President Trump’s announcement on Liberation Day has quite literally taken the world by storm, with global equity markets sliding by over 10% cumulatively in the next 3 trading days. Various leaders have come to speak about how ludicrous this regime is, and retail investors are furious as Trump single-handedly erased a full year of market gains. In this article, I give my two cents on the outlook of the tariff situation, and also explain the potential implications on various investment instruments.
The Likelihood of a Trade War Is Uncertain
It does help that Trump has agreed to a 90-day pause on tariffs for most countries, giving them time to reach deals with the White House. There is significant bargaining power on the table, especially when the "reciprocal tariffs" imposed on the various countries were not, in fact, based on effective tariff rates but more so a ratio of trade imbalance. Countries that did not run a trade surplus with the US were still slapped with a flat 10% tariff, with close to no justification.
Apart from the huge injustice faced by other countries, President Trump also needs to consider how these exorbitant tariff figures affect his own people. Being an import-dependent country, the US economy is threatened significantly — especially if US firms are unable to find sufficient local substitutes for imported goods. As such, with all these factors in play, there is a good chance that the original Liberation Day tariffs do not fully materialise.
Even in the event of a trade war, it doesn’t need to (and won’t) last forever.
Suppose the Liberation Day tariffs play out the way they’re supposed to. Yes, global economies will take a huge hit. Retaliation will be rampant. Prices will go up due to cost-push inflation, and many countries will be on the brink of recession. There is no denying that tariffs can inflict damage on global economies, and the livelihoods of people. However, if there’s anything that history has shown us, it’s that things eventually get better.
Whether it’s the successful restructuring of global supply chains, or the formation of new and fruitful trade agreements between other countries, there is a multitude ways for countries to recover from a trade war in the long-term. In addition, the US president will eventually be re-elected in about 4 years — so if tariffs play out drastically, we can expect the next person in power to react accordingly.
What This Means for Your Investments
Market downturns often reveal a simple truth — not everything that goes down must go back up. Some of the biggest losers of a potential trade war include small-to-medium caps with weak bottom lines, funds with overly risky investment objectives, junk bonds and speculative assets like cryptocurrencies, amongst others. Ultimately, the outcome of these tariffs does matter significantly if your portfolio largely consists of the above instruments.
Yet, on the flip side, if you’re a value investor who owns shares of companies with strong economic moats and proven resilience in recessionary conditions, you’d be salivating at this fire sale. Regardless of how these tariffs play out, regular and sustained investments in good companies (and funds containing them) rarely turn out badly in the longer term. Trade war or not, a portfolio of sensible investments eventually recovers in the future. As such, I’d believe that most value investors are sleeping easy and loading up on shares trading below their intrinsic values.
A final point I’d like to add is that regardless of your choice of investment, it is crucial to not be over-leveraged, especially during such market conditions. Investors who trade on margin or sell a significant quantity of naked options should proceed with caution, as huge market swings can easily cause over-leveraged portfolios to go south.
We Must Stay Level-Headed
It is often during periods of market uncertainty that retail investors with money in good, strong companies end up letting go of them, with hopes to go back in when the market "is more stable" or "has bottomed out", However, the statistics on this matter are clear that timing the market rarely does you any good in the long run. The legendary investor Peter Lynch puts it perfectly — more money has been lost by investors trying to anticipate market corrections, than in the corrections themselves.
As the capitulation of stock markets continues, nobody really knows when, or how a reversal will take place. Yet, history has shown that following a systematic and effective investment process will reap returns in the long run — whether a trade war happens or not. As such, it is of paramount importance to stay level-headed during these times of turmoil in global stock markets.
***
Disclaimer: The above advice cannot be generalised (and should not be) to all investment portfolios. It is important to delve deeper into your own portfolio, either on your own or through a professional, and decide how you’d navigate such market conditions.