We do not expect large, broad, and sustained US tariffs, but repeated threats of higher tariffs on key trading partners and a lack of policy visibility could weigh on business investment and hiring even if they are never imposed. More volatile markets require an increased focus on portfolio diversification and hedging approaches.
• President Trump in early March imposed a 25% blanket tariff on Mexican and Canadian goods, only to swiftly pause this for most goods (anything compliant with the UMSCA). Levies on China goods rose to 20%.
• Trump also reportedly ordered an investigation into the national security harm posed by lumber imports, and threatened 250% tariffs on Canadian dairy.
• A fiery exchange between Ukraine's President Volodymyr Zelenskyy and Trump saw a minerals deal collapse, with Trump later withdrawing weapons supply and critical battlefield intelligence.
• Trump has directed his administration to evaluate reciprocal tariffs on products from countries that impose trade barriers on US goods. Crucially, the administration considers domestic sales taxes as a non-tariff barrier to trade.
• We expect that after 1 April, most countries will be threatened with tariffs. But we would also expect various deals to be struck to limit their overall breadth and scale.
• The path to a lasting ceasefire in Ukraine looks very challenging given the lack of trust and the large gap between desired outcomes.
• In equities, capital preservation strategies can help manage downside risks.
• We like high grade and investment grade bonds as they offer some insulation against uncertainty and can help diversify portfolios.
• We also continue to see gold as an effective hedge against geopolitical and inflation risks, while certain hedge fund strategies could offer portfolio resilience during market volatility.
In a nod to mounting growth and tariff concerns, President Trump on 9 March predicted “a period of transition” for the economy when asked about recession risks, while Treasury Secretary Bessent warned “there’s going to be a natural adjustment as we move away from public spending to private spending.”
Investors should prepare for near-term market volatility and focus on diversification and hedging strategies.
• Mexico and Canada together account for about 30% of the US’s total trade, more than twice the share of direct trade with China (12%).
• We believe that President Trump will be willing to seek “deals,” particularly if US economic activity is potentially at risk from failure to agree, and if counterparties show a willingness to offer concessions. The action on tariffs thus far shows how threats can be escalated only to be subsequently deescalated.
• In our base case, we expect tariffs on China increase to an average effective rate of 30% by the second half of 2025. We also expect select tariffs on Europe and some efforts to limit transshipments.
We have cautioned that volatility is likely to be higher this year due to policy uncertainty and trade frictions, but we reiterate our view that the bull market is intact, and we expect US equities to end the year higher. Investors should ensure portfolio diversification and consider hedges to navigate volatility ahead.
