Will your clients’ portfolios survive post Liberation Day?
United States (US) President Donald Trump gave the mainstream media exactly what it wanted when he branded his international tariff announcement ‘Liberation Day’. Within minutes, news feed were awash with hashtag Liberation Day memes featuring Trump’s country-by-country tariff poster or similar, while the public relations teams at asset managers and other financial institutions rushed to ‘stitch’ the phrase into their content plans.
The road to recession
Global asset manager, Schroders, did not disappoint, inviting its clients to a webinar on what ‘Liberation Day’ tariffs might mean for global investors. Sebastian Mullins, Head of Multi-Asset and Fixed Income at Schroders Australia, weighed in on whether the unfolding tariff war would push the world’s largest economy into recession. “The longer [the tariff war] takes to resolve, the more likely Trump is going to have the recession he did not have to have,” he said, putting the blame on what follows squarely on the MAGA man.
Mullins explained that trade tariffs would impact the cost of consumer goods, potentially causing a spike in inflation and forcing the US Federal Reserve to pause on its interest rate cutting cycle. He also warned that the erosion of consumers’ buying power due to lower real wages and potential job cuts would put the brakes on US economic growth. “The consumer and corporate spending that was pushing the economy higher is now potentially retreating; the longer this lasts, the more of an [economic] retreat you will see,” he said.
Asset managers and other market commentators can do little but watch as Trump’s trade tariff trade-offs transmit through to hard macroeconomic data. Mullins hinted that by the time the key metrics roll over, confirming an economic slowdown, financial markets will already be pricing in a recession. He also warned that the key consumer perception metrics were being muddied by partisanship: for Democrats, the world is ending, whereas Republican consumers reckon everything is A-okay.
Global responses to US stagflation
Stuart Podmore, Investment Propositions Director at Schroders, asked what impact a low growth, high inflation US economy might have on South Africa and the rest of the globe. The stock answer here is that when the US catches cold, the rest of the world goes down with it.
“The [pre-tariff] view was that the rest of the world ex the US would grow, but slower than the US; now that the US is shooting itself in the foot, those other economies are going to be weaker too,” Mullins said. He noted that non-US central banks were relatively better positioned than the Fed, and that China and much of the European Union (EU) could unleash fiscal stimulus in addition to monetary policy to support their economies.
Fiscal and monetary policy interventions could limit the fallout from a US recession, but there are few, if any, economies that will emerge unscathed. The hope for South Africa is that China might respond to the recession threat by stimulating its economy in a resource-dependent way. “Countries like South Africa and other commodity producers might improve just on that China sentiment,” Mullins said. He warned, however, that China was as likely to pivot towards domestic consumption to support its economy. In other words, we cannot bank on a repeat of the commodity boom that lifted South Africa’s economic growth from 2000-2008, and again from 2009-2011.
Vera German, Emerging Markets Fund Manager at Schroders, said it was not a foregone conclusion that China would come out second best in a trade war with the US. “China will lose money by losing the exports that it has had to the US up to now; but the US will lose very visible goods like consumer electronics, fireworks, and toys,” she said. In her view, China is waiting for a clearer picture on the outcome of the tariff posturing before deciding on its fiscal stimulus path. Over the longer term, Chinese firms have enough talent and innovation to endure.
Too much government interference?
Podmore made a gallant attempt to talk up US prospects by focussing on Honda’s recent decision to invest in manufacturing capacity there. This inward investment contrasts with the company-level experience of the likes of Nvidia, which has been caught up in the China-US wrangle through multiple presidencies.
According to German, the Biden administration took steps to stop the chip maker from selling its high-end product to China, prompting a significant investment into an alternative, government-sanctioned chip. Sadly, Trump has put the kibosh on that too, forcing a USD6 billion write-down.
On the plus side, SA-based investors may enjoy the panellists’ outlook for gold, which was around USD3300,00 per ounce at the time. “We like gold,” said Mullins. “We bought some more of the metal when it was below USD3000,00 per ounce and we have seen a USD300,00 increase in the last week.” The commodity has rallied further as countries consider holding gold over developed market treasuries. Gold is a great alternative for those who need dollars for trade or want to maintain reserve currency stockpiles without supporting the US. PS, this is not financial advice.
Gold flying high on structural support
Gold is benefiting from support from both Eastern and Western markets. As Schroders explained: the East has been upbeat on gold for some time, with the Liberation Day increasing their appetite for the metal. The Western ‘bid’ is chasing the gold price momentum that has been building since it crossed the USD2400,00 per ounce level some months back. Podmore asked whether gold was being structurally supported by central banks and other institutional buyers.
The short answer is yes. “Eastern buyers and central banks are increasing their bid for gold, and they have got a long way to go just to reach parity with the US as a percent of their reserves,” Mullins said. He warned, however, that that everyone was long the metal. “Goldman Sachs now have a USD4200,00 per ounce target; if everyone gets exuberant that might be cause for concern,” he said. So, while the asset manager was bullish on gold as a structural asset allocation, it could not rule out a correction due to recent rapid gains.
One of the attendees grilled the presenters on the outlook for US equities versus the rest of the world. Are US equities losing their appeal, and what are the prospects for the Magnificent Seven and the S&P500 index more broadly? “Policy uncertainty and fiscal ill-discipline is something that has always been punished in the emerging world; suddenly you have a situation where the biggest, safest country is displaying [these traits],” said German. As such, equity investors should be eying emerging market countries that do not have to rely on US trade.
An East-West trade inflection
The portfolio manager suggested we were nearing an inflection point where the emerging world starts trading within itself and with the EU rather than with America. “The US was interesting as a trade partner because it provided free, safe trade which is no longer free and no longer guaranteed,” German said. The US promises of a strong consumer market and technological superiority are also in question, so why not go to China which offers supply chains in multiple industries and coherent, stable foreign policy.
The asset allocation decision seems skewed towards emerging market equities which are presently offering a 40% discount to developed markets. The conclusion was that emerging markets offer better structural dynamics than the US, at a lower valuation. And while markets can be wrong in the short term, they always reflect the fundamentals in the long term. Amidst this volatility, Schroders was upbeat on prospects for active fund managers to outperform their benchmarks.
Writer’s thoughts:
The US’s economic dominance is being challenged by a more multipolar world, with emerging markets on the rise and traditional offshore defaults up for debate. Are your clients ready to look beyond America when they invest offshore? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
