant and growing risk of a sort of stagflationary year in the US as these tariffs come to bite. But there's still plenty of question marks over, where they end up applying, how they end applying and indeed if there's still plenty of negotiation to be done. If you think about the complexities of that, there's around about 60 countries where you would presume behind the scenes now, there are very detailed and in-depth negotiations going on. Is this a start on the reciprocal tariffs, which is a general tariffs across all imports? Are they intended as the sort of fixed point, or are they going to be a sort of basis from which there's further negotiation?

The other bits of complication come from the fact that there are exemptions to these reciprocal tariffs and those exemptions then leave space for sectorally specific tariffs. So for example autos and steel and bits and pieces we've already talked about in previous videos and been talked about by other commentators. You know, the point of there is that they don't necessarily fit in the reciprocal tariff bucket. It doesn't mean they're going to get a free pass. It might mean that you get a different type of a tariff applied to those imports. So there's lots of variables and lots of areas where there's still alot of unknowns. So why was the equity market response relatively muted? I think really that boils down to the fact that these changes have been telegraphed and so while we had a change and a surprise in terms of the order of magnitude of these tariffs, it really is a matter of degree, rather than a matter of principle. They've been broadly anticipated, even through the election cycle, let alone since Donald Trump's been in the White house.

So what we do know in the short term is it seems likely that these tariffs if they're applied in the way that it's anticipated, will have the inflationary impact, will have the GDP knock in the US, increases the risk of a stagflationary and less benign GDP outlook. But the longer run implications are still very much up in the air. What we don't know is how it impacts the US's good relationship with a number of trading partners, how they retaliate and where we really go from here. The consequences of this news are dramatic and could be significant and will have repercussions for many years to come. The stock market impact has been relatively muted so far in the sense of many markets outside the US have actually not been particularly impacted. Europe's down in the 2s and 3s, UK similarly. The US market is doing a little bit worse than that, but not dramatically worse. But clearly overall, what we've had over the course of this year is an underperformance from the US and, you know, firmly in a sort of technical correction from the top. Whereas other trading partners and other economies around the world, like Europe and the UK, their year-to-date gains have had a little bit shaved off the top, but they still actually remain in positive territory year-to-date as we sit here. It demonstrates I suppose, the importance of diversification and making sure you have lots of different returns drivers in your portfolio, and also arguably makes the case for the importance of valuation when you're holding an investment. We've made the point repeatedly in these videos and over the last few years that the US market is looking expensive. It certainly rallied when Trump came into power, pushed valuations higher still, whereas the likes of UK, Europe, even emerging markets arguably were looking relatively cheap and in some ways they've been less meaningfully impacted by this news. It's similar in some way to 2022, where we had bonds, global bonds, government bonds in particular, very highly valued and therefore vulnerable to the bad news with respect to inflation. The big move up in inflation would have impacted government bonds even if they hadn't been overvalued. But because it was a quick bit of news, things changed very quickly and it was on top of very high valuations in fixed income, the impact was exacerbated. And that's arguably what we're seeing in the US stock market in particular over the last few weeks. That's it from me. Have a good weekend when you get there and I'll see you next time.