By Harry Roberts, Associate Director of Capital Markets, Income Asset Management
With President Trump’s introduction of global tariffs, share markets have fallen sharply causing huge uncertainty among investors. The aim of these tariffs isn’t just about making a political statement—but to try and get American manufacturing humming again, a move that’s stirring up a lot of economic drama.
A Quick History Lesson
First let’s see if history can give us a guide on how this will play out. The US hasn’t seen tariffs likes these since 1930, when horses were the main mode of transport and Burnley FC were getting relegated from the Premier League (not much has changed there). The goal then and now is the same…to make America a self-sufficient powerhouse. But as history has shown us—like during the Great Depression—big tariffs can lead to big troubles.
What This Means for You
There are a few key points where everyday investors might see some opportunities:
- Rates on the Move: Think of interest rates like the price of borrowing money. With the economy potentially slowing down under these tariffs, we might see interest rates drop to encourage spending and investment. For those of you holding bonds, this usually means their value goes up. For those of you not holding bonds, it might be worth adding some to your portfolio.
- Currency Fluctuations: Tariffs can lead to currency wars. As countries respond to U.S. tariffs, the value of the dollar and other currencies can fluctuate. For investors holding international assets, understanding currency risks and potential benefits is key. A weaker Australian dollar can make foreign investments more lucrative when converted back .
- Risky Business with Credit: Higher paying/higher risk assets could start to feel the pinch. Watch credit spreads start to widen as companies grapple with new tariff costs, their financial health—and thus their bond ratings—could wobble. This makes high-yield investments riskier but potentially profitable if chosen wisely. It’s a perfect example of risk versus reward, and understanding the underlying stability of these companies becomes crucial.
- Looking Abroad: As the U.S. shakes up its trade policies, other countries might dodge these economic bullets and come out looking attractive for investors. Keeping an eye on how these countries are doing could reveal some safe spots to park your money.
The Ironic Twist of Trump’s Trade Strategy
It’s arguable that President Trump’s strategy comes across as a tad ironic. He aims to bolster the economy and create jobs through these tariffs, but they might slow down economic growth initially…imagine trying to accelerate by applying the brakes.
China and the Reciprocal Tariffs
As of writing this sentence, President Trump is proposing a 145% tariff on China as China reciprocated with an 84% Tariff on the US.
As of the latest data, the United States is one of China’s largest trading partners, accounting for approximately 16.8% of China’s total exports, making the U.S. a significant buyer.
The imposition of high tariffs by the U.S. can significantly impact China’s growth in several ways for Chinese goods. My main concern is the loss in revenue will naturally lead to a manufacturing and an economic slowdown in China.
China’s economic health is crucial for Australia, especially regarding our exports of agriculture and raw materials. This could have a flow on effect leading to lower commodity prices globally that have already been on a downward trend.
What does this mean? Play with caution in this market – In response to economic uncertainty and potential slowdown, the Reserve Bank of Australia (RBA) might adopt a more dovish stance, potentially lowering interest rates to stimulate the economy. During times of economic uncertainty, investors tend to move their investments from riskier assets (like stocks) to safer assets, including government bonds. This increased demand for bonds can drive up bond prices
Bottom Line: Finding Opportunities in the Mess
This trade war is a reminder that where there’s confusion, there’s also opportunity. It’s not just about surviving the storm, it’s about finding the right investment opportunities. By keeping up with how these tariffs are shaking things up, you can spot chances to make some smart moves that could pay off down the road.
In the end, understanding these shifts can help you make more informed decisions and having a diverse and liquid portfolio can help you take advantage when these volatile market opportunities arise.
