Investors are seeking to protect portfolios from the potential economic fallout from US President Donald Trump’s tariff plans even as many on Wall Street doubt the situation would erupt into a sustained trade war that cripples assets.
Announcements on tariffs have whipsawed markets this week, as investors try to wrap their heads around the evolving dispute. Sweeping tariffs Trump ordered on Saturday last week on Mexico and Canada were paused a month while tariffs were being imposed on China, which retaliated with levies of its own.
Some investors have been preparing for the potential for tariffs that Trump vowed to put in place during his presidential campaign, including moving to assets seen as less vulnerable to a trade dispute or geopolitical uncertainty more broadly.
Illustration: Mountain People
With stocks trading at lofty price-to-earnings ratios, investors also said the tariff news could warrant more caution for equities and create volatility in the near term.
At Nomura Capital Management, where stretched valuations for equities and other risk assets had already spurred the firm to become more defensive in the past few months, the tariffs were further reason to be cautious, said Matt Rowe, head of portfolio management and cross-asset strategies.
With the tariff situation, “it’s really hard to see exactly where it’s going to go, how long it will last,” Rowe said. “But it’s easy to say that this is not good for growth, it’s not good for consumer spending and it’s likely to have a negative impact on earnings.”
The tariff developments caused big swings in equities and currencies on Monday, which retraced initial moves after news of the pauses on the Mexico and Canada tariffs.
“The threat of tariffs is live and that’s unlikely to go away,” Wellington Management macro strategist Michael Medeiros said, adding that the uncertainty could force the firm to explore more tactical, short-term trades.
PROFIT SQUEEZE
Analysts estimate that tariffs could drive up inflation, while weighing on economic growth and corporate profits. Goldman Sachs strategists said the tariffs that Trump announced on Saturday last week — 25 percent on Canada and Mexico, and 10 percent on China — would reduce their S&P 500 earnings forecasts by about 2 to 3 percent, while strategists at BofA Global Research said the earnings hit could be as much as 8 percent.
“If company managements decide to absorb the higher input costs, then profit margins would be squeezed,” the Goldman equity strategists said in a note on Sunday. “If companies pass along the higher costs to ... end customers, then sales volumes may suffer.”
The onset of tariffs raised the risk of an S&P 500 pullback of at least 5 percent early in the year, Lori Calvasina, head of US equity strategy at RBC Capital Markets, said in a note on Sunday.
Strategists at UBS Global Wealth Management on Monday maintained their view that the S&P 500 would end the year about 10 percent above current levels, but said “tariffs are likely to represent an overhang on markets and contribute to volatility, at least until investors gain greater clarity on the path and destination of US trade policy.”
The UBS strategists recommended gold as “an effective hedge” against geopolitical and inflation risks.
Robeco added to its positions in safe havens gold and US Treasuries late last week, because of concerns about market complacency with respect to tariffs, said Colin Graham, the firm’s head of multiasset strategies.
“We’re in a worse position than we were on Friday,” Graham said, as he watched the initial market reaction unfold on Monday.
FLUID SITUATION
While the tariff threats lent support to some strategists’ current allocations and encouraged others to make changes, many warned against knee-jerk reactions to Trump’s announcements.
Morgan Stanley equity strategists said the tariffs reinforced their preference for services industries, including financials, software, and media and entertainment, saying in a note on Monday that “we would expect the market to rotate further toward services given recent trade policy implementation.”
Concerns about risks from tariffs and geopolitical uncertainty more broadly have led Manulife Investment Management in recent weeks to move into more defensive equity areas and reduce exposure to riskier high-yield credit, said Nathan Thooft, chief investment officer and senior portfolio manager at Manulife.
“But we’re advocating for people to remain fairly calm,” Thooft said. “This is still very fluid and the reality is we don’t know what the policies will be.”
Baker Avenue Wealth Management had been underweight on healthcare stocks before the new year, but added exposure to the group in the past few weeks because it seems to be relatively immune to tariff risk, said King Lip, the firm’s chief strategist.
Nonetheless, Lip said he thinks the US president recognizes the concerns a trade war brings for the economy and markets, so the situation would be “ratcheted down in a reasonable amount of time.”
Indeed, many investors remained doubtful that Trump would allow the tariff dispute to spiral into a full-blown trade war that severely damages asset prices.
Spencer Hakimian, chief executive officer of Tolou Capital Management, a New York-based macro hedge fund, said that he was not making any changes to his investment portfolio based on the tariff announcements.
“Trump is bluffing,” Hakimian said. “Fade all the noise.”
Additional reporting by Suzanne McGee and Carolina Mandl
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