Tariffs, tariffs, and more tariffs

From an economic point of view, the first quarter of the year has been dominated by Donald Trump’s obsession with imposing tariffs on imports to the US and the knock on effects this has could have. The tariff threats started with 25% levies on steel and aluminium imports from Mexico, Canada and an additional 10% on imports from China. These were framed as a war against drug trafficking into the USA. However, the Tarriff threat soon moved into a much wider scope, effecting most countries. Most recently, Trump announced 25% auto tariffs, which were due to begin 3rd April. These will particularly affect Europe and the also UK, as 40% of the vehicles manufactured here get exported to the US. There has also been threats of retaliatory tariffs from affected countries.

It is feared that wide ranging trade tariffs on imports will stoke US inflation again and drag on the US economy. Markets are also concerned that the situation could spiral out of control, into a global trade war where nobody wins, and the world is pushed into a recession.

Although Donald Trump seems to believe that all his tariffs will make the US economy stronger in future, the US stock market does not seem to agree with him! So far this year it has been one of weakest main market performers, with the S&P500 down over 5% to the end of March. Ironically, China and Europe who are two of Trump’s major tariff targets have done well, with the Hang Seng and Euro STOXX stock market indices up over 16% and 7.75% respectively, to the end of March.

UK

The UK’s main stock market index, the FTSE 100 has so far this year also been in positive territory, up 6.1%. Although the UK economy is also potentially going to be impacted by the US tariffs, the very large companies in the FTSE 100 derive a significant amount of their earnings from overseas and are therefore less exposed to the UK economy. The parts of the UK stock market with more mid-sized/smaller companies that are heavily exposed to the domestic economy, have not done so well, so far this year. This would seem to have less to do with the tariff threats and more to do with the weakening in economic growth (GDP numbers) since last summer’s tax raising budget. As we have approached the date for the large increases to National Insurance, business rates and minimum wages, there appears to be increasing numbers of business closures and staff reductions/ layoffs.

It does remain to be seen what tariffs will be imposed on the UK and what affect this will have in terms of company profits, but also whether this will lead to a need for the Chancellor to raise taxes further to balance her books! What we do know is that stock market valuations of domestic UK companies are still particularly cheap and continue to attract offers of acquisition from overseas buyers. Business confidence surveys for March did show high levels of confidence in trading prospects, despite the challenges.

The latest inflation figure in March showed that UK inflation (CPI) cooled in February to 2.8% (from 3% in January). The Bank of England (BOE) is expecting some short term rises, due to large energy, water and Council Tax rises from April. However, they still see a general trend of reducing inflation this year and expect further possible cuts in interest rates. This would be seen as positive for the economy and UK shares.

Global picture

The general outlook is still one of moderating inflation and slowly rebounding growth, across the globe. This view could be disrupted by the US tariffs, but it is too early to tell as changing behaviours by countries and individuals could change the picture.

There is also the issue of the change in US policy towards Russia and the war in Ukraine. This is still very much a work in progress, but if hostilities there do cease there could be positive economic effects through reduced energy and food prices.

Sources: Reuters, Office of National Statistics, Schroders.

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The comments made in this review represent our current investment views and are in no way a guarantee of future performance.