Trump’s latest tariffs threats and their impact on markets

• On Monday, president elect Donald Trump threatened to impose a 25% tariff on all products coming from Canada and Mexico, and an additional 10% tariff on goods coming from China.

• Tariffs or not, we believe that the US economy will remain resilient. Its high concentration of high-quality companies, well-developed capital markets and rich culture of innovation should ensure that its economy and stock market continue to do well in the long run. 

• During times of heightened volatility, investors should place even greater emphasis on high quality stocks, as these are the ones that are likely to outperform. 

Donald Trump threatens tariffs on trade partners on his first day in office

US president elect Donald Trump once said that tariff is the most beautiful word in the dictionary. 

Earlier this week he announced that on his first day in office, he plans to impose a 25% tariff on all products coming from Canada and Mexico, and an additional 10% tariff on goods coming from China. This hardly comes as a surprise as over the course of his campaign, Trump has said on multiple occasions that he intends to impose a 10-20% universal tariff on all US imports and a 60% tariff on goods coming from China. 

Trump cited drugs and crime as justification for his tariffs, as he believes that both Canada and Mexico are not doing enough to stem the flow of illegal immigrants and narcotics into the US. He also blames China for its role in the fentanyl crisis, accusing it of failing to uphold commitments to address the issue. China is a significant supplier of industrial chemicals used in the production of fentanyl. 

Financial markets had a mixed reaction to the news, with most Asian & European equities closing in the red on Tuesday. US equities on the other hand showed more resilience, as the S&P 500 index clinched a new all-time high of 6,025 points accompanied by a strengthening USD. 

Even though tariffs are traditionally used to protect domestic industries, Donald Trump has sought to weaponise them, using it as a negotiation tool to achieve broader policy objectives. Following the announcement, Canadian prime minister Justin Trudeau had a brief call with Donald Trump, where they discussed matters related to trade and border security. On the other hand, representatives from China and Mexico voiced their displeasure, and hinted at the possibility of retaliation against the US. 

While it is challenging to analyse the precise impact of such tariffs, broadly speaking global growth is likely to moderate should countries decide to engage in “tit for tat” tariffs with the US. The silver lining here is there is still sometime between now and Donald Trump’s inauguration, so there is a possibility that things may change. Historical precedence also suggests that campaign rhetoric does not always translate into actual policy, and in the case for someone like Donald Trump this is especially true. 

Why should you stay invested in the US

Despite the threat of tariffs and deglobalisation brought about by Trump’s second presidency, we still see several compelling reasons to stay invested in the US. 

For one, the US is home to many high-quality companies, most of which are industry leaders with sustainable competitive advantages that will allow them to stay ahead of the competition. Often, these companies operate on a global scale, holding dominant positions not only within the US but also in various international markets as well. They tend to have strong profitability and solid balance sheets, positioning them well to absorb any potential shocks.

Home to several of the world's largest technology giants, including Alphabet, Amazon, and NVIDIA, the US is a major player in the digital economy – a sector that has become increasingly crucial to global growth and innovation. Big tech companies are well-positioned to capitalise on structural tailwinds such as digitalisation and artificial intelligence, megatrends which are reshaping the global economy. 

On a deeper level, most US companies are global in scope, selling not only to US consumers but also to global ones. As a result, their earnings growth is driven not just by the US economy but by global growth as well. Having a geographically diversified business model also helps to ensure that a downturn in one market will not affect these companies significantly.

Next, the US has the world’s largest, deepest, and most liquid capital markets, providing efficient channels for financing businesses. This is a significant advantage that is hard to replicate, as a well-developed capital market is crucial for fostering innovation. Combined with the country’s rich culture of innovation, this ensures that the next tech success story is likely to come from the US, rather than anywhere else.

Finally, we think that not many countries can outperform the US especially in the long run. Tariffs or not, the economy and earnings growth of US equities are likely to remain resilient – which should support further share price appreciation. 

Although a second Trump presidency is likely to introduce more volatility to equity markets, it also has the potential to create more investment opportunities. Keeping this in mind, investors should place even greater emphasis on high quality stocks, as these are the ones that are likely to outperform during times of heightened volatility. 

Investors who are keen to invest in the US market may consider the following products:

Table 1: Recommended products for US equities

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a NIL position in the abovementioned securities.