Managing uncertainty is at the core of the process of investing. Last week, Trump unveiled new trade tariffs on the so-called “Liberation Day”, taking investors into uncharted territory. The Economist rebranded it “Ruination Day”: equities nosedived, the US dollar took a hammering, crude oil was in the doldrums, bonds rallied… China’s retaliation further exacerbated the selloff. There are still some reasons to expect a milder outcome, as the most aggressive US tariffs will go into effect on April 9. But expectations of a quick settlement are fading.
Taking a medium- to long-term perspective, we keep a close eye on Warren Buffet’s old adage “be greedy when others are fearful”. Globalisation is indeed under serious threat. But who remembers those pundits calling the end of capitalism after the 2008 global financial crisis, the end of the euro zone in 2012, the panic uncertainty surrounding Covid, and the massive selloff in the wake of the unprecedented monetary tightening in 2022? Peak uncertainty marks the entry points. But obviously, when you are going through the storm, no one knows where peak uncertainty is exactly. In any of the above-mentioned panic episodes, we could have said “this time is different” (aka no reason to buy). At present, it is easier to formulate dark scenarios than to see silver linings, although we note the positive gift from Saudi Arabia to Trump. If we take as a base case the 2018 market selloff related to the first episode of Trump’s trade wars, markets could find a floor a few percentage points below current levels. If serious trade negotiations start next week, the market will rebound.
You cannot have your cake and eat it. Trump is betting that trade partners will make “phenomenal” offers to bring down trade tariffs. He underestimates the fact that when you hit someone hard, he is not going to say thank you. But at the end of the day, the US market remains the largest market worldwide and no company wants to be cut off from the US consumer. Trade deals will be reached because everyone stands to lose from trade wars, but the risk is that things get worse before they get better. This is a classic case of the prisoner’s dilemma.
The carrot and the stick. In the report, we do the maths on trade wars. We find that trade tariff revenues would exceed USD300bn per year, even taking conservative estimates (cutting the weighted average trade tariff to 15% instead of the current 20%, assuming a 30% fall in imports). That would largely fund several tax breaks: exempting overtime income from taxes would cost USD200bn per year, ending taxation on social security benefits would cost USD130bn per year, and cutting the corporate tax rate to 15% would cost USD70bn per year according to estimates. This is probably the next step, as the 2025 budget is now being debated between the Senate and the House.
How to protect it, equity baskets, and more. Spotting the point of peak uncertainty is not an easy task and, in the meantime, you need to hedge against volatile conditions. The latest CPI report in the euro area calls for an ECB rate cut in mid-April and curve steepeners in euros would benefit from additional ECB rate cuts ahead. In European equities, we have upgraded Telecommunications and Utilities to play the possibility of a pro-domestic growth agenda in the EU. They’re defensive on top. Finally, with the fantastic job done by our equity analysts, we have built several European equity baskets. First, a European basket, composed of 76 domestic stocks, which is very significantly outperforming the STOXX Europe 600. Second, within the Kepler Cheuvreux equity coverage universe, we have identified those European companies most exposed to the US (>30% of sales) and split them into those who export to the US (highly vulnerable to trade tariffs) and those who produce locally to address the US market. The latter have significantly outperformed the former.
Week ahead: US CPI, FOMC meeting minutes, University of Michigan consumer sentiment (April). In China, new yuan loans and aggregate financing will be released for March. US earnings season to start.
