Trump’s Tariff Announcement: Implications for Australian Investors
By Michael Malseed, Head of Institutional Portfolio Management
There’s a well-known maxim in the markets: sell the rumor, buy the fact—a belief that market expectations can often be worse than reality. However, in the case of today’s US tariff announcement, the outcome was, unfortunately, worse than anticipated, leading to increased volatility across global markets. Equities took a hit, and bond yields fluctuated—at this early stage, trending lower as concerns about growth appear to outweigh inflationary fears. This is a strong reminder of the importance of diversification and maintaining a margin of safety in your investment strategy. While the new tariffs will undeniably have significant implications for global trade, economic growth, and inflation, volatility can create attractive entry points for quality assets, especially for investors with a medium- to long-term time horizon. It’s also important to remember that there’s much more to unfold as countries respond to these changes.
What We Know About the Tariffs
Today, the US announced a set of “reciprocal tariffs” on a range of countries, based on what it believes to be the effective tariff rates that these nations impose on US goods, including factors like local sales taxes and alleged “currency manipulation.” The new tariffs have had a notable impact on countries that serve as major manufacturing hubs for US goods. For instance:
- Vietnam will face a 46% tariff on goods imported to the US.
- China, already subject to a 20% tariff, will see an additional 34% added.
- Australia, with which the US maintains a trade surplus, will face a 10% tariff (the minimum rate).
Notably, any goods manufactured within the US are exempt from these tariffs. Additionally, there are some temporary exemptions, including:
- Steel and aluminum
- Automobiles and auto parts already affected by Section 232 tariffs
- Copper, pharmaceuticals, semiconductors, and lumber
- Bullion, energy, and certain minerals not readily available in the US.
What We Don’t Know
While President Trump did not provide a definitive timeline for the duration of these tariffs, he implied that they could remain in place indefinitely. Many factors could influence the length of these measures, including potential legal challenges and the outcome of upcoming elections.
One major uncertainty is how the affected countries will respond. Will they retaliate by raising tariffs on US goods, prompting further US tariff increases? Or could we see countries seek to negotiate and lower tariffs on US exports in exchange for concessions on their goods? The next steps in this evolving situation remain unclear.
Initial Market Reactions
In after-hours trading, US stocks experienced a sharp sell-off. Unsurprisingly, companies reliant on imported goods were among the hardest hit, including:
- Apple (-7%)
- Nike (-6%)
- Amazon (-6%)
- Gap Stores (-12%)
Foreign companies with significant exposure to the US market, particularly those based in China, also took a hit, such as:
- Alibaba Group (-6.5%)
- JD.com (-5.5%)
US broad market indices followed suit, with the S&P 500 dropping over 3% and the NASDAQ falling by more than 4%.
However, the most significant consequence of today’s announcement might be its impact on future US Federal Reserve policy. The tariff news, which some commentators have described as worse than even the worst-case scenario, could shift the Fed’s focus from inflation concerns to economic weakness. If this occurs, the Fed may decide to resume interest rate cuts sooner than previously anticipated.
Prior to the announcement, Treasury yields were rising, but they quickly reversed course and moved lower during the press conference. The Federal Reserve has found itself in a difficult position—balancing the need to support economic growth while simultaneously combating inflation. Unfortunately, today’s news adds pressure to both fronts.
In response, Fed Funds futures now indicate that three rate cuts are priced in for 2025, up from the previous expectation of two. However, this projection remains highly fluid and subject to change.
Potential Ramifications
The negative implications of today’s tariff announcement are clear. These new tariffs will disrupt the efficiency of the global trade system, which is built on comparative advantage. As a result, consumers in the US will face higher prices, leading to inflationary pressures. Furthermore, global GDP growth could be stifled as profit margins come under pressure from increased costs.
That said, economics is rarely so straightforward. There are counterbalancing factors that could offset these challenges. For example, the US might respond with fiscal stimulus measures, such as additional tax cuts, to support the economy. Furthermore, the tariffs could accelerate the “reshoring” of manufacturing, which has been one of President Trump’s key goals.
What Should Investors Do?
Market volatility, particularly in reaction to policy shifts like tariff announcements, is a timely reminder of the crucial role portfolio diversification plays in mitigating risk. While short-term fluctuations are inevitable, a diversified portfolio can help smooth out the bumps and provide relative stability during periods of uncertainty.
Take a Long-Term View
While tariffs can cause immediate disruptions, it’s essential to take a step back and focus on the long-term picture. Markets often overreact to news, creating potential opportunities for those with a disciplined investment approach. We invest based on the fundamentals of a company—their ability to innovate, generate cash flow, and maintain competitive advantages over time. Tariff-induced volatility may present opportunities to initiate or reinforce positions in companies with strong, sustainable growth trajectories.
Focus on Companies with Competitive Advantages
It’s important to remember that not all businesses will be impacted in the same way. Companies with true competitive advantages, often referred to as having “wide moats,” will likely have more pricing power to withstand tariff increases. These businesses are better equipped to pass on costs to consumers or adjust operations in a way that minimizes the impact of rising tariffs. Focusing on firms with strong brand recognition, economies of scale, or unique intellectual property can help investors weather the storm.
Look for Opportunities in Domestic Manufacturing
Adjustments in global trade dynamics due to tariffs may lead to a shift toward domestic US production. This trend could create significant opportunities for U.S.-based manufacturers who stand to benefit from the relocation of supply chains or reduced competition from foreign imports.
Keep an Eye on Fiscal Responses
Lastly, investors should be mindful of potential fiscal responses to tariff announcements, such as government stimulus programs or changes to tax policy. These responses could create opportunities in sectors that benefit from increased government spending or regulatory adjustments.
Conclusion
The US tariff announcement has added to market volatility and uncertainty. While short-term disruptions are inevitable, it is important to reinforce the benefits of diversification and a focus on the fundamentals.
