Collective Views: Liberation day, tariffs, market volatility

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Thematics AM

Looking through a long-term thematic lens, Thematics AM’s portfolio management team said

• The current environment is characterized by significant uncertainty regarding tariffs, with rapid changes despite a recent 90-day pause . The trade war with China and tariffs on steel, aluminum, and automobiles persist, maintaining a prolonged ambiguity.
• It is complex to assess the precise impact of tariffs on businesses due to a lack of clarity on the origin of components and the difficulty in predicting the sharing of the burden. Investors will likely apply higher equity risk premiums due to the potential macroeconomic shock.
• There is an observed "order pull-in" by consumers anticipating price increases due to tariffs, which could lead to solid short-term results. However, this raises concerns about a weakening of future demand.
• Overall, however, recent market moves served to underline the importance of diversification across sectors and the benefits of an active management approach that can take advantage of short term moves to invest selectively in high quality companies with good fundamentals

Mirova

Speaking on 14 April, Jens Peers CIO, Mirova US unpacks the long-term implications of the US Administration’s new trade policy:

• Our base case expectation is that deals are likely to be made between the U.S. and individual countries in the next few months. However, we see new alliances forming among countries, maybe differing from past alliances. While we don’t know the longer-term impact, we believe globalization as we have seen it in the past few decades will be redefined. The uncertainty around future developments will lead to volatility and very likely pressure in the markets.
• Higher effective tariffs rates are likely to lead to higher inflation, particularly in the US, which could result in a consumer-led recession. In contrast, Europe may experience lower inflation as China may look for new markets to sell excess inventory into. We may see opportunities emerge in Europe as countries within the region cooperate more and more, where we also see supportive equity valuation in certain areas.
• In this environment, we like high-quality companies that can provide downside protection while also offering upside potential, in combination with a barbell portfolio positioning that can navigate different scenarios with balanced exposure across more defensive parts of the market and areas exposed to secular growth. Companies that can navigate or offer solutions to investment themes related to the reshaping of globalization and global supply chains may offer a solid investment opportunity.
• The volatility we have seen in the market emphasises the link between sustainability and financial performance and why it is important to focus on companies that do not take irresponsible risks and have a strong long-term view. 

Vaughan Nelson

In a recent podcast, Vaughan Nelson’s CEO and CIO Chris Wallis, discusses the market's reaction, investor expectations, and taking action. 

• I think the number one thing, as we talk about tariffs and we talk about rebalancing trade, I would really stress to people: ignore what you see economists write, ignore what you see popular news write and Wall Street write because they're going to come out with either a flawed model or they're going to come out really expressing their views based on their own interests.
• The way we're thinking about it is coming into the year, a market that was very low on liquidity, and we still are, that the US was going to experience a significant slowing in services, which it is. And the rest of the world was going to experience a reacceleration in industrial activity, which it is, which also supports what we've seen quarter to date, a selloff in US assets and a recovery in rest of the world, right? So it was right in line with those fundamentals.
• I want to stress up until April 3rd, the selloff had nothing to do with tariffs. In the US, Q1 earnings are going to be somewhat weak. In Q2, they're going to be a little weaker, not off dramatically just lower growth. And then we'll start to see a recovery in the back half of the year.

Harris | Oakmark

Harris | Oakmark also reminded investors that significant short term moves have happened many times before and can prove to be excellent buying opportunities.

Do the tariffs pose a paradigm shift for economic growth?

• We continue to hope that the tariff situation in the US is part of a negotiation process with other countries, and while we expect the situation to remain fluid, we think that the more draconian tariff measures may well be short lived.
• In terms of economic impact, if the tariffs remain in place for an extended period of time, the base case scenario would be higher inflation in the US, given tariffs are essentially just another form of corporate taxation, which will likely be passed on to consumers. It would also have a negative impact on global growth, possibly pulling many countries into recession, which would – in the short term at least – negatively impact the earnings of most companies, including many in which we are invested.
• It is important to look at all policies together and other proposed policy changes, including less regulation, maintaining tax cuts, and improving government efficiency which would generally be pro-growth and anti-inflationary, and could also help reduce government deficits. In addition, US policy uncertainty could provide an opportunity for countries outside the US to focus on domestic pro-growth initiatives, something which has been lacking in much of the world for many years.
• We believe that economic forces are stronger and longer lasting than political forces. If this policy is as bad as some fear, there are many checks and balances which could reverse it, including court rulings, Congressional action, pressure to change before mid-term elections, and if not before, the new president would likely reverse much of this in four years.
• As market volatility has increased in recent weeks, we would remind investors that there have been many major events that have rocked the markets in the short term, but for prudent investors these periods have proven to be excellent buying opportunities.

Loomis Sayles

The Loomis Sayles Macro Strategies team provides some key insights into the implications for the credit cycle:

• The US tariff shock is monumental, upending generations of trade liberalization and global economic integration. It is a major shock with significant uncertainty on economic and financial outcomes.
• Tariffs are a tax paid by either importers, suppliers or consumers. The fiscal tightening from tariffs could hit demand and disrupt supply chains globally. 
• Unfortunately, we think the risk of a downturn has increased. We believe profits are the key indicator to watch going forward. If profits become negative, we would view it as a red flag that a downturn may be approaching.

While, Loomis, Sayles & Co. Head of Full Discretion Team, Matt Eagan made the following comments about the implications for the bond market.

To understand what comes next, it’s helpful to frame the constraints now shaping policy:

• Tariffs still weigh on growth and inflation. Even after the freeze, substantial tariffs remain in place. Their persistence could drag on economic activity and add to price pressures.
• The US holds a weak strategic hand in a global trade war. Picking fights with major trading partners who also finance your debt becomes especially risky with a wide fiscal deficit and no credible plan to rein it in.
• China remains the central showdown. Beijing views US trade actions as part of a broader containment strategy. While China faces its own economic pressures, its leadership has signaled a high tolerance for economic pain. In contrast, Trump faces the shorter political time horizon of elections and voter sentiment.
• Dollar dominance is not invincible. The trade war has introduced uncertainty about the long-term appeal of the US dollar as a reserve currency. While the dollar’s position is supported by deep capital markets and global trust, aggressive attempts to close the trade deficit risk unsettling this balance – particularly if they lead to long-term deglobalization.
• The Fed’s room to maneuver is limited. The central bank remains focused on fighting inflation and may hesitate to ease policy significantly. If labor markets weaken, a modest 25–50 basis points is plausible, but Powell is unlikely to offer a full monetary offset for any economic drag from trade tensions.

Markets now shift their focus to two fronts: the evolution of trade negotiations and the pending budget bill. Hopes that fiscal stimulus could offset the drag from tariffs have dimmed. Recent volatility in the bond market has underscored concerns about the growing deficit. In fact, news about the growing prospect of the bill’s passage helped push yields higher at the long end.

Bond investors should stay vigilant. Treasuries offer liquidity and ballast in downturns, but that protection weakens when inflation rises or when fiscal credibility is in question. The recent price action suggests that the U.S. Treasury market itself could become a source of instability – a risk that now feels more plausible than remote.

And Co-head of the relative return team, Rick Raczkowski, was asked whether or not stagflation was back.

Depending on the percentage changes after negotiations are finalized, our view is that we could see a stagflation-like environment during the tariff phase in. But we don't believe this will be persistent. And in any event, we certainly will not be going back to the 1970s, when the US suffered double-digit inflation and unemployment rates. We just don't think the current economy can sustain that kind of long-term inflation.

Tariffs act like a tax on consumers. They reduce real income and purchasing power. And we were already seeing wages and income growth start to cool before the tariff announcements. The expected hit to real incomes is likely to dampen consumer spending, which in turn should limit how much inflation takes hold in the broader economy. But in the near term, there’s little doubt inflation's going higher, and growth is slowing.

That really puts the Fed in a tough spot. Because I think in a perfect world, the Fed might want to look past a short-term inflation bump from tariffs. But that's a hard ask when inflation's already above their 2% target and likely moving higher. One thing is for sure, the Fed does not want to let inflation expectations take hold. So unless we see a sharp economic downturn or a spike in unemployment, certainly both plausible, but something we're not forecasting right now, it's going to be tough for the Fed to start cutting rates aggressively. And that, in our view, raises the risk that the Fed may keep rates elevated longer than is ideal. So in short, there are a lot of moving parts. We're going to have to wait and see how these tariffs evolve.