Active Investing in a Post-Tariff World
After one of the most poorly thought through policy announcements in recent years, with a rationale that seems at odds with how the modern global economy operates, the announcement of President Trump’s tariff policies 24 hours ago has caused the market’s view regarding the possibility of a US recession to rise sharply, and US equity markets understandably fell steeply overnight.
Equities are now down more than 10% from recent highs, putting them firmly in correction territory. Bond markets have rallied (yields fallen) for the same reason, driven mainly by downgrades in growth expectations by bond investors. Interesting, the USD has continued to fall through this episode which we think highlights that most investor concerns lie with what the tariff changes will mean for the US economy – lower growth and higher inflation according to market moves This to us feels somewhat like Brexit – i.e. the UK’s decision to leave the EU, as in an “own-goal” entirely of their own doing.
The difference to Brexit however is that these unilaterally imposed US policy changes can be wound back. Trump is a pragmatist at heart and will likely be keenly aware that he has just lost US households a significant amount of their personal wealth in one day. He will also likely have an eye on the mid-term elections next year. If Trump doubles down on these policies, then a recession will be even more likely, ahead of which equity markets will likely fall further, and he could risk losing a significant number of seats in the mid-terms in November 2026. This would play into the hands of his opponents and even possibly lead to the unwinding these announced changes.
It is for this reason that we are not outright pessimistic. How US trading partners react now will be the next key hurdle – some have decided to apply reciprocal tariffs (reportedly France, Germany and Canada) while others (reportedly the UK) have chosen to negotiate. We remain cautious, but we also acknowledge that the market has now corrected 10%. The probability of a US recession has increased, but at least some of this probability has already been priced in. In Australia we are likely to be somewhat insulated from first round effects – the Reserve Bank has plenty of firepower, inflation is now trending in the right direction and, if needed, the RBA could easily cut rates more vigorously and sooner than expected. For us, the impact on China will be key, and here we would expect the Chinese authorities to react to any higher likelihood of recession arising from any tariff changes.
We are looking for superior quality companies trading at attractive prices. The great news for us and our investors is that now these prices will be lower. It is these times in particular that an active approach to investing allows the flexibility to seek the significant opportunities that are already beginning to appear.
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