Executive summary:
- Market impact: In response to the US global tariff announcement, UK and European stock markets dropped by around 1%, with expectations of a 3% decline in the US market. Conversely, bond markets rallied as investors anticipated potential rate cuts from Central Banks due to lower growth expectations.
- Tariff details and responses: The average tariff is about 20%, significantly higher than the expected 10% to 15%. The EU is already planning retaliatory measures, and tariffs on Asian goods will impact US tech firms.
- Equilibrium funds: We anticipated this outcome and therefore have already adjusted our core portfolios, moving away from big US stocks, holding less in equities and more in bonds, as well as adding an element of “portfolio insurance”.
“Liberation Day” is finally here!
This is Donald Trump’s term for the day he announced his trade tariffs. Liberation from what is not exactly clear; perhaps freedom from the “tyranny” of cheap imports?
As you will no doubt be aware, this has impacted markets, and we expect this could continue for some time.
At the time of writing, the morning of 3 April, UK and European stock markets have dropped about 1.5%, and we expect the US stock market to open about 3% down. However, bond markets have rallied.
We’ve covered much of the potential impact elsewhere – in particular, please see The Pulse from last month. In summary, there is plenty we can do about this and plenty we have already done, which we hope will limit the impact.
Our initial response to the announcement is that the tariffs are at the top end of expectations. On average, the tariffs are about 20%, according to Goldman Sachs analysis, compared to expectations of maybe 10% to 15%.
In essence, there’s a “baseline” tariff of 10%, which is the minimum amount that will be paid. UK exports to the US will attract 10%.
Then they work out (using pretty dodgy maths) the total tariff that other countries charge the US (occasionally including the impact of things like VAT, and sometimes not!) and then charge half of that.
The upshot is that the EU will pay 20%, China will pay an additional 34% (totalling 54%), and Japan 24%. Mexico and Canada have their own arrangements, previously announced, of 25% (with some exceptions).
The EU has already announced they plan to retaliate with measures of their own.
The higher-than-expected tariffs on Asian goods will impact some US tech firms in particular, who manufacture and import components from various countries in Asia. Amazon and Apple, for example, have seen their shares fall in after-hours trading.
As mentioned in The Pulse, we’ve been positioning the portfolios for this type of outcome. In general, within equities, we’ve been moving away from big US tech stocks and holding more in other countries and different types of stocks.
In the core portfolios, we’ve been holding less in equities and more in bonds. The initial sense is that bonds are benefiting from this announcement, as markets expect more rate cuts from Central Banks in response to potentially lower growth.
Tariffs are, of course, inflationary, but that would be a one-off price increase, and perhaps Central Bankers are prepared to look through that. Of course, this remains to be seen and could easily change.
We’ve also previously explained how we’ve added “portfolio insurance” to the core portfolios. We believe these assets should gain in value should stock markets fall (particularly US markets). This should hopefully cushion the impact and reduce losses if markets drop further.
As always, we’ll continue to watch carefully. Later in April, we will be issuing our usual quarterly update and will go into more detail about the impact on portfolios and the actions we’ve taken.
In the meantime, if you have any queries then please get in touch with us on 0161 486 2250 or reach out to your usual Equilibrium contact.
