The Trump Tariff Tantrum and Stock Markets

The initial reaction to Liberation Day, when the US unveiled tariffs on countries it believes have taken advantage of it, was not a good one. The scale of tariffs, which reach close to and above 50% for many countries in Asia, is a clear message: the old economic order is over.

For most of our investing lives and particularly since 2001 when China joined the World Trade Organisation, we have been in an environment of globalisation. It didn’t matter where a company sold its final product, it could be manufactured anywhere in the world at the lowest possible cost. Apple and Nike are examples of US companies that are heavily dependent on manufacturing in China and Vietnam, both countries that will now have to pay a heavy tax to import goods into the US.

The immediate consequences of this change are likely to be higher inflation and lower growth, a combination that is not a positive one for equity markets. It will reduce the profitability of corporates and put pressure on consumer expenditure as prices increase. This will inevitably take some time to work through economies and markets as companies will need to adjust their profit expectations for the coming year. But to focus on this alone is likely to be a mistake.

What we are witnessing is a fundamental re-ordering of the global economy, from which there will be significant investment opportunities. Understanding this re-ordering and the economic framework that will come from it will be critical. Although it is early days, the following comments will hopefully put things into perspective and provide some reassurance.

It would appear we are moving to a multi-polar world, where three economic regions, North America, Europe, and Asia, trade more within themselves than with each other. This suggests investors should think about these three regions separately rather than being interlinked. Investing regionally as opposed to globally will be a skillset that many investors will have to learn and relearn. Globalisation isn’t completely gone, but it may now matter which markets a company is listed on and operating in, in a way that it hasn’t for some time.

In the US, there could be an acceleration of the re-shoring trend, which has been ongoing for several years, but now must accelerate as companies have to manufacture in the US to access it as a market for selling goods. Companies providing products and services to build out US manufacturing have been weak recently and may be in the coming days due to recession concerns, but they will likely benefit in the long term from what has occurred.

Europe will continue to look a more attractive place to invest as it stimulates domestic demand at the same time as it becomes politically more cohesive. Better growth and lower risk are a potent combination for equity investors, and although tariffs will hit Europe too, it has created an environment for real change in a positive way.

Asia, led by China, will also form its own economic block. Countries such as China, Japan, and South Korea, historically foes, are now coming together to respond to the US. As these and many other Asian countries begin to trade more with each other, it will create new economic linkages and opportunities for companies that operate there.

What happens in the next few days and weeks is less important than what happens in the next few years. The initial reaction will be negative from equity markets, and that needs to be respected in decision-making. However, it could miss the broader point; that economic re-orderings of this scale tend to set the investment trends for years to come. This creates opportunities, and those investors who can identify these trends will be well rewarded.

At times of fundamental change, some investors find themselves wrongly positioned, and to readjust their portfolios, they adopt a “sell first, think later” approach, which can cause extreme volatility. News flow has been universally negative in recent weeks, and this adds fuel to the turmoil in markets and creates further uncertainty.

This can be unsettling for longer-term investors, and it can be very easy to get carried away by market noise and become overly pessimistic. However, as always, it is important to sit tight and do nothing. Being able to rely on a robust financial planning strategy provides comfort to ride out market volatility. In the meantime, Clarion will continue to monitor the changing situation closely.

The Clarion Portfolio funds, which we have been gradually repositioning for some time, have wide regional and sector diversification and are well placed to benefit from changing trends.

Finally, on a previous occasion when stock markets experienced a similar bout of investor nervousness and volatility, the renowned investor Warren Buffett famously remarked, “That is the beauty of stocks and shares, they can sell at crazy prices sometimes and that is what has helped to make Charlie [Munger, Warren’s partner] and I, rich.”

Please do not hesitate to get in touch with your usual adviser if you have any questions or concerns.

Keith Thompson

ACII, Dip FA

Clarion Group Chairman

Please note

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested.

Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

The content of this article does not constitute financial advice, and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.