Trump could be making the rest of the world great again

Jacob Mitchell | Antipodes

Trump has unveiled the US' new global tariffs, which are roughly a weighted average 20% global tariff rate.

While this is worse than expected, the final act hasn't been written just yet. A 10% baseline tariff will be levied on the 5th April, but now the negotiation begins around additional tariffs which aren't due to come into effect for another week.

US equities have fallen 5% in USD terms in 1Q25, the largest quarterly US underperformance relative to the MSCI ACWI since 4Q12. It's a misconception that tariffs have been priced into US asset prices. This drawdown has been led by the Magnificent 7 - or the Meltdown 7 - which have fallen 16%. This drawdown relates to the range of outcomes widening around AI. Investors are questioning what will the return on investment look like on the hundreds of billions of dollars that is being ploughed into AI.

Today's announcement isn't a clearing event because the impact of tariffs is yet to be fully felt. Further, most North American trade is in intermediate goods, heightening the risk of supply chain disruptions as well as the risk of upward pressure on inflation and lower economic growth. Estimates suggest that, all else equal, a 20% tariff could add 1.5% to core PCE inflation (which is currently running at 2.8%). While uncertainty from tariffs remains, and uncertainty around the extent of DOGE spending cuts, business and consumer confidence will continue to be weak.

The market hates uncertainty. Asset prices will not only be impacted by the effect on corporate earnings but also a higher discount rate that will inevitably be applied to those earnings to compensate for this uncertainty. We have seen this playbook before in China when policy became unpredictable with the introduction of President Xi's "Common Prosperity" programme from 2021. That is, Trump could be underestimating the impact to US asset prices.

While policy uncertainty is widening in the US, it's arguably narrowing in Europe and China where the direction of fiscal policy is more positive - and starting valuations are more attractive. While the headlines around tariffs do look worrying, net exports to the US account for c. 2.5% of Germany and China's GDP - at a minimum least some of this can be offset by fiscal stimulus that will support their domestic economies. In contrast, the US could be exposing itself to stagflation again.

The unintended consequence of Trump's policies is that it could make The Rest of the World Great Again.

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