Investors appear to have under-priced the risk to equity markets of tariffs as the President Trump show wraps up a non-stop 100-day program marked by “volatility and confusion”, according to a new Salt Funds Management paper.
The Salt report says even after the recent correction, US share index levels still imply an “unwise assumption” that most of the Trump-announced tariffs would be substantially watered-down or possibly scrapped.
“… even at its lowered level, the market seems to be pricing in sharp reductions in the announced tariff rates over the next few months,” the analysis says. “While not impossible, this tariff de-escalation is certainly not a given…”
Authored by Greg Fleming and Bevan Graham – Salt head of diversified funds, and, economist, respectively – the report highlights the tariff troubles also come amid softening US economic data, verging on recessionary.
“That counsels for investor caution, not seeking to ‘bargain hunt’ in beaten-down stocks just yet, but rather to reinforce those portfolio holdings which have defensible earnings streams and low international tariff or exchange rate sensitivity, such as Listed Real Assets.”
But Fleming said market signals remain a “little over-optimistic” as odds shorten for a slowdown in the US economy and Trump continues to push incoherent policies.
“There’s no grand [Trump] plan,” he said. And the constant flip-flopping on policies has likely left the market dismissive that anything real backs the “bluster”.
“Investors have become too blithe about the bluster,” Fleming said. “But there are pieces of steel behind the bluster that could bruise investors.”
The report notes, too, that the concentration of equity risk in US markets – now amounting to 72 per cent of the MSCI World index – compounds the danger.
“… investors are very vulnerable to shocks emanating from the Trump disruptions and are increasingly looking to shift some assets to steadier countries.”
For example, Fleming said Salt, through its global shares manager Morgan Stanley, has increased holdings of European stocks as well as some Japanese companies.
He said the manager is also holding its defensive asset allocation stance put in place last November with an overweight to listed real estate and infrastructure.
At the same time, the prospects for NZ equities have improved slightly with a second-half pick-up possible this year.
“Local share market investors also benefit from the higher dividends on offer – equalling about a third of total returns – compared to global counterparts,” Fleming said.
Against a backdrop of “erratic” US policy-making, however, the Salt report suggests many investors are questioning some of the core assumptions that have underpinned the global economy in the post World War II era.
“Taken together, these developments signal a critical inflection point. The notion of US exceptionalism — that American markets can outperform and attract capital regardless of political dysfunction — is being questioned, if not yet fully re-evaluated,” the paper says. “The first 100 days of the Trump 2.0 agenda has revealed that America’s economic leadership cannot be assumed; it must be continually earned.”