• Actions over the past four weeks have made it increasingly clear that trade uncertainty will persist over the next few quarters, with the potential increasing that trade tensions escalate even further. Even absent a full-on trade deluge scenario, the lingering of the trade uncertainty clouds will dampen businesses sentiment and economic growth, not only overseas, but in the U.S. as well.

  • Trade uncertainty will cap valuations, leaving earnings as the main driver of returns. Given our expectation for elevated volatility, investors should focus on sectors like financials, energy and real estate, which have historically demonstrated a more balanced total return profile.

  • The Fed will likely loosen monetary policy in 2019 but the amount of future rate cuts depends on how trade talks progress. Within fixed income, quality should outperform credit if trade fears continue; however, yields will likely rebound if the trade clouds clear and confidence picks up.

  • Trade uncertainty will cap valuations for international equities as well, while keeping volatility high especially for emerging markets and cyclical sectors. A more targeted and defensive approach to international investing makes sense for the short-term, while investors should not lose sight of the long-term potential for the asset class.

Trade was the hot topic of 2018, with the U.S. administration engaging in negotiations with many major trading partners. Some tariffs were imposed along the way, with solar panels, washing machines, steel, aluminum and about half of Chinese imports (25% on $50bn and 10% on $200bn) all finding themselves in the crosshairs. This increased the U.S. tariff rate from 1.4% in 2017, the lowest in the world after decades of globalization, to 3.2% at the end of 2018, already higher than most developed countries [Exhibit 1]. In retaliation, trading partners like China, the EU, Mexico and Canada enacted tariffs on U.S. goods. The negative economic effects of these moves were most evident for big export economies like those of Japan, Europe, China, Taiwan and Korea, leading manufacturing activity to weaken significantly over the course of last year. This manufacturing-led weakness led to a downshift in the pace of global growth to below trend levels by the end of 2018. The U.S. economy, on the other hand, held up much better, partly due to the fiscal stimulus boost, partly due to a lower reliance on exports and partly due to the still small dollar amount of the applied tariffs.

EXHIBIT 1: U.S. tariff rates now higher than DM countries, approaching EM countries

Tariff rate, applied, weighted mean, all products


Source: IMF, U.S. ITC, World Bank, J.P. Morgan Asset Management. Historical tariff rates are 2017 figures. Data are as of May 31, 2019.

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