Trump surprises negatively with tariff announcements
The White House has announced comprehensive new tariffs, which have triggered strong market reactions worldwide. In our view, the US government's tariff methodology suggests that they are aiming more at negotiations rather than maintaining them permanently. Important exemptions show that the US administration is concerned with limiting damage to its own economy and is aware that there are significant risks for the USA as well. Only six countries account for 70% of the implied tariffs. This indicates that a few key agreements could already alleviate much of the pressure.
Assessments, positions, and outlooks represent a snapshot and can change at any time without notice. They have been created using information that we consider reliable and correct; however, no guarantee can be given. Due to the complex global trade interconnections, the many different possible reactions and actions by a vast number of stakeholders (governments, companies, central banks, financial market participants), any impacts and scenarios are generally only very limitedly calculable and fraught with high uncertainties.
US President Trump has clear incentives to strengthen the markets and attract as many investments as possible into US manufacturing before the next presidential election – and sees tariffs as an instrument for this. Whether he will achieve significant success with this is currently as uncertain as the further development on the trade and tariff front in general. Given his notoriously erratic behaviour and the fact that he is reluctant to be influenced in his decisions, almost anything seems possible. Even a reversal or a significant rollback of the tariff measures is conceivable, provided he can sell it as his victory or receives acceptable concessions in return. Currently, a mitigation of many measures through negotiations seems most likely. The faster this happens, the better; the longer it takes, the greater the economic damage worldwide (note: this is just one possible scenario among many).
Economic impacts
The tariffs for Europe have been set at 20 %, somewhat below expectations, while those for Asia have been set above. Overall, a negative growth contribution of 0.5 – 1% is expected for the eurozone. Globally, the figure is likely to be around 1%, while the negative impact in the US will most probably be even greater than 1%. The probability of a recession in the US is therefore increasing noticeably, especially if tariffs remain in place as proposed by Trump. This assessment is subject to possible retaliatory measures by other countries and potential fiscal programmes in individual countries to cushion the negative impacts, which cannot be assessed at this time. For inflation rates, we expect a slightly reducing effect for Europe, while in the USA we currently anticipate an increase of 1 – 1.5%. It is debatable whether and to what extent the US Federal Reserve will view this as a temporary price spike and cut rates anyway, even if inflation is well above its official target. The financial markets are currently clearly leaning towards this view, with more than three interest rate cuts expected in the US before the end of the year. However, over the past two years we have repeatedly seen that market participants quickly price in and out interest rate moves by the Fed.
Impacts on asset classes and on our funds
Naturally, all funds and all asset classes are affected by these announcements and market movements, albeit to varying degrees.
Asset Allocation
In our long-term strategic asset allocation (SAA), spread asset classes (e.g. euro investment grade, euro high yield and Emerging Markets hard currencies) were reduced at the beginning of March and, in response to the sharp rise in yields, positions in German government bonds were added to. The latest announcements by the new US administration and the market reaction to them have not yet triggered any further changes in the SAA.
In our short-term asset allocation (tactical asset allocation, TAA), the equity allocation was reduced. This is due to the increased risk that the now intensifying trade war could negatively impact the global economy and corporate earnings. The equity weighting in mixed funds is therefore neutral at present. It remains to be seen how economic and corporate data evolve in the coming weeks and months. Depending on this, further adjustments to the equity weighting are likely.
Equities
In some of our equities funds, particularly our Emerging Market equities funds, we had already positioned the portfolios quite robustly for tariff risks some time ago, given Trump's focus on China. However, this does not mean that these funds are immune to losses. In other equity funds, some positions will be more affected by the tariffs, others less so or not at all.
Fixed Income
Most of the bond funds and mixed funds of Raiffeisen KAG benefited from the general decline in yields on government bonds and their (moderate) long-duration positions. Spreads on corporate bonds, high-yield bonds and emerging-market bonds in hard currencies widened markedly, which negatively impacts performance. However, this was offset wholly or partially by corresponding general yield declines in government bonds.
If you wish to receive more in-depth information on any of our funds and mandates, please contact our staff, who will be happy to provide you with further details.