5 Thoughts on Tariffs and Trade

A return of ‘Capital Nationalism’ and the repatriation of capital away from the US could have major consequences for the relative performance of US equities

 
With the liberation day tariffs dominating the news agenda, Ben Leyland and Rob Lancaastle of the JOHCM Global Opportunities Fund have shared 5 points that are guiding their thinking during this volatile time
 

1. We are thinking a lot and acting little, for now. Our focus is on protecting capital through short-term volatility and being vigilant to where structural fundamentals are changing for the worse. We are monitoring for where babies are being thrown out with the bathwater and the sell-off might create opportunities to deploy capital as this unfolds. We own plenty of multinational companies with sales in the US, but most of these are services businesses or domestic infrastructure, rather than goods exporters. We have seen weakness in our industrials, especially in Japan, but we do not have that much US cyclical exposure, and our utilities and defence names have so far been resilient. So far both our global (MSCI AC World) and international (MSCI EAFE) strategies are performing as we would expect.
2. There is a lot of uncertainty with regard to the particulars of these tariffs, but this doesn’t really change the general backdrop which we think we are working in. Whether all the tariffs will be implemented – most of those announced year to date have not been – is not clear, but they are likely to lead to a fragmenting geopolitical environment in which regional self-sufficiency needs to be re-established and rebuilt, likely supported by fiscal stimulus. Our portfolios have been constructed with this in mind since 2022 and we see little reason to change this view currently.
3. Big first order losers would appear to be a) sectors directly and indirectly involved in cross-border trade into the US (eg consumer goods and electronics) and b) US domestic cyclicals, given the increased likelihood of stagflation. Banks, industrials, consumer goods and technology were particularly hard hit yesterday; domestic sectors like utilities, retail and telcos were much more resilient. In regional terms, the US was by far the worst affected, whilst other markets fell much less – and the differential was exacerbated by USD weakness. But we are not complacent that this is simply an anti-US rotation – non-US economies are likely to be impacted and non-US equity markets could well decline.
4. US cyclicals are still a long way from pricing in recession. We will need to monitor things like the Fed response, potential tax cuts, and consumer confidence/unemployment, which will all affect the likelihood and severity of a macro slowdown. If we see a significant sell-off then we may look to increase our exposure to companies which can benefit from US re-industrialisation and reshoring, which presumably is one intended outcome of this tariff policy.
5. Beyond economic fundamentals, the new regime is likely to have major implications for cross-border capital flows, which are intimately connected with trade flows/current accounts and have been a huge tailwind for the pricing of US risk assets for the majority of the last 15 years. A return of ‘Capital Nationalism’ and the repatriation of capital away from the US could have major consequences for the relative performance of US equities. We are also mindful of the potential for a re-run of the rapid unwinding of the JPY carry trade, which we saw briefly upsetting markets in the middle of last year.