A not-so-festive Liberation Day

After a long wait since January and a one-hour-long 'speech', President Donald Trump unveiled yesterday his “kind reciprocal tariffs”.

In a nutshell, starting 5 April, the US will impose tariffs of at least 10% on all goods coming into the US. Countries that are “ripping off” the US via tariffs, currency manipulation, or any other trade barrier that the US administration has deemed unfair will, starting 9 April, be subject to tariffs that are half of what they charge the US.

For the European Union, this will be 20% which, compared to the 46% to be imposed on imports from Vietnam or the additional 34% levy on Chinese goods, appears kind indeed. The UK will be subject to the minimum of 10%. 

A lot to digest and more to come

Here are some initial thoughts, keeping in mind that this is a very fluid situation: 

• This is close to a worst-case scenario for markets as the hope was that tariffs will be closer to 10% or 15%. Instead, the numbers given yesterday equates roughly to a 20% weighted global tariff.  The good news – if there is any – is that the bad news is out now and we can all move on, knowing what the left tail looks like
• This is a mess for anyone having to deal with supply chains, but the most likely response is that imports will start transiting by low-tariffs countries (this is potentially good for the UK and as well as for Canada and Mexico if the US-Mexico-Canada Agreement [USMCA] remains in place – see point below)
• There was no mention of possible negotiations which is a negative. It sounds like President Trump is counting on the “trillions” flowing from these tariffs to finance upcoming tax cuts. Optimists will point to the fact that if we move on from tariffs and start talking about tax cuts, this could be a positive, but we are months away from actual tax cuts, if any
• That said, we shouldn’t underestimate Donald Trump’s ability to change his mind. On that front, Treasury Secretary Bessent seemed a bit more conciliatory, hinting that today would set the ceiling for tariffs, allowing negotiations on lowering them to proceed on a case-by-case basis
• There was also no mention of carve-outs but there is a notable exception to these tariffs. Indeed, the USMCA will continue to apply to trade between the US, Canada, and Mexico. That said, the 25% tariffs tied to drug trafficking and illegal migration remain in place
• With all the best will in the world, the US doesn’t have the manufacturing capacity to replace all of its goods imports, which means that a significant price shock and/or margin hit is likely. 

Letting the dust settle

It will take a while for markets to digest this watershed moment for global trade. There is also the question of possible retaliations. We will also listen to what Jerome Powell may have to say on how the Federal Reserve (Fed) intends to react. 

Clearly, the dust won’t settle just yet as investors will want to gauge both the economic and earnings impact of these tariffs. In this context, the next few days and weeks are likely to be volatile. But markets should find a floor eventually as the risk of further bad news has been greatly reduced.

Going back to basics

For investors we see a few initial takeaways: 

1. Diversification and selectivity, two key themes of our Outlook 2025, have rarely been so essential
2. Volatility is here to stay as we now enter the negotiating phase
3. Watch for retaliations (bad) but also possible stimulus plans (good) to support the most affected industries. 

We can also expect further downgrades to growth forecasts. On that note, Barclays Investment Bank’s revised forecast points to a Q4/Q4, real GDP contraction of 0.1%. While consistent with a recession, it’s important to recognise that this would be as mild as it gets.

Long-term opportunities arise in difficult times

To conclude, there are still a lot of unknowns, but the overall picture isn’t great. Importantly though, this uncertainty about the outlook and these concerns around future growth are exactly what’s required for equity markets to produce strong returns.  

It’s impossible to say if the bottom will be in by the end of the day, the week, or the month but the wall of worry is getting high enough that anyone with a 12-month-plus investment horizon should seriously consider stepping in (gradually, selectively and with diversification in mind of course).

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