I have just received the following from Shanti Keleman, MPS Chief Investment Officer at M&G and I thought you might find it interesting and possibly a little reassuring:
“Going into yesterday’s tariff announcements, we thought the clarity would be preferable to the uncertainty. It wasn’t. The number of countries impacted and the rates announced were more than we expected. Equity markets have – rationally – reacted negatively. If the government charges a tax on purchases of goods, then the goods will cost more. That higher cost will reduce what consumers can buy, leading to lower sales, less revenues and ultimately less money to return to shareholders.
The big question is whether these policies last. We’ve already seen multiple reversals in the 10 weeks with US President Donald Trump in office. Even with a firm resolve, pleasing voters will become a necessity as we get closer to US mid-term elections. There is a large imbalance between what the US buys and what it sells. It’s possible to lower the buying fairly quickly, via measures such as tariffs that raise prices and reduce demand. Increasing what the US sells to the rest of the world will take years, as companies need to build new factories and reorganize where they buy the materials and parts to produce goods. Companies will want clarity on the rules they’ll be operating under, to decide where to produce goods. An environment with constant change doesn’t give that.
As of 2nd April, the S&P 500 Index had fallen -6.8% YTD (measured in sterling terms). It’s expected to be down another 3% today – 3rd April – as of (9:30am UK time). Ironically, some of the largest impact will fall on US multinationals, as they make and sell products around the world. The US dollar was also weaker, bucking the trend of the currency generally rising in response to uncertainty. The falls need to be seen in the context of a very strong period of performance in 2024. Other equity markets have fallen, but by lower amounts. The FTSE 100 Index is down -1.2% today and the Euro Stoxx 50 Index has fallen -1.4%.
Our view is that the likelihood of tariffs staying in place for an extended period of time in the proposed form is low; the costs would be too high for voters. We’re not making any changes to our portfolios based on this specific announcement. Our equity exposure is diversified across different regions, which has worked well as the US market’s strength has faded. While government bonds have held up well, they haven’t delivered significant rises to offset the equity losses. We don’t think this is likely, as the risk of inflation will keep the interest rates paid by bonds from falling sharply. If we saw a steeper fall in equity markets, we’d likely view it as a buying opportunity.”
As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
