Asset Intelligence Comment: US reciprocal tariff policy

President Trump, giant cardboard prop in hand, last night announced an astonishing list of higher import taxes on goods coming into the US – in what he dubbed a “kind” policy on reciprocal import taxes.

Make no mistake, yesterday’s announcement represents an enormous rewiring of the global trade system which has prevailed for decades. Under the policy, the average tariff on US goods imports will rise from 2.3% last year to an estimated 26%. This is the highest level since the 1890s.

On the back of the news, we have today seen stock markets around the world move lower. European markets, including the UK’s FTSE 100, are down by 1.5-3.5% at the time of writing on Thursday afternoon. America’s flagship S&P 500 index is down by over 4.5%.

Please find a summary of what has been announced, the possible impacts and information about our current actions as follows.

What happened yesterday?

President Trump announced a new baseline tariff of 10% on US goods imports from most countries. Additional tariffs were also levied on many other nations. These vary in accordance with how big America’s trade deficit is with each, but are often considerable. The most important total tariffs include:

• China 54% (including 20% previously announced)
• Japan 24%
• EU 20%
• UK 10%
  
  
• 25% tariffs on around half of Mexican and Canadian goods to remain
• 25% on all global imports of steel, aluminium and cars also to remain

 

 

What is the possible impact?

 

• Markets could remain volatile for a while as they digest the full implications of Trump’s move.
• US inflation could now rise from the current level of 2.8% to well above 4.0% this year.
• However, longer-term it is important to remember that tariffs are simply taxes. Higher taxes erode people’s buying power, and if fewer people are buying things, that typically leads eventually to lower inflation. This is something that central banks worldwide are likely to take into account when considering what to do with interest rates.
• Further, the negative impact of tariffs on US economic growth is likely to be eased if the revenues they raise are used to cut personal and/or corporate taxes. President Trump has suggested that this is indeed the plan.

 

What is Asset Intelligence doing now?

• The analyst team are reviewing all fund and stock holdings to consider what holding-specific risks may have arisen.
• No immediate changes are planned pending the outcome of this work. We never want to make knee-jerk moves which are often destructive to long-term value.
• Depending on risk profile, portfolios may also contain exposure to assets which have been more resilient through this choppy period. These include government bonds, certain currencies, gold and hedge fund-type strategies.
• Some cash is available to deploy within some of the portfolios if we do see any overblown price moves in quality stocks. We can move quickly to take advantage of any opportunities thanks to the enhanced trading flexibility afforded to us by our discretionary management powers and the recent enhancements made to the structure of many of our portfolios.

 

 

What else should you keep in mind?

 

• No investment strategy will ever avoid losses at all times – anyone who claims otherwise is selling you snake oil. In volatile periods like this, it can help to remind yourself that investment returns are rewards for taking risk. If there were never any risks, there would be no long-term rewards beyond those earned on a typical savings account either.
• The historical record clearly shows that equity markets tend to rise over time. While there will inevitably be some bumps along the way, as we are experiencing now, our view is that staying the course and staying invested usually provides the best outcomes in the end. Over the course of more than 150 years, global markets have seen World Wars, pandemics, political chaos, financial crises and more – and the long-term trend through it all has been upward. Indeed, although there are no guarantees, the very premise of a financial market is that it should continue to rack up all-time highs – else why bother?
• A great company yesterday remains a great company today, even if it might now face additional logistical challenges or cost pressures. The hallmark of a great business is the ability to adapt to changing conditions and retain the loyalty of your customers over time. Holding financial assets gives you a stake in the ever-growing innovation and ingenuity of entrepreneurs and business leaders around the world.