Q1 2025
With Trump in the White House volatility was always going to be the watchword of 2024 but the dramatic policy changes of the last 2 weeks has been unprecedented in living memory. On 2 April Trump announced trade-weighted effective tariffs of over 20%, double the 10% expected and a significant jump from the current 2.5%. By 7 April the US market was in bear market territory, reaching a sustained drop of 20% with $9.5 trillion wiped off global markets, yet 24 hours later, on 9 April, the NASDAQ had posted its second best day ever and the US closed one of its best trading days of all time. Trump had flagged his tariffs on the campaign trail and indeed during his first term, with a particular focus on China and certain sectors like car manufacturers. He has three bug bears; tariffs, a strong dollar and trade deficits. Yet no one predicted the scale nor breadth of tariffs announced on ‘Liberation Day’, with tariffs being almost double (on average) the worst case scenario predicted by investors. They are based on trade deficits and so penalise companies that sell more to the US than vice versa leading to bizarre outcomes such as South Korea facing 25% tariffs even though the two countries have a free trade deal.
It wasn’t until bond markets began dumping US Treasuries that Trump was brought to heel and performed his U turn announcing a 90 day pause. No doubt his approval rating falling 5% in two weeks and the dramatic weakening of the dollar also panicked him. Markets breathed a sigh of relief but the impact of this attack on global trade has only just begun to be felt. With his shock and awe tactics Trump has managed to leave investors relieved that the baseline tariff level is ‘only' 10% with investors almost suspending disbelief to imagine that 174 trade deals (which usually take years) can be pushed through in 90 days. By the end of the 90 days on 8 July, 60 countries will face higher rates with China facing 145% tariffs on imports. The EU faces a 20% tariff and he had already imposed a number of tariffs on certain sectors such as 25% on all car imports and 25% on steel and aluminium, These are the highest tariffs since the 1930s when the Smoot-Hawley Act raised them to 40%, leading to inflation, a trade war and contributing to the Great Depression.
Most concerning for investors is that Trump does not appear to have a plan or indeed logic for his tariffs. His see-sawing and reactionary policy such as exempting electronic goods - iPhones etc, when he belatedly realised that price rises would dent his popularity speaks to a total lack of any grand plan. The DOGE initiative is all about reducing government and yet the tariffs are an effective tax on consumption of some 2.5% of GDP. Further, a trade war with the world’s second largest economy will have no winners. Whilst the US is the crucial export market for China, President Xi has been planning for this, his targeted tariffs will impact Trump voters, such as soybean farmers and its $20 trillion dollar economy will prove more resilient than Trump assumes. Markets are assuming that with an economic softening rates will come down, however, it is equally likely that prices rises will ultimately be borne by the consumer leading to further inflationary pressure with US inflation rising to 4-5% by the end of the year.
The quarter started with price volatility in AI stocks as DeepSeek in China released a seemingly more efficient Large Language Model at an astonishingly low price. As the Chinese economy has been in the doldrums for such a long time, investors have failed to notice the impressive strides their large tech companies and indeed small ones are making. This contributed to the underperformance of the US magnificent 7 and the US underperforming the rest of the world in Q1 by 10%, its most significant underperformance for 23 years. The Bank of America fund manager survey showed the biggest reduction in US exposure in its 24 year history with investors looking to Europe for opportunities. As markets now have a singular focus on tariffs, it is important for investors not to lose sight of other innovations and opportunities, which can offer long term rewards to the patient investor. Loss of confidence in the US and the inflationary impact of tariffs will have continued repercussions for markets. Look out for managers positioned to companies with less vulnerable supply chains, strong pricing power and under-exposed to vulnerable sectors like autos but with indiscriminate selling most portfolios have all been hit in performance terms.