US | Bracing for tariff decisions
In the eyes of the Trump Administration, tariffs reflect a strategy to address international trade imbalances, support domestic industries and respond to geopolitical concerns. However, tariffs have also led to increased tensions with trading partners and raised concerns about potential growth and inflation impacts both domestically and internationally.
US President Donald Trump has made several tariff announcements since he took office in January, some of them being delayed and/or rolled back. These ‘erratic announcements’ have increased policy and market uncertainty.
This week, the White House is preparing to implement significant trade measures (on 2 April). Trump has referred to it as ‘Liberation Day in America’. Previously announced tariffs will come into effect: these are 25% on all cars and auto parts not produced in the US, and 25% on imports from countries purchasing Venezuelan oil. In addition, the US Administration will likely target countries deemed to have ‘unfair trade practices’ or higher tariffs on US goods with reciprocal tariffs.
Uncertainty on the details remains and at the time of writing, discussions and negotiations are ongoing. Reciprocal tariffs have spooked markets as they are broad in scope. But recent media reports suggest these tariffs may be more targeted and narrower than previously threatened, potentially providing a relief to market sentiment and reducing uncertainty by setting a clearer process for international trading in goods.
Of course, this is just a possible (yet plausible) scenario and, taken at face values, tariffs have the potential to raise inflation and lower economic growth, even if uncertainty were to diminish. Looking at the difference between tariff rates charged by trade partners on US exporters and the tariff rate the US charges on imports from those countries, Brazil, Turkey, India, Vietnam, Thailand, Indonesia and South Africa are among the most exposed to an increase in tariffs. Plus, there are broader geopolitical concerns on China. This is why we are not holding any active tactical allocation to emerging markets.
Overall, we maintain a diversified allocation across asset classes and regions. For instance, we hold inflation-protected bonds, gold, and broad commodities to mitigate the impact of tariff risks on portfolios. Tactically, we overweight short-dated bonds, which can cushion downside risks. In equities, we have diversified away from broad US equities, where valuations are demanding, especially in technology, to an equal-weight index giving greater importance to more attractively valued sectors. These include US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation, and Europe, where we envisage a boost from fiscal stimulus too, centred around defence and infrastructure.
We also stand ready to readjust and, more tactically, we continue to own an ‘insurance’ instrument that appreciates when US equities fall, to mitigate downside risks (where client knowledge and experience, and investment guidelines and regulations, permit). Markets tend to react very swiftly to the news flow as economic, corporate and (geo)political events unfold continuously. Rather than knee-jerk reactions, we seek to maintain composure, anticipating potential developments.
This Week | ‘Liberation Day’ and US labour market data
In the US, markets are braced for a major policy signal from President Trump on Tuesday (see above). In the meantime, it’s a busy week with the March ISM manufacturing survey (Tuesday), followed by factory orders (Wednesday) and the ISM services survey (Thursday). On Friday, the March labour market report, with non-farm payrolls and the unemployment rate, will shape expectations for Fed policy. Investors will scrutinise the labour market to see if the prevailing policy uncertainty has started to negatively impact hiring. A softer print could increase the case for rate cuts later this year.
Eurozone inflation (Tuesday) is expected to edge down to 2.1% or 2.2% year-on-year from 2.3%, while the unemployment rate is forecast to increase slightly from 6.2% to 6.3%. Hence the data will not go in the way of the European Central Bank, which looks set to reduce rates further. We expect the central bank to bring the deposit rate to 2% by year-end from 2.5% currently.
Lastly, China’s purchasing managers’ indices (PMIs) for March will be released on Tuesday and Thursday. Markets will be looking for signs of stabilisation in the world’s second-largest economy, following a period of subdued domestic demand and lacklustre industrial activity.