As the first quarter has drawn to a close one word has dominated the headlines – Tariffs.
This story is very fast paced and seems to change on a daily basis, if not an hourly basis, this does make it extremely difficult to see where this will all end.
At the time of writing, the main tariffs have been paused for 90 days which has given a massive sigh of relief to global markets and, whilst this has taken us away from the cliff edge, we are not quite out of the woods yet. Although he has reversed most of the tariffs, China has not been spared as Trump has raised the tariffs on Chinese imports to 125%, the 25% tariffs on Canadian and Mexican imports also remain in place.
The 25% tariff on all imports of cars to the US also remains in place as well as the 25% on aluminium and steel. This has led to a number of car manufactures, such as Jaguar Land Rover, BMW, and VW Audi, to pause shipments and use a wait and see policy rather than have their vehicles hit with a significant tariff thus making them uncompetitive within the US. Cars are the biggest single UK export item to the US, accounting for sales worth £6.4bn. The Prime Minister has been keen to ensure that the UK gets a better trade deal, but at the moment there are significant sticking points in the importing of US agricultural products, such as chlorinated chicken and hormone-treated beef, both of which are currently banned in the UK. There is also the reluctance to appear to have completely appeased Trump and more efforts should be made to bring closer ties with Europe and our Commonwealth allies in an economic coalition of the willing.
So far as the UK is concerned, there is no question that, even with a 10% tariff (25% on cars, aluminium and steel), it will dent our economic output and that we will feel some pain from the new tariffs. On a potentially positive note, the odds for the Bank of England to reduce interest rates harder and faster has increased significantly given the potential fallout from Trump’s plan.
Prior to the Trump’s tariff trade war GDP (Gross Domestic Product) was set to grow by 1.2%, this is now expected to fall to around 0.8%, even though the UK has been hit with the lowest of tariffs – 10%.
The prospect of a fall in interest rates will be very welcome news to the housing market which, following the rise in stamp duty, has put pressure on the sector. Most analysts are predicting that we could see interest rates fall to 3.5%, with a few predicting it could fall further, depending on how long the trade war continues.
It is not just share prices that have been falling, the price of oil has taken a sharp fall as well, with crude oil now 20% lower than at the beginning of the year as traders factor in the drop in consumption given the economic impact of the massive increase in tariffs. This will lead to lower fuel prices at the pump, and will have an impact of offsetting some of the persistent inflationary pressures that have taken longer to work through the system than first thought.
This current trade war is undoubtably no good for anybody, and global markets, whilst they have seen a very welcome reprieve from the big falls, are still reeling from the irrational decisions from Trump, it remains a dynamic situation with many potential outcomes and the whims of one man. This, in some economists’ view, could well do irreparable damage to the US and its reputation as a reliable trading partner, nations will already be looking at other markets in which to trade.
Whenever change of this nature grips markets, it is imperative that we look through the initial ‘noise’ and position portfolios to navigate this volatility for longer-term returns.
It is also in times like these that our active management can add significant value, given our ability to deploy capital in favoured sectors rather than simply tracking the entirety of the equity market. Government bonds and alternatives, such as gold and infrastructure, act as a cushion when markets go through times of significant downturns.
We will continue to monitor the situation in the coming days and weeks and make changes, as necessary, to portfolios where we feel appropriate.