On Saturday Donald Trump announced a 25% tariff against Canada and Mexico and a 10% tariff against China.
The tariffs are predicted to reduce US GDP by 0.7 percentage points. Canada and Mexico may fall into recession.
www.oxfordeconomics.com/resource/the-damaging-first-act-of-the-global-trade-war/
China may experience an economic hit similar to the US, although if the tariff is increased to 60% later as Trump has promised, China’s GDP would fall more.
www.eiu.com/n/the-impact-of-us-tariffs-on-china-three-scenarios/
Trump also threatened tariffs against the European Union. The EU is, however, relatively insulated from US tariffs. A 10% tariff is predicted to lower GDP by only 0.1%.
www.lse.ac.uk/granthaminstitute/wp-content/uploads/2024/10/Economic-impacts-of-the-Trump-Tariff-Proposals-on-Europe.pdf
In the longer run, Trump’s tariffs will end up hurting the US the most. If China and Europe retaliate against the US with their own tariffs, it is the US who will end up with the lowest economic growth rate of the three, according to a London School of Economics model. In addition, the US may lose diplomatic power.
www.ft.com/content/069a3af8-261b-4848-b19b-4fe82d324c64
Given Trump’s penchant for the ‘art of the deal’, there is always a chance the tariffs will turn out to be temporary. Trump is generally considered to be attentive to the stock market and so may be compelled to change his policies if stocks fall sharply. There is a 50% chance the tariffs against Canada and Mexico will soon be rescinded, according to prediction markets.
https://x.com/zerohedge/status/1886288289520291938
The portfolio should be relatively insulated from the tariff war in the medium term.
The portfolio has no appreciable exposure to Canada or Mexico. There is exposure to Brazil, but that country would not be greatly affected by a 10% universal tariff.
In Europe, the portfolio contains a number of Financials. I’m comfortable with these positions because of their low valuations and because EU GDP should not be greatly affected by tariffs.
The European Real Estate and Utilities positions in the portfolio should benefit from lower interest rates, in case the economy does weaken.
The stock most likely to be affected by tariffs in the portfolio would be $AKE.PA (Arkema) . Arkema is a play on the global manufacturing cycle, which was improving until recently, but may now take a hit from the tariffs. I’m OK with holding a little exposure to manufacturing, in case the tariff situation improves.
In my view, the tariffs make it more likely that the ‘US exceptionalism’ thesis that has boosted the US stock market in recent times may soon come to an end. The US economy may feel the effect of the tariffs and slow down. If Elon Musk’s DOGE department manages to cut government spending, the resulting fiscal tightening would only slow the US economy down further.
In summary, I don’t see the need for any major portfolio changes as a result of the tariffs.
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