Tariff turmoil: what are
investors to make of it?

The US announced a sweeping set of new tariffs on imports, with rates far higher than markets expected. Most countries will now face a minimum tariff of 10%, but some are being hit much harder: 20% on goods from the EU, 30% on South Africa, and 54% on Chinese imports.

The logic behind these tariffs is unusual, to say the least – they’re based on the size of the US’s trade deficit with each country, calculated as a percentage of total trade, and then halved. This formula has no clear economic justification, and its arbitrary nature has left investors and policymakers alike questioning the rationale.

WHY HAVE MARKETS SLUMPED?

Markets have reacted sharply to the announcement. The sell-off reflects a combination of heightened uncertainty and real economic concerns, including:

• Severe disruption to global supply chains: Tariffs at these levels act like an extra tax on consumers – the disruption will result in increased prices for consumer goods.
• Weaker US consumer demand: As imported goods become more expensive, US households are likely to cut back on purchase volumes.
• A drag on global economic growth: Lower demand in the world’s largest economy tends to ripple outward and will impact growth across the world.
• A boost to inflation: Higher prices will likely push inflation up, at least temporarily – limiting the extent of the interest rate response by central banks.
• Expected retaliation: Other countries are likely to respond with tariffs of their own, risking a broader trade conflict.
• Materially increased uncertainty: Market participants are less willing to pay up for future profits, and business managers are likely to delay capital spending – both of which weigh on markets.
• A vicious cycle: In an environment of falling markets and low CEO confidence, consumers’ savings are worth less and they worry about job security, so they spend less and save more. Weaker demand drags earnings expectations down further, and markets fall even more in response.
• An erosion of trust: A deeper concern is that trust in the global economic system overall has been materially dented.
• Global markets were quite expensive beforehand: When the starting valuation is in the ‘high’ zone, much good news is baked into prices, so the impact of any change in outlook is magnified.

In our view, market prices of assets have now adjusted to reflect most of the above.

WHAT HAPPENS NEXT?

A number of countries are expected to respond with retaliatory tariffs of their own – China has already entered the fray with an announcement of a 34% reciprocal tariff on imports of US goods. While this sabre-rattling risks further escalation, it may also drive negotiations around trade deals. The negative economic consequences of a trade war might drive some softening of tariff positions – the Trump administration will be keenly aware that continued economic growth is essential if the Republicans wish to retain control of Congress and the Senate.

Against this backdrop, we can expect Trump’s previously promised pro-growth measures – including tax cuts and deregulation – to be accelerated. In the meantime, expect volatility to persist as the markets react to news flow. While a US-led global recession is not our base case, it has become a more realistic downside scenario than it was only a few weeks ago.

IMPACT ON PORTFOLIOS

What does this mean for our clients’ investments with us? At Sanlam Private Wealth, our commitment to our clients is to not only grow their wealth responsibly over time, but also to protect it during periods of volatility. Our portfolios have so far delivered in this regard, falling less than their various benchmarks since the new tariffs were announced.

Our portfolios are purposely structured to be well diversified, with a mix of assets that don’t all move in the same direction at once. By holding less-correlated assets and focusing on downside protection, we aim to navigate stressful periods relatively better than many of our peers.

History has shown that markets often overreact – in both directions. Uncertainty, while uncomfortable, also creates opportunity. Given that prices now appear to reflect most of the bad news and the risk/reward balance has tilted, we are wearing our ‘buying hats’, as a number of high-quality businesses are now trading at substantially more attractive valuations.

We know that the Trump administration won’t be around forever and that great businesses will survive the current turmoil. We are therefore careful not to extrapolate all of the current changes into perpetuity.

That said, even after the recent declines, global equity markets are not yet in what we’d consider ‘cheap’ territory. So, while we are prepared to increase exposure to risk assets, we will do so selectively and responsibly. We are in no rush to deploy all of our available dry powder – but where prices are right, we will act.