Skipping a beat

The early days of a relationship are always exciting. You are getting to know someone new, dating in different places and trying new activities. But it isn’t always plain sailing. Harking back to my dating years the texting game always had its highs and lows. The heart skips a beat when you wake up in the morning to see if they have replied. Did they laugh at my unfunny joke, do they want to go for another drink, or have I been ghosted completely like so many who have gone before?

Now married, the closest parallel to this for me nowadays is waking up and seeing the latest FT breaking news article on my phone. I wipe the sleep out of my eyes to see the inevitable Trump-related headline and work out what kind of day I'm in store for. And it’s indeed an almost daily occurrence under the new US administration as it announces tariffs, freezes US foreign aid, takes aim at government spending, targets peace in Europe or just thinks creatively out loud on turning Gaza into the Middle Eastern Riviera. 

Of course, this is perhaps more like getting back with a former partner than forging a new relationship – we’ve been here before. It’s not exactly the same – it’s been four years and, if we’re honest, we’ve been keeping an eye on them on social media ever since. We’ve both changed. But, ultimately, we know what we’re getting in for. A focus on immigration, government largesse, and unfair trade practices. But part of it, I think, is a concerted effort to take control by blitzing the media, the courts and the markets with more than they can possibly process at once.

Keeping your eye on the prize

The hysterical media response to these daily announcements, conferences and tweets demonstrates that they have learnt nothing from the first term – like the one friend who never thought your partner treated you well enough and can’t let it go. At times it feels like Trump is toying with them. Those in the media or markets who recently spent their weekend analysing the impact of 25% tariffs on Colombia found their research of little use after the Colombian government relented: not only accepting illegal immigrants being deported back from the US on military planes (they had initially been denied permission to land), but also agreeing to send their own presidential plane to support the deportations. 

I think many people are focusing too closely on what Trump is saying today and not thinking enough about why he’s doing it. He’s not whacking everyone with tariffs and new policies just for the joy of it. He’s trying to drive changes in relationships between governments, businesses, allies, enemies and trading partners alike. Investors should be thinking about those changes, about whether he’s likely to be successful, and what they would mean for investments.

Keeping up with all these policy announcements can be a monumental task. And a fruitless endeavour. This, I think, highlights the incredible power of these tariffs. And Trump understands this, which is why he’s aggressively wielding them to get countries to bend to his will. Mexico and Canada have also been in the firing line for purportedly not stemming the flow of illegal immigrants and drugs into the US. Their 25% tariffs were put on ice after “friendly discussions”. Although Trump has now unveiled his plans for reciprocal tariffs – equalising US tariffs with those charged by foreign states on US imports – which will affect both nations as well as numerous others.

Of course, these tariffs haven’t been about unfair trade. Much more so tariffs on China (in place now for the best part of a decade, but continuing to ratchet up) and more recently on steel and aluminium imports. China’s response to Trump’s extra tariffs so far looks to strike a balance between avoiding material escalation (China has enough on its plate domestically) while presenting an element of strength. Meanwhile, given the rhetoric, Europe also feels very much in Trump’s sights – “They treat us very badly” – but whether our neighbours will be able and willing to make concessions to prevent tariffs is highly uncertain.

Despite this noise, apart from occasional day-to-day volatility, markets overall have remained relatively sanguine. There are a huge number of factors at play here, but I think the benign reaction to this turmoil boils down to the generally restrained nature of the tariff threats so far. They are well below the 60% on China and 10% on everyone else that was floated during the election. They have been used as an obvious ‘large stick’ in negotiations, and the recipients of those tariffs have in most cases been keen to toe the line rather than risk the potentially devastating hit to businesses trading with the world’s largest importer of goods. However, more tariffs are likely to come, and some will no doubt find it harder to make the necessary concessions, whether politically or because of real world constraints.

Investing in the time of tariffs

In our multi-asset portfolios, our analysis suggests that the direct impacts from potential tariffs are unlikely to be material for our global businesses exporting goods into the US. And talking to many of the US companies we own, most think tariffs will have limited impact on their business, either because they have already addressed some of those supply chain issues in response to Trump 1.0 and COVID, and/or they’re confident they can pass on any price increases without hurting demand. 

Aside from the immediate impact on those nations and businesses to which tariffs are applied, there’s the risk that these tariffs act as a drag on growth and add to inflationary pressures. There’s no doubt that the rhetoric will continue, and that more tariffs will be implemented over the next six months. However, for now, some of the inflationary impulse will be offset by a stronger dollar. Trump’s target of a weaker oil price through ramping up US production and pressure on OPEC should help to keep inflation in check over the year ahead. 

Whatever the tariff end game, a decrease in global trade – which is the result of greater tariffs – is a negative for global growth and some of the noise may start to hurt business sentiment. The likelihood is that any economic pain will be more pronounced on those outside of the US, and hence we have a preference for government bonds in Europe, as bond prices should rise if rates fall to prop up struggling economies over there. However, on the growth side, the new administration’s clear push for deregulation and lower energy prices should be overwhelmingly supportive for US growth. Trump wants to be seen as winning these negotiations. But he also marks himself by the performance of the S&P 500, so negative market reactions may encourage U-turns and therefore may prevent particularly destructive policies. 

As with any new or rekindled relationship, there are pros and cons. There’s always the risk that it all falls apart – especially in volatile relationships. And your know-it-all friend will be there to say I told you so. I’m not certain that this will be a happily ever after tale, but it might just be a prosperous four years, even if it gives me a few missed heart beats.

Tune in to The Sharpe End - a multi-asset investing podcast from Rathbones. You can listen here or whenever you get your podcasts. New episodes monthly.