Summary
There have been numerous developments since our note on the ‘Liberation Day’ tariff announcements circulated last Thursday. We are monitoring a very fluid situation unfolding between the US and its key trade partners, with various countries responding to the US ‘reciprocal tariffs’ differently.
As a recap, Trump views tariffs as one of the tools that can be employed to restore the US trade balance with other countries and to reduce its trade deficit. Other levers used to achieve this goal include onshoring of manufacturing, as well as reducing inefficient federal government spending.
On Friday, China announced retaliatory tariffs on the US, indicating an initial unwillingness to enter into trade negotiations. This resulted in a continued selloff in equity markets that further spread to the European, Asian, and Australian markets.
Various comments were expressed by several members of Trump’s cabinet, including Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent, that short-term pain may be necessary to restore the US trade balance. US Federal Reserve Chair Jerome Powell also indicated that the US central bank would not be cutting rates in reaction to the US tariff announcements, which also contributed to markets adopting a ‘risk-off’ mentality and a flight to defensive assets.
Further developments
More than 50 countries have since reached out to the White House to initiate trade talks following Trump’s tariff announcements. Listed below are notable examples of how some countries have responded:
- Australia: no reciprocal tariffs to be imposed on US
- Cambodia: immediate reduction of tariffs from 35% to 5%
- China: imposed a retaliatory 34% tariff on all imports
- India: no indications of retaliation
- Japan: no indications of retaliation
- South Korea: the trade minister was sent to the US for negotiations
- Taiwan: pledged zero tariffs to remove trade barriers
- Vietnam: removed all tariffs on US imports.
Several US apparel companies whose suppliers are based in Southeast Asia (e.g. Nike, Lululemon, Deckers) had share price rallies on Friday on the back of the tariff reduction/removal announcements from Vietnam and Cambodia. We anticipate that other segments of the equity market will experience similar rallies when further tariff reductions are announced between other countries and the US.
Potential portfolio adjustments
- We are considering the possibility of multiple scenarios unfolding (e.g. trade war fears subsiding as countries enter into negotiations with the US, or trade wars continuing to escalate) and have plans to act accordingly.
- We are looking to tactically add to certain risk assets such as quality large cap equities, as well as allocating to high yield credit as credit spreads have been widening, offering a more attractive entry point. Some of this will be achieved through rebalancing and some may well require manager replacement.
- We are also maintaining duration exposure through fixed income to provide downside protection, as well as to benefit from the upside when the Fed does decide to cut rates. We will be active in this space and could potentially reduce duration when the opportunity presents.
- We may look to put on more risk (e.g. in small and mid-cap equities) if the current state of trade tensions escalates and results in further market weakness.
Finally, as a reminder, negative market events are to be expected from time to time, and it is prudent not to panic during these events.
