The portfolio has fallen 15% in the last few days due to escalating concerns about the economic impact of Trump’s tariffs.
Today the main headline in newspapers is that the markets are ‘crashing’, ‘tumbling’ and ‘in free fall’.
This is a classic buy signal. For every seller there is a buyer. The sellers will be those panicking; the buyers, those who see stocks as attractive at current levels.
When a negative economic shock hits, it is necessary to assess the medium-term GDP impact of the shock. This establishes how much the portfolio should fall from a fundamental perspective.
The economic impact of the tariffs can be analysed with models. One such model predicts that the US, Mexico and Canada will be hit the worst, with a 1.5-2% GDP hit.
www.stuff.co.nz/world-news/360640344/new-modelling-reveals-full-impact-trumps-liberation-day-tariffs-us-hit-hardest
On the other hand, estimates suggest that the negative impact on the eurozone will be less than 1%, probably closer to 0.5%.
Countries such as South Korea and Brazil will see little impact on their GDPs.
A 20% drop in the stock markets of the US, Canada and Mexico seems reasonable, given the rather large hit to their GDPs.
On the other hand, applying the rule of thumb that markets fall 10x the drop in GDP, I would see a drop of 10% in the euro area stock market as fundamentally warranted.
Corroborating this view, this morning JPMorgan estimated that European banks could see a 10-15% drop in their earnings due to a shallow recession caused by the tariffs.
That kind of drop, and more, has already happened. In other words, the fundamental effect of the tariffs is probably in the price already.
JPMorgan views the European banking sector as attractive from a longer-term perspective.
I concur and so will hold the portfolio, looking for opportunities to rebalance into the most oversold European cyclicals. Days like today can provide opportunities for those willing to accumulate stocks at good prices for the long run.
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@triangulacapital -0.7%
SWDA.L -9.9%
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