Tariff reaction - a new world is emerging

What happened?

President Trump has imposed steep tariffs on all exporters to the US, with higher tariffs on c.60 nations, to counter their trade surpluses with the US. The move has sparked threats of retaliation from other countries. The tariffs are expected to lead to higher US prices and slower growth with recession a real possibility.

Key highlights:

• 10% blanket tariffs on all imports, starting 5 April
• Tariffs of 104% on China, 20% on the EU, 24% on Japan, 26% on India, 10% on UK from 9 April*
• Mexico and Canada avoid new tariffs for now
• China and small Asian countries like Vietnam are the worst affected

This is going to be negative and painful for corporate earnings and therefore markets. The market was primed for tax cuts and what Trump delivered is the largest tax increase in modern US history.

How were these numbers decided?

A formula has been used which divides the US trade deficit with that country by what the US imports from that country. If a country (in this case Vietnam) runs a U$123bn surplus with the US, and exports $137bn to the US, the country is deemed to have trade barriers of 90%. Halving this gives us 45% which in theory should reduce the trade imbalance by half. Vietnam does not have trade barriers equal to a 90% tariff, so they have no way to remove barriers. The country has an advantage in manufacturing and has become a key part of global supply chains. The bizarre calculation includes estimates for non-tariff barriers and currency manipulation. Currency manipulation is impossible to calculate – a change in currency can be a result of manipulation or market forces. Same problem with non-trade barriers.

What does it mean for markets?

Equity markets hate uncertainty, and this has caused huge uncertainty. We expect markets to remain volatile for the remainder of 2025. We are keeping a close eye on credit spreads. We are likely close to peak turmoil that should die out towards the end of the year. Otherwise, the Republicans risk losing the Senate after the mid-term elections in November 2026. A lame duck Congress would severely hamper Trump’s agenda for the remaining two years. The reaction of the US dollar was interesting and something that has been on our radar for some time. Economic theory would imply that the dollar would rise as an offset to the tariffs. This did not materialise, and the dollar is now close to its six-month lows. We have long held the belief that too much investor wealth is held in US assets. The US has now become a much less welcoming place for foreign capital, we expect to see the dollar weakening to continue. The reaction of the dollar has dashed hopes that the tariff pain will be borne by the overseas exporter, it will hit the US consumer.

Conclusion

We expect nothing but more chaos and volatility for at least a couple more quarters. Corporate credit spreads will be crucial. We continue to favour equities with strong balance sheets, strong free cash flow generation, limited US dollar exposure. We will look to add to our equity weighting on signs of peak pessimism and exhaustion.

* Tariffs correct as at 9 April 2025.

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