Commenting on President Trump’s tariff announcement, Altaf Kassam, Europe Head of Investment Strategy & Research, State Street Global Advisors, said:
The uniformly negative reaction of equity and equity derivative markets post the “Liberation Day” announcement reflects the ‘sticker shock’ from investors digesting a higher absolute level of tariffs from the U.S. than expected, although the relative ordering might have been more predictable.
Nowhere is this surprise clearer than in the rates levied against China and Vietnam, reflecting the Trump administration’s urgent desire to decouple its economy from China, meaning the equities of economies with strong trade linkages to China will also be hit, as well as those relying on China for growth. As such, emerging market equities, particularly in Asia, appear most vulnerable to continued underperformance, as well as companies with complex global supply chains for whom recalibrating their business models will be a lengthy and complicated process. This negative ripple effect could also be exacerbated by currency weakness, both more immediately through and over the medium-term through monetary policy.
Within global developed market equities, defensive sectors including utilities, consumer staples and healthcare, have demonstrated relative resilience so far this year, as well as more cyclical sectors such as energy and financials. Of these we think utilities are the most likely to continue outperforming as tariff induced monetary policy easing boosts these “bond proxies”. The energy and financial sectors however could see the wind taken out of their sails as worries about global growth and consumer and corporate consumption and CapEx become more pressing.
While the technology and communications services sectors in the U.S. face genuine headwinds from supply chain disruptions and higher input costs, their quality of earnings, and pricing power, may enable them to hold their heads above water in the medium term, especially for those with more domestically oriented revenue streams. This outperformance should also extend to other more domestically focused U.S. companies, which should be relatively insulated from the negative impacts of tariffs on international trade. Furthermore, as tariffs make imported goods more expensive, domestic consumers might substitute towards domestically produced goods and services, providing a further boost.
One wildcard for outperformance might be European equities. So far the UK has been one of the few countries to “escape” with only the blanket 10% tariff, but most importantly the €U has one of the stronger hands to play in terms of potential retaliation, possibly through the imposition of retaliatory tariffs on US service exports to Europe (see More Storms Brewing: Are Tariffs on Europe Next?), and President von der Leyen’s immediate response has certainly been one of the more robust amongst the U.S.’s largest trading partners. If the U.K. can remain “under the radar” and the €U play its relatively stronger hand to bring the U.S. to the negotiating table, then the outperformance of European vs. US equities we have seen YTD could continue.
An overall ‘best case scenario’ would be that the announced tariffs have planted a ‘flag in the sand’, setting a hard line from which the U.S. administration would be comfortable retreating over the medium term. However, in the short term, market volatility is bad for all risk assets, especially those driven more by sentiment like equities, and this “rolling uncertainty”, and hence negative absolute performance, will likely persist as countries formulate responses and investors assess second-order effects on inflation, monetary policy, and global growth in real time. Only the feeling that we have ‘reached a limit’ could allow equity markets to move on, which event currently feels a long way away.
