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Investment markets had largely ignored Donald Trump’s threat to impose stringent tariffs for much of the first quarter. However, in recent weeks there has been a move to risk-off sentiment as investors have focused on their potential negative impact on the global economy. However, the tariff increases announced yesterday are higher than markets had anticipated, with imposition of a standard 10% tariff, with a wide range of more stringent measures announced. This has led to heavy falls across global markets today with the US facing some of the heaviest drops (the S&P 500 is currently 4% lower, compared to a 1.5% fall in the UK’s FTSE 100). In currency markets the pound has ticked up against the dollar (which will at least help the UK's inflation outlook).

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The reaction of the market is focused on the outlook for US led global growth and inflation. The tariffs (if implemented) will lower the short to medium term growth prospects for the US economy. At the same time the price rises will increase inflationary pressures which leaves the Federal Reserve (and other Central banks) in a tricky spot on whether to reduce rates to support growth.

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The Fed has signalled in recent commentary that supporting growth and avoiding recession is the priority with tariffs probably increasing the scope for further US interest rate cuts this year. Overnight the market’s rate cut expectations increased with at least three US rate cuts pencilled in for 2025.

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Nothing from Wednesday's announcement was a particular surprise and the worst thing you can do in such times of market volatility is panic! These tariffs are purely the start of the negotiating tactic with each country. It is a broad-brush approach rather than a clearly defined economic strategy (as illustrated by the fact he has imposed 10% tariffs on an Antarctic island that is only inhabited by penguins). Trump styles himself as the expert negotiator - whether taking on over 60 countries in one go is the best way of going about this remains to be seen.

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One interesting aspect is what this means for investment in the US equities given that the US makes up 60% of the MSCI AC World index. For some time, the dominance of US large cap technology has been the only game in town and holding US or global index trackers (which are dominated by US stocks) has almost been the only stockmarket strategy you have needed.

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However, the advent of trade war(s) is likely to lead to overseas investors reducing their US equity exposure (the US has over $33trillion of equities and bonds owned by overseas investors). This is likely to drag on US assets and the dollar in the short to medium term and we have been seeing evidence of this year to date. In our view this sharp change in sentiment does reinforce a strong argument for including active management strategies and diversification across global equity markets, (especially taking advantage of areas that are trading on much cheaper valuations than US equities).

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Yet experience has told us that you underestimate the quality of the US corporate sector at your peril (irrespective of the US political or economic backdrop). Is this all just a negotiation ploy to get more US based manufacturing? In the long-run you would be brave to bet against the potential of US equities.

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Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided does not constitute a personal recommendation to deal. Any statements, opinions, forecasts and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd. Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

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