In April, the market disruption driven by “liberation day” events and intensified trade discussions had an ugly tone to it.
It raised some choices: do we exit the market, use the opportunity to average in, or step aside temporarily?
It is clear that the US has moved away from a rules-based international system to one that applies to others via the World Trade Organisation but not to itself. Just to add to the confusion, tariffs are being deployed not just as economic policy, but also as instruments of political pressure. Think of Canada being cited for the fentanyl crisis, Brazil and others.
Were these just negotiating tactics by President Donald Trump, as exemplified by the Financial Times’s ill-judged “Taco” (Trump always chickens out) quips? As the revised tariff regimes come through, it’s clear they were not. This was indiscriminate gaslighting before the boot kicked — hard. Tariffs were hiked by a net four times to 15% on the EU and Japan, and 19% on the Philippines — and this is how the US treats its allies.
US negotiations were not conducted in good faith, which raises the question of what the intent is.
The first clear strategic aim seemed visible in the copper tariffs, which at 50% seem oddly arbitrary — until viewed through the lens of the Project 2025 policy framework. At its core, Project 2025’s trade and supply chain strategy is driven by economic nationalism, a worldview that prioritises US sovereignty, domestic production and control over strategic industries.
The collapse of key global supply chains during the pandemic is cited as a clear warning; the US should never again be dependent on adversaries or fragile logistics chains for critical goods. Thus tariffs are a deliberate effort to shorten supply chains.
In April we thought Trump was bluffing and markets quailed at the prospect; now that it’s clear he really does mean business, markets are in melt-up mode. There seems to be an element of denial in quite sophisticated players, namely that after a short burst of inflation, tariffs will be deflationary and won’t affect growth. Trump has a pronoun problem. He keeps saying he’s imposing tariffs on “them” (foreign countries), but he’s actually imposing them on “us” (or US citizens).
Tariffs are taxes. Excessive taxes always choke growth and add inflation. In terms of inflationary pressures, tariffs will affect manufactured goods. Inflation in the US is still heavily concentrated in shelter/housing costs, meaning that tariff inflation will be new.
US markets are seeing higher tax collections without the inflation-boosting and growth-choking side effects (yet) — hence the melt-up. Tariffs are deflationary, they say. Well, just watch. Lest anyone say I’m thinking short term, I believe the full consequences of Trump’s tariffs could outlive me. Tariffs have a way of getting embedded in place. As Paul Samuelson said: “When the facts change, I change my mind.”
While the US has every right to revise its strategic interests, this will come at a cost. In addition, a significant boost to global growth came from the peace dividend of reducing military spending from 4% to 2%; shifting this is a further unwelcome change.
Tariffs are taxes. Excessive taxes always choke growth and add inflation
It’s important that the rest of the world sees US tariffs for what they are, and does not allow the Project 2025 supply chain reset to turn into a broad trade war.
When you buy an MSCI World tracker now, you are buying a 73% US allocation, vs the rest of the entire Organisation for Economic Co-operation & Development. That’s too much concentration risk for me, when slapped on top of valuation risk.
My view is to initiate a gradual retreat, managed as a profit-taking and derisking exercise, to get to below a half-weight US exposure in any given global portfolio. Looking at global valuations using cyclically adjusted p:e ratios, we see considerable value in Far Eastern markets and the UK. The easy gains driven by reratings in Europe and Japan may already have been made in these regions as they suffer sluggish growth. Emerging markets, on the other hand, may still offer meaningful opportunities.
A weaker dollar benefits emerging markets, particularly in Southeast Asia, and we intend to capitalise on that. Reasonable value exists in China, Hong Kong, Brazil, Thailand and Malaysia. South African bonds still offer exceptional real yields.
In multicurrency portfolios, we are also evaluating opportunities in commodities and real estate.
Lucas is a portfolio manager at Vunani. These views are personal
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