US trade tariffs and TAA update

What has happened?

President Donald Trump announced ‘reciprocal tariffs’ on all US trading partners on what he hailed as “Liberation Day”. This means a minimum 10% tariff on all imports. The reciprocal tariffs have been calculated to take into account tariffs imposed on US imports by individual trading partners. Some additional tariffs targeting specific industries may yet be announced, although no guidance has been provided.

What does this mean?

The tariffs are higher than forecasters had been expecting. For example, a 20% tariff has been imposed on the EU, 34% on China (in addition to the previous 20%), 26% on India and 24% on Japan. A period of negotiation will now begin. Nonetheless, average effective US tariffs may reach close to 20%, which compares to 3% in 2023.

It is likely that economists will downgrade their growth forecasts and increase their inflation forecasts for 2025. As a result, we would expect analysts to also downgrade corporate earnings for this year and next.

What next?

We now see several forces continuing to shape the investment landscape. Tariffs could indeed slow global trade somewhat and keep inflation higher than in the recent past. But we also believe consumer resiliency—and the potential for new trade deals—could help the global economy maintain moderate, steady growth.

Central banks are likely to diverge in their policy responses, and investors will need to watch carefully for shifts in interest rate trajectories, especially in the US and Europe. Valuations for both equities and bonds differ across regions, creating opportunities in the search for quality companies and more attractive yields.

AXA IM Select view

Our overarching message is one of caution whilst we carefully navigate this new regime. We will be keeping our eyes open for excessive pessimism, which might offer opportunities, given that new technologies and fiscal programmes could come in to bolster growth. Risk management will be key. While shifting trade policies and political headlines can shake near term sentiment, they do not negate the fundamental strengths that underpin the markets and our economies.

As a result of this tariffs announcement, and based on the current market context, we have decided to change the tactical model portfolio allocation to a slightly more defensive stance.

We are downgrading global equity, as earnings growth is correlated with global trade growth. In the short term, some companies’ margins might be impacted by the rise in prices across the supply chain, resulting in an inability to pass on increased tariffs to their customers. We keep our regional equity allocation unchanged, with no regional winners or losers emerging from this news. However, we expect more dispersion between individual stocks, likely in favour of defensives, making stock picking key in this new regime. Overall, our bias is to rebuild positions on weakness.  

As for fixed income, we are slightly increasing our overall government bonds exposure, preferring Eurozone government bonds where valuations remain attractive versus cash rates. We are significantly reducing our underweight position in US Treasury bonds. Although the recent rally seems overdone and doesn’t reflect inflation risks, the size of the tariffs might keep inflation expectations at elevated levels and income tax cuts could lead to a higher budget deficit. Within corporate bonds, we remain neutral on both investment grade credit due to unattractive valuations, as well as on emerging market bonds, given their negative sensitivity to protectionist policies. We are downgrading our view on global high yield bonds to neutral, as spreads could widen further on rising stagflation risks.

As a result, we are increasing our cash position with a view to reinvesting as investment opportunities emerge.