Markets’ responses to tariffs

April 11, 2025

Other markets are responding to the U.S.’s reciprocal tariffs:

China: In response to the U.S.'s 145% tariff, China increased its tariff on U.S. goods to 125%. Additionally, China included six U.S. firms on its unreliable entity list and 12 U.S. entities on its export control list.

Mexico/Canada: Mexico has opted not to respond with tariffs against the U.S., considering the current state of its economy. President Sheinbaum has been recognized for effectively managing negotiations and increasing oversight of border crossings and drug trafficking. Canada has adopted a more aggressive stance, announcing 25% tariffs on targeted U.S. goods and non-USMCA compliant vehicles.

European Union: On Wednesday, European officials voted to impose measures on USD 23 billion of U.S. goods but decided to delay their implementation following the announcement of the 90-day pause.

Asia ex-China: Even outside China, emerging markets in Asia were significantly affected by the “reciprocal” tariff announcements, given steep trade deficits with markets like Vietnam (USD -109billion in 2023). Southeast Asian governments have been more conciliatory, with Vietnam offering to lower tariffs on U.S. imports to 0%. On the other hand, Korea’s and Japan’s negotiations with the White House appear to be progressing positively.

The seven mega-caps and tariffs

April 09, 2025

The Trump administration’s “Liberation Day” tariffs have impacted global markets. While intended to level the playing field, these measures have placed additional pressure on major U.S. tech companies.

Up to 75% of the seven mega-caps’ suppliers are located overseas, particularly in East and Southeast Asia. These companies don’t just build abroad, they sell there too. They generate over half of their revenue overseas.

Tariffs could squeeze margins and hamper innovation. Electronics, semiconductors, server infrastructure—all areas dominated by the seven mega-caps—are at the center of the new tariff lists. Capital expenditures may also slow, with steel, aluminum and copper tariffs increasing the cost of the data center buildout.

Foreign responses add another layer of risk. The EU and China have considered measures that target the substantial U.S. services trade surplus, which is significantly supported by U.S. tech companies.

Drivers of the trade deficit

April 07, 2025

The trade deficit of the U.S. can be ascribed to two factors:

• If government spending exceeds taxes and private investment equals private savings, then imports will exceed exports. The huge budget deficit is a key cause of the huge trade deficit. 
• For many years, the U.S. dollar exchange rate has been too high to achieve trade balance. In simple terms, U.S. goods are relatively expensive, which can reduce foreign demand, while foreign goods are more affordable, leading to higher U.S. consumption.

To achieve trade balance, a more effective approach might involve reducing the budget deficit and collaborating with other markets to gradually adjust the exchange rate to a more reasonable level.

Immigration and labor supply

April 07, 2025

As native population growth has slowed, the U.S. has leaned on a growing immigrant population to drive long-term economic growth. While the number of monthly deportations is still in line with the average under the Biden administration, unauthorized border crossings have declined significantly.

Industries like construction, professional and business services, and other services, including personal care and repair and maintenance, are particularly vulnerable to a slowdown in immigration levels. Conversely, sectors less reliant on immigration, such as financial services and information, tend to pay higher wages.

Tariff announcements exceed expectations 

April 07, 2025

On April 2^nd, U.S. President Trump announced much higher than expected tariff rates on imports from around the world, on top of previously announced measures.

What happened with tariffs?

• On April 2nd, the U.S. President issued an Executive Order based on a “national emergency” including two main tariff announcements: 1) 10% universal tariff on U.S. imports with the goal of raising revenue (effective April 5th) and 2) Higher “reciprocal” tariffs on more than 25 of the country’s biggest trading partners based on the size of their trade deficit with the U.S. (effective April 9th).
• These “reciprocal” tariffs were much higher than expected, prompting varied international responses. China saw an additional 34% (for a total tariff increase of 54 ppts this year), 20% on the European Union (EU), 24% on Japan, 25% on South Korea, 26% on India, 32% on Taiwan and higher tariffs on Southeast Asia (e.g. 36% on Thailand; 46% on Vietnam). Canada and Mexico were were not included in this round, as discussions relating to the United States-Mexico-Canada Agreement (USMCA) are ongoing. Within Asia, Australia and Singapore are not subject to reciprocal tariffs as the U.S. has a trade surplus with these markets.
• These announcements added to previous tariffs: 25% on non-USMCA compliant goods from Mexico and Canada (10% on Canadian energy and 10% on potash), additional 20% on China, 25% on steel and aluminum and 25% on imported autos and auto parts.
• As seen in Exhibit 1, we estimate that this brings the average effective tariff rate to around 25% , the highest since the early 1900s.

What happens now?

• Additional sector-specific tariffs may still be forthcoming (on semiconductors, pharmaceuticals and certain critical minerals). These sectors were exempted from the tariffs announced on April 2nd but have been mentioned by the U.S. President in prior tariff announcements as areas of focus.
• The duration of these tariffs will matter for the growth outlook. The 10% universal tariffs are likely to be permanent given the revenue raising goal, but the additional tariffs may be the start of negotiations with individual trading partners, leading to their reassessment over time.
• Trading partners may decide to retaliate with their own tariffs on U.S. exports and U.S. companies (including services like technology). At the time of writing, China announced a 34% tariff on all U.S. imports starting April 10th. Canada has also retaliated, announcing their own tariffs against U.S. auto imports. Both Canada and the EU have stated they are planning additional countermeasures against the U.S.
• Fiscal and monetary policy responses will be key. U.S. additional tax cut discussions are likely to be accelerated, and fiscal stimulus overseas can increase further (especially in Europe and China). Central banks (including the Federal Reserve) are likely to focus on responding to the growth hit by lowering rates,  rather than the supply driven inflationary impact. Some emerging market (EM) central banks may decide to devalue their currencies to maintain export competitiveness (led by China).

What are the economic impacts?

The tariff announcement has raised market pricing for a recession, but there is still a large degree of uncertainty regarding the duration and depth of any recession that may eventuate. What is more certain is that the short-term economic impacts of tariffs tend to be stagflationary.

Some of the one-time increase in tariffs may hit U.S. businesses’ bottom line, while some may be passed on to the end consumer, raising prices. Important business decisions (investment and hiring) may be postponed or canceled, and consumers’ spending habits may change by pulling back on bigger purchases. 1Q growth was already looking soft and further softening in 2Q will depend on the duration of tariffs.

The extent to which global companies and economies are impacted will depend on their policy responses and the external vs. domestic focus of specific companies.

Investing implications

Since April 2nd, risk markets have pulled back significantly. The S&P 500 fell more than 10% in the subsequent two days following the announcement, while the NASDAQ and the Russell 2000 have fallen into bear market territory (more than 20% from the recent peak). Within U.S. equity indices, multinationals with significant overseas production have faced greater challenges. Asian and European stocks also fell. Bonds rallied on growth concerns, with U.S. Treasury yields falling over 20 basis points (bps), and being 80bps lower than their January peak. Safe haven assets such as gold and the Japanese yen strengthened. Commodity markets weakened on softer demand outlook, especially oil prices.

How should investors be positioned?

• A diversified approach is essential to cushion portfolios from shocks: Core bonds can help during growth shocks, with the U.S. Aggregate index up 3% year-to-date. Other diversifiers are needed when inflation and fiscal concerns take the lead again, with real assets (infrastructure, real estate), gold, certain hedge funds and hedging strategies are top of the mind.
• Diversify equity exposure: After two years of concentrated U.S. equity performance, expectations are high, and portfolios are concentrated exactly in the previous winners. So far this year, investors have been rewarded for being diversified, with value outperforming growth by 1,000bps and international markets outperforming the U.S. by 1,100bps (the biggest since 1989). Companies with lofty valuations and low quality continue to be the most vulnerable.
• Active management to differentiate perfomance: Companies and sectors will be impacted unevenly. Companies that are domestically oriented, services-oriented and have higher pricing power are likely to fare better.
• Role of income remains key, whether from high quality fixed income, stock dividends, alternative assets or strategies with option overlays. A consistent income stream is important when asset prices go through policy-induced volatilities.

Podcast: What should investors do following the U.S. tariff announcement?

April 03, 2025

Tai Hui, Chief Market Strategist, Asia Pacific, dives into the overnight announcement of new tariffs by U.S. President Trump for imports into the U.S. across a large swath of countries globally. What are the tariff amounts being applied and to which countries? How has the market reacted since the announcement? With so much uncertainty facing businesses, which investment areas could be more resilient?

Tariff preview ahead of April 2^nd

March 25, 2025

• What has been announced and implemented so far? Tariffs on China, Canada, Mexico, steel and aluminum have been implemented. April 2 is a key date where reciprocal tariffs, tariffs on EU and select strategic sectors could be announced or implemented.
• What will be key? Uncertainty remains on specifics of reciprocal tariffs, value added tax (VAT) considerations, implementation pace, room for negotiation and whether tariffs will be additive. Potential retaliation from other economies could risk worsening tariff impacts.
• Who is vulnerable? Reciprocal tariffs imply that the European Union (EU), India, Japan, Taiwan and Thailand could be at risk. Sectoral tariffs will likely prioritize automobiles tariffs, followed by semiconductors, and then pharmaceutical products. If U.S. President Trump targets trade deficits, apart from China and Mexico, Vietnam has a large and growing deficit.
• How about markets? Markets have rotated from being initially optimistic over market-friendly policies to being led by risk-off sentiments due to policy uncertainties. There will likely be heightened volatility around April 2 with new announcements and implementation details.

• Timing: April 2 is a key date for the proposed implementation of reciprocal tariffs, sectoral tariffs and tariffs on the EU. April 1 is also the deadline for federal agencies to provide recommendations on trade pacts with Canada, China and Mexico, paving the way for potentially higher tariffs on the three economies.
• Tariff rate: The below chart illustrates the implemented tariffs highlighted above. This would bring average tariff rates to a level unseen in six decades. If the exemption for USMCA goods expires on April 2, the average tariff rate could approach 10%.

What will be key?

Implementation details

While U.S. President Trump has provided hints of what he might target on future tariffs, the implementation details could lead to uncertain outcomes. Here are a few key questions that remain unknown, making it very difficult to forecast the economic impact.

On reciprocal tariffs:

• Will tariffs be placed on specific product categories with the largest tariff gap only, or will it be placed on a market level (i.e. on all products from that market)?
• Will there be any exemptions?
• Will differences in VAT be considered? For example, while the EU does not have a high tariff differential against the U.S., it has a high VAT.

Are the proposed tariffs going to be additive on top of existing tariffs?

• For context, steel and aluminum tariffs were imposed on top of existing tariffs on non-USMCA compliant goods. However, Bessent refused to confirm whether sectoral tariffs will be stacked on top of reciprocal tariffs in a Fox News interview on March 18.
• If tariffs are confirmed on April 2, will they be phased in or effective immediately? How much room for negotiations will there be?
• Will U.S. President Trump clamp down on transshipments through China? How will that be executed?
• Will U.S. President Trump be more lenient on economies that have a free trade agreement with the U.S.?

Potential retaliation

If other markets retaliate, resulting in a tit-for-tat trade dispute, the economic impact could be much broader (e.g. impacting more industries) and longer in duration.

• For tariffs implemented so far, China and Canada have retaliated, while the EU and Mexico have both delayed retaliation to pave way for negotiations.

As for smaller economies such as Malaysia, Thailand, and Vietnam, it remains to be seen whether the U.S. is willing to engage and negotiate individually given the size of their economies.

Who is vulnerable?

Reciprocal tariffs

On February 13, U.S. President Trump proposed reciprocal tariffs, aiming to match U.S. tariff rates with those imposed by its trading partners. He also hinted at considering non-tariff barriers, such as VATs (levied on value added to both domestically produced and imported goods), potentially broadening the tariff scope, and resulting in an even larger tariff hike.

The chart below examines the vulnerability of select markets to reciprocal tariffs in terms of the tariff gap above the U.S.

• The EU, India, Japan, Taiwan, and Thailand have a relatively high tariff gap, implying a higher probability of being scrutinized.
• China’s tariff gap has likely narrowed as a result of the recent 20% tariff hike from the U.S.
• South Korea has a free trade agreement (FTA) on manufactured goods with the U.S. (albeit high tariffs on agricultural imports from the U.S., which only accounts for 0.3% of Korean exports). Other markets such as Australia, Singapore and Vietnam also have trade agreements with the U.S., which could leave more room for negotiation.

Sectoral tariffs

On February 18, U.S. President Trump hinted at tariffs of 25% or more on semiconductors, pharmaceuticals and automobiles, with further details expected on April 2.

Out of these categories, we see auto tariffs as a likely priority, given U.S. President Trump’s frequent comments on automobiles since his first administration, followed by semiconductors which are strategic in nature. Pharmaceutical tariffs will likely face pushbacks from the many U.S. pharmaceutical companies that manufacture overseas.

In terms of vulnerable Asian markets:

• Semiconductors: Malaysia stands out as being a major testing and packing hub for semiconductors (chip exports to the U.S. comprise nearly 2% of its gross domestic product (GDP)). South Korea and Taiwan are also vulnerable.
• Pharmaceuticals: India and Singapore are quite exposed. In fact, India supplies nearly half of the U.S.’s generic drugs.
• Automobiles: Japan and South Korea are most at risk. In fact, nearly one-third of Japan’s exports to the U.S. are autos and auto parts, with the auto industry employing 8.3% of Japan’s workforce.

Trade deficit

Overall trade deficit is a result of an imbalance between a country’s savings and investment rates, which is difficult to reverse. In fact, the U.S. trade deficit ended 2017 at USD 568.4billion, but after the 2018-2019 trade tensions, the deficit actually widened to USD 616.8billion in 2019. Although the deficit against China has decreased slightly, the U.S.’s trade deficit expanded significantly against Mexico and Vietnam.

However, U.S. President Trump has repeatedly criticized the nation’s trade deficit, especially after it reached a record high in 2024 to USD 1.2trillion. He has also implied that trade deficits against individual economies will be a key consideration in deciding who to target with tariffs. A recent Bloomberg article also hinted that markets that the U.S. has a trade surplus against will likely be exempted from reciprocal tariffs.

If U.S. President Trump targets trade deficits:

• Apart from China, Vietnam is quite vulnerable, with the trade deficit hitting a record high in 2024. Part of the rise in this trade deficit since 2018 was due to transshipments of Chinese goods, as Vietnam took over from Japan as China’s third-largest export destination for the first time in 2024, which will likely draw attention from the U.S. if U.S. President Trump decides to clamp down on transshipments.

Taiwan, Japan and South Korea are also vulnerable, but could prove more resilient than Vietnam given their more complex and high-tech products, which are harder to be replace elsewhere, making the U.S. relatively more reliant on their imports.

Overall

• Even if a market gets targeted with tariffs, the economic impact will be relatively limited if they have low exposure to U.S. trade.
• For example, even though the U.S runs huge trade deficits against China and the EU, these two economies’ exposure to U.S. trade is only 3% of their GDP, which is significantly lower than Canada and Mexico’s 20% and 27%, respectively. This shows that for Canada and Mexico, a vast majority of their exports go to the U.S. For other economies, their export destinations are much more diversified.   

How about markets?

Quick recap on what happened:

• Since the presidential elections last November, U.S. equity markets were initially optimistic over expectations of lower taxes, deregulations, and other market-friendly Republican policies. This momentum carried on until mid-February, which saw a flurry of tariff announcements from the U.S. These heightened trade uncertainties have led to scrutiny around the soft-landing narrative, rising inflation expectations and worsening consumer sentiment, thereby driving market volatility and a risk-off rotation in financial markets.
• The rotation from U.S. mega-caps to the broader market also contributed to the index’s drawdown given high concentration, while positive developments outside of the U.S., such as anticipation for higher fiscal expansion in Europe and optimistic sentiment around China’s artificial intelligence advancement, also accelerated flows out of the U.S.

What to expect:

• The April 2 deadline for tariff announcements marks an important date for markets. The lack of details thus far suggests that markets remain largely uncertain about the amounts and targets of U.S. tariffs as well as potential retaliatory tariffs or escalations, leading to a wide range of possibilities beyond consensus estimates. This means that markets are likely to continue trading with heightened volatility through April 2.
• Beyond the announcement date, evolving developments around trade policies, whether negotiations or retaliations, could mean a prolonged period of uncertainty. The risk of unclear implementation of the U.S. trade policies also adds the potential possibility for continuous lack of clarity and measures for markets to quantify tariff impacts, keeping market volatility elevated.
• Risk and uncertainty should mean exploring opportunities deeper in the U.S. market and across asset classes. The observed resilience from the non-mega-cap names in the U.S. is expected to persist through the tariff-led volatility, as their less-demanding valuations should provide a cushion against de-rating risks. Additionally, maintaining a diversified exposure to other regional markets will continue help benefit from different market cycles and rotations.

Podcast: U.S. Tech and what's next after all the volatility

Tai Hui, Chief Market Strategist, Asia Pacific, is joined by Joseph Wilson, portfolio manager and research analyst covering the technology sector with the U.S. Equity Group, to take a closer look at the recent performance of the U.S. tech sector amidst a lot of recent market volatility.  What are the risks and opportunities that investors should be mindful of in the U.S. tech area?  How does China's recent AI development compare to similar innovation taking place in the U.S.?  Will semiconductors continue to lead the next phase of tech growth?

Fiscal considerations for the reconciliation bill 

March 24, 2025

• Extending the 2017 Tax Cuts and Jobs Act (TCJA) is estimated to cost USD 4.6 trillion from 2026-2034, using current law as a baseline since the tax cuts are set to expire in 2026.
• However, Congress could also assume the current baseline today (in which the TCJA is in effect) is the starting point, allowing room to include other tax cuts proposed during the campaign.
• Congress could adjust the time frames, implementing an extension of tax cuts lasting only five years or having 10 years of spending cuts finance five years of tax cuts.

The Fed responds to policy uncertainty 

March 20, 2025

In the March FOMC meeting, Chair Jerome Powell acknowledged the uncertainty in Washington, noting that tariffs are expected to contribute to upward pressure on near term inflation: “Inflation has started to move up now, we think partly in response to tariffs and there may be a delay in further progress over the course of this year.”

Economic deceleration or acceleration from policy? 

March 17, 2025

Deceleration risks:

• Tariffs: Policies enacted have increased the average tariff rate on goods coming into the U.S. to 6.4%. its highest level since the 1960s.
• Immigration: Illegal border crossings decreased to 12,000 encounters in February, compared to 100,000 per month in 4Q24, and 250,000 per month in 4Q23. Conversely, immigrant visas increased in January and deportations are at less than 1,000 per day. However, labor supply could be affected if immigration slows down.
• Job and spending cuts: 75,000 federal workers accepted the buyout offer and layoffs have occurred across various departments. It is suggested that the Trump Administration plans to reduce 45,000 IRS jobs, 55,000 Department of Defense civilian positions and 80,000 Veteran’s Affairs jobs. The House budget resolution envisions up to a USD 2.0 trillion reduction in federal government spending.

Acceleration opportunities:

Tax cuts: The fiscal 2025 budget resolution passed by the House in late February authorizes up to USD 4.5 trillion in tax cuts, extending the 2017 tax cuts. However, additional tax cuts could be considered by allowing some to expire within a few years while assuming spending cuts hold for a full decade.  Alternatively, Congress could decide to calculate further tax cuts relative to “current policy” rather than “current law”, thereby assuming no need to fund an extension of the 2017 tax cuts and leaving more room for tax reductions in other areas in 2026.

Podcast: Are uncertainties in U.S. government policies leading to the overnight market drop?

March 11, 2025

Ever-changing tariff announcements and softening economic data, which have affected consumer and business confidence, have raised concerns about persistent inflation and a looming recession. This has led to stocks moving towards correction territory.

Tai Hui, Chief Market Strategist, Asia Pacific, dives into the large overnight market drop in the U.S. and highlights some of the underlying reasons leading to negative investor sentiment. How are businesses adjusting to the latest tariff developments and cutbacks on U.S. government spending? What were the market bright spots when many companies had large downward movements? With financial markets showing significant concerns, could future U.S. government policies shift to be more supportive of businesses and markets?

In times like these,

• Rebalancing can help adjust portfolio exposures away from the most concentrated parts of the market.
• Investors can use this sell-off to consider quality companies trading at valuations that were less accessible just weeks ago.
• Current yields across the fixed income universe present relatively attractive levels of income.
• Core bonds can help better prepare portfolios for any potential shocks that may occur.

Scope for DOGE savings from job and spending cuts

March 7, 2025

• The estimated annual compensation of a federal employee was approximately USD 130k in FY24, with about 3 million federal employees. Of the USD 6.75 trillion spent by the U.S. government in FY24, only USD 388 billion (less than 6%) was allocated to federal employee compensation.
• Beyond workforce reductions, the Department of Government Efficiency (DOGE) has explored pausing payments from federal grant programs. Federal grants-in-aid to state and local (S&L) governments totaled USD 953 billion in FY24, or 14% of total spending. Given S&L governments' reliance on these funds, significant cuts could present challenges. In FY24, federal grants-in-aid represented approximately 24% of total S&L government receipts.

Podcast: What is causing the recent U.S. market volatility? Tariffs, immigration, jobs and taxes.

March 5, 2025

Dr. David Kelly, Chief Global Strategist, and Tai Hui, Chief Market Strategist, Asia Pacific, shed light on what's causing the latest U.S. financial markets volatility. Which U.S. government policies have impacted the markets the most? How confident are American businesses in navigating the recent changes in tariffs? Can the U.S. economy traverse through these recent challenges?

Economic impacts of tariffs 

March 3, 2025

“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.”

Sentiment indicators hint at uncertainty 

February 28, 2025

Sentiment indicators have highlighted some concerns about growth and inflation in the current political environment:

• The National Federation of Independent Business (NFIB) small business survey reported the largest monthly decline in "Plans to make capital outlays" since 1998 and the largest monthly increase in uncertainty since the survey began in 1986.
• The University of Michigan 1-year inflation expectations rose to 4.3% from 3.3% in February.

The preliminary services purchasing managers’ index (PMI) fell below 50 to a 25-month low, while manufacturing reached an 8-month high. Commentary noted, “New order growth also weakened sharply and business expectations for the year ahead slumped amid growing concerns and uncertainty related to federal government policies. The upturn in manufacturing output was also in part linked to the front-running of tariffs, hinting at merely a temporary boost.”

Reciprocal Tariffs Impact:

February 19, 2025

U.S. President Trump introduced the "Fair and Reciprocal Plan" to address practices deemed unfair by his administration. This plan aims to equalize tariff rates and increase tariffs in response to non-tariff barriers, like value added taxes (VATs), government subsidies, regulations and legal actions against U.S. companies.

Equalizing tariff rates and focusing on non-tariff barriers could cause potential economic impacts. As we approach the April 1 deadline, here are the markets most at risk:

• European Union (EU): The U.S. and the EU have similar average tariff rates on each other’s imports, but disparities arise at the product level. The EU imposes a 10% tariff on U.S. autos, whereas the U.S. applies a 2.5% tariff on European autos. In addition, the administration argues that Europe’s value-added tax (VAT), which averages 20% vs. the average U.S. sales tax of 6.6%, disadvantages the U.S. If the U.S. retaliates against VATs, reciprocal tariffs could exceed 20%.
• Emerging Markets: Tariffs are common in emerging markets to protect nascent industries. India and Brazil have average tariff rates of 11.5% and 7.4%, respectively, on all imports. India, which had a USD 43 billion trade surplus with the U.S. in 2023, has begun reducing tariffs on certain products to ease tensions. Brazil, which maintains a slight trade deficit with the U.S., may face less targeting, though high tariffs on products like U.S. autos and ethanol are still pain points.

Scoping out government employment

February 10, 2025

The current administration aims to reduce the federal workforce as part of its fiscal strategy, proposing measures like severance packages, hiring freezes, and potential agency eliminations. However, data suggests there may be limited scope for significant cuts. There are three million federal jobs (excluding active duty military personnel), representing just 1.9% of all jobs. In contrast, state and local governments account for 13% of total payroll jobs, but the federal government lacks authority over those positions.

Federal employees on an average earn USD 106.5k annually, so a 10% reduction in the federal workforce would save only USD 32 billion per year or 0.5% of the 2025 federal budget.

Lessons from 2018: Tariff and Tax impacts on Equities

February 07, 2025

There is uncertainty regarding the development of tariffs and tax reform, but 2018 can offer insights into how these policies could impact profits, corporate activity and market performance.

• Earnings and Margins: The 2017 Tax Cuts and Jobs Act added roughly USD 13 to earnings per share when implemented in 2018. Profits grew an impressive 21% that year, and margins contributed to about half of that profit growth.
• Revenues: Revenues increased 7.2% in 2018 as consumers enjoyed an income tax cut. However, consumer spending decelerated throughout 2018 and the cumulative effects of tit-for-tat trade tensions began to weigh on revenue in 2019.
• Buybacks and M&A: Elevated margins from tax cuts invited a flurry of corporate activity. Announced mergers and acquisitions (M&A) volumes leapt in 2017 to record levels, and while momentum slowed in 2018, overall volumes and deal count remained elevated. The value of announced S&P 500 buybacks jumped 68% in 2018.
• Capex: Capex intentions peaked in 1Q18 and gradually declined, echoing a rise in economic policy uncertainty likely arising from tariffs. We have already seen this dynamic emerge today—last month, capex intentions had the biggest decline in 30 years according to the NFIB.
• Market performance: Profits helped the S&P 500 notch 19 new all-time highs in 2018 and shrug off volatility generated by trade tensions, but a hawkish Federal Reserve soured markets, leaving the S&P down 6.2%. In the end, earnings contributed 16% points to the S&P 500 return, but multiples subtracted 22% points.

Lessons from 2018: Tariff and Inflation

February 05, 2025

Overall inflation remained contained in 2018, though sectors that were exposed to tariffs did see upward pressure on prices. However, the limited scope of the 2018 tariffs confined price increases to just a few sectors, and in the generally benign environment of the time, these price rises were offset by price declines elsewhere.

China’s potential responses to tariffs

February 05, 2025

China’s response to U.S. tariffs could resemble its 2018-2019 playbook:

• Retaliatory tariffs: Large-cap U.S. tech firms derive approximately 14% of their revenues and 16% of their inputs from China.
• Currency depreciation and export diversification: From peak to trough within the trade tensions period, the CNY depreciated by 16% vs. the USD, helping offset the impact of tariffs and facilitating trade diversification toward other markets.
• Export restrictions and U.S. company crackdowns: China could expand mineral export controls and challenge U.S. businesses operating in China. 
• Fiscal stimulus: Tariffs could hurt China’s GDP growth due to lower investment, consumption and reduced business confidence, requiring increased fiscal stimulus.

Tariffs on Mexico, Canada and China

February 03, 2025

Tariffs on Mexico, Canada and China could have a notable impact on each economy:

• Announced tariffs imply an average import tax of 19% on those goods. Under the crude assumption that a 19% increase in prices results in a 19% decline in purchases, the tariffs proposed could raise USD 206 billion.
• Total U.S. consumer spending is USD 19.8 trillion. If all of the price increase were passed on to consumers, it could increase CPI by just over 1%.
• The administration may view tariffs as a strategic tool to address immigration, drug trafficking, trade deficits/disputes and geopolitical influence.
• Exports to the U.S. make up 32% of Mexico’s GDP and 21% of Canada’s.
• Mexico and Canada account for 52% of U.S. auto part imports, while Canada alone makes up 60% of U.S. crude oil imports.

Inflation expectations by political affiliation

The latest University of Michigan survey of inflation expectations revealed a sharp increase. However, political biases are clear given the divergence by political affiliation: Republicans expect inflation to nearly stall at 0.1%, while Democrats forecast a surge to 4.2%. 

Boosting energy production

U.S. President Trump signed a slew of executive orders and made several declarations to boost U.S. energy production and deregulate oil drilling. However, the U.S. is already the world’s largest crude oil producer and LNG exporter. The difference between U.S. primary energy production and consumption has reached the highest levels in recorded history.

In addition, energy companies may not want to significantly ramp up supply as it would decrease oil and gas prices and impact profitability. Oil exploration and production firms need oil prices at USD 64 on average to profitably drill a new well, leaving little room for current prices to decline. 

Executive Orders in Week 1

January 27, 2025

After the inauguration, the U.S. President Trump:

• Revoked 67 executive orders signed by President Biden, including regulations imposed on the development of artificial intelligence, public health and environmental issues
• Ended federal diversity, equity and inclusion (DEI) programs
• Withdrew from the Paris climate accord and World Health Organization
• Declared a national energy emergency, reopening large swaths of federal land and federal waters to oil and gas drilling
• Put a 60-day freeze on new federal regulations

On balance, less federal regulation going forward could boost real gross domestic product (GDP) growth, although with hard-to-assess impacts on the risk of disaster, should something go wrong.

Podcast: Volatile markets after Lunar New Year - Tariffs, AI and the Fed

February 04, 2025

In this episode of the On Investors' Minds - APAC Edition podcast, Tai Hui welcomes everyone back from the Lunar New Year break and takes a closer look at the recent market volatility that has stemmed from recent tariff tensions, new AI engines, and the U.S. Fed taking a pause.

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