
How investors can navigate the trade war chaos
Donald Trump has thrown financial markets into disarray by…doing exactly as he said he would. It is a tribute to the sunny optimism of financial markets that when he said he would impose 25% tariffs on Mexico and Canada, and a 10% additional tariff on China, that they had hoped he was joking. Markets must now digest the consequences.
US tariffs: the fallout begins
President Trump signed a number of executive orders over the weekend imposing the new tariffs. As previously flagged, Canada and Mexico will face 25% tariffs, with the exception of Canadian oil and energy products, which will face 10% tariffs. Canada provides over half of the US oil imports and Trump will have been conscious about the impact on domestic inflation.
The orders also contain a retaliation clause, whereby if companies hit back with tariffs on US goods, the US will push tariffs even higher. This did not deter Canadian Prime Minister Justin Trudeau, who immediately levied 25% tariffs on a range of goods, including farming products, alcohol and household appliances. He said: “These countermeasures are effective immediately and will remain in place until the U.S. eliminates its tariffs against Canada.” The threat may or may not have contributed to Trump’s ultimate decision to defer the tariffs by a month, though Canada also made concessions on border control.
Mexican President Claudia Sheinbaum initially threatened retaliation: “I’ve instructed my economy minister to implement the plan B we’ve been working on, which includes tariff and non-tariff measures in defense of Mexico’s interests.” However, the government ultimately agreed to send additional troops to the border, which has bought it a one-month stay of execution on tariffs.
China has announced counter measures, including a 15% tax on coal and liquefied natural gas imports from the US. 10% tariffs on crude oil, farming equipment, pickup trucks and large-engine cars are due to come into force next Monday. China has also made a complaint to the World Trade Organisation, saying that the US is breaking international rules.
Europe is eyeing the situation nervously. The Eurozone has a significant trade surplus with the US, which puts it firmly in President Trump’s line of sight. Germany, for example, had a trade surplus of €63.3 billion with the US in 2023, with a focus on pharmaceuticals, cars, and machinery*. For the time being, German Finance Minister Jörg Kukies is urging caution, saying that the tariffs are the beginning of negotiations and not the end.
Almost certainly, these tariffs are part of a policy to act first and then negotiate later. While President Trump has made it clear that he believes tariffs will be ‘worth the price’, US citizens watching the price of their cars, food or household goods rising may not agree. The fall out from trade wars often lands on ordinary consumers.
However, in the meantime, there will be volatility, particularly in sensitive sectors, such as carmakers, consumer goods, and commodities. It is worth saying that there may also be opportunities. Markets can over-react to concerns – Chinese companies may have been expecting considerably worse than the 10% tariffs levied.
How can investors navigate this complex and volatile environment?
There is no immediate reason to panic. Tariffs are not new. China has been dealing with US tariffs for some time and has even imposed a few of its own. China imposed anti-dumping tariffs on European Union brandy imports in October, causing problems for groups such as Pernod Ricard.
However, it is a disruptive factor and can impact companies’ ability to trade. Fund managers may set out their stall as stock pickers, but most are very aware of the impact of macroeconomic factors on the holdings in their portfolios. Martin Connaghan, manager on the Murray International Trust, for example, says that while they are selecting individual companies, rather than investing in regions, they recognise that there will be macroeconomic factors they need to take into account.
At the moment, the group holds Mercedes Benz, and recognises that it could be hit by the tariff regime. All carmakers have been weak in response to the recent announcements. However, for Martin, the company has a very attractive dividend, which more than compensates for any hit from US tariffs**.
Other fund managers are managing the problem by targeting high quality companies that are well-insulated from the tariff regime. They have stronger balance sheets to defend themselves, and better product pricing. On the Guinness Global Innovators fund, manager Ian Mortimer says: “Focusing on the US equity market, we enter 2025 with elevated valuations as many stocks are trading at a premium to long-term averages. This leaves them vulnerable to external shocks or negative catalysts.
“In such an environment, we remain grounded in our investment philosophy of finding high-quality companies with exposure to long-term growth themes, as these companies tend to be shielded by better fundamental characteristics in terms of margins and balance sheets.”
Dan Roberts, manager on the Fidelity Global Dividend fund, says high valuations start to look particularly problematic in this type of environment. He adds: “A market pricing in optimistic growth expectations is vulnerable to negative surprises. That risk is particularly acute among the more speculative pockets of the market.
“Surprises are inevitable when investing across the globe, but our approach seeks to limit their impact. In part that comes from a permanent focus on valuation and a tilt away from those stocks with high expectations that are most at risk of valuation compression. It also comes from a bias towards resilient businesses whose outlook is predominantly driven from within rather than being closely tied to external factors, such as particular political or macro scenarios.”
Undoubtedly, this will be a volatile few months while negotiations ping back and forth, and investors work out the real impact of the tariffs. However, solid businesses will find a path through.
*Source: German exports to US reach new high as election looms, 16 October 2024
**Source: the armchair trader, 22 January 2025