Playing with fire
Wednesday, 5 February 2025 09:20
Divergent Opinions in External Articles - The opinions expressed in articles from external sources do not necessarily reflect the views of Renalco SA and are shared for informational purposes only.
Trump rattled global markets in announcing trade tariffs last Friday. He threatened Mexico and Canada with 25% additional trade tariffs on goods (except for Canadian oil products at 10%); and China with 10% additional tariffs. Europe was mentioned but no concrete measure was announced so far. Tariffs were due to go into effect on February 4th but tariffs against Mexico were announced to be delayed by one-month. Negotiations with Canada and China are probably ongoing.
- We show in the report that actually the US has a trade deficit with its major trade partners, though in percentage of GDP such deficits are rather negligible.
- Machinery, electronics and transportation equipment are the most exposed to tariffs on Mexico and Canada.
- US imports from Mexico and Canada equals $ 900bn per year, which at a 25% tariff, would yield more than 200bn in budget revenues.
- The overall market reaction was negative but not so dramatic. Estimates on the impact of trade tariffs on economic fundamentals suggest the overall impact would be manageable (see link and link). Yet, we fear such studies might underestimate second round effects (consumer confidence, wealth effects if equity markets experience a severe pullback etc…)
- Inflation hedges such as the USD and commodities were up
- In equities defensive sectors outperformed cyclicals: telecommunications, consumer staples, health care
- 2-year Treasury yields rose as markets reconsider the Fed policy. Yet, the risk aversion mode dragged long term yields lower.
Going forward, higher volatility suggests lower risk appetite although we have not changed our asset allocation for now. Our view is that trading the Trump newsflow can be very challenging in 2025.
- We find defense and health care as appealing in current market conditions. Defense is boosted by Trump pressures to bring military spending at 5% of GDP for NATO partners.
- Health Care is defensive, attractive in terms of valuation, brings diversification compared to the Tech theme which is probably overinvested at present. Kennedy Jr. confirmation hearing last week suggests there is a chance he is not confirmed by the Senate. That would be a positive for the sector in the US and in Europe, after months of turbulence.
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