Tariff Uncertainty

The US has announced sweeping tariffs on imports.

How were the tariffs calculated?

They are based on the size of the US’s trade deficit with each country, calculated as a percentage of total trade and then halved. The rationale of this formula has been criticized by those who believe there is no economic justification.

What are some of the economic concerns generated by the tariffs?

• Weaker US consumer demand. Imported goods will become more expensive in the US thereby lowering demand. This in turn will lower global growth as lower demand in the world’s largest economy will impact growth.

• Higher inflation. Higher prices will likely result in higher inflation.

• Expected retaliation. Other countries are likely to respond with their own tariffs thereby resulting in a global tariff conflict.

• Uncertainty. Businesses are likely to delay capital spending thereby having a negative impact on economic growth.

• A vicious cycle. Falling markets, low business confidence and concerns about job security results in consumers spending less. Weaker demand drags down earnings expectations resulting in markets falling more in response.

• Erosion of trust. Trust in the global economic system has been significantly eroded.

• Global markets were quite expensive beforehand. The change in outlook to negative is magnified when the starting valuation is high.

History shows that markets often overreact, up or down. Prices now appear to reflect a lot of the bad news and whilst markets are not yet in ‘cheap’ territory, some quality businesses are now trading at more attractive valuations. Analysts will be looking to take advantage of buying good business at these lower prices.

Source: Sanlam Private Wealth