This week’s blog is written by portfolio manager, Sacha Chorley.
As we roll into the end of another week, it’s once again an announcement related to the actions of President Trump on which we focus this blog.
On Wednesday evening, the US Court of International Trade judged that the so-called reciprocal Liberation Day tariffs are illegal. This means that the administration must stop collecting those tariffs and start to refund those collected to date.
A pertinent question to ask is whether this recent news will have any longer-term implications that we should consider. Unsurprisingly, the immediate market reaction was positive. Although this change does not completely mitigate all the tariff increases we’ve seen year-to-date, it would lessen the direct impact by revoking about half of the incremental tariff changes implemented since the start of the year. Aside from these developments, given we are now two months on from Liberation Day, this is an ideal time to look for any signs that corporate trading behaviour has changed more permanently.
We have certainly seen some initial trade ‘frontloading’. CPB trade data showed a significant increase in US import volumes over the first quarter. However, subsequent data releases – both in ‘hard’ data (which are based on the actual measurements of things) and in ‘soft’ data (where people are surveyed to offer their opinions) – have shown weaker trading patterns. On the hard data side, this includes lower rates for shipping charters, while on the soft data side, PMI surveys are saying that companies are expecting fewer orders for export.
US companies’ earnings reports often focused on expected benefits or costs but lacked concrete conclusions due to the newness of the policies. You can read more about this in our previous blog. When we discussed this with our peers, we heard them reporting similar comments from the companies in which they invest.
We know Japanese companies, particularly those in the auto sector, face high tariff exposure. Recent guidance from Japanese companies suggests a 5% decline in net profits for the next fiscal year, and analysts have lowered their earnings expectations by this amount. Meanwhile, European earnings expectations have also fallen by a similar amount. In contrast, Chinese companies show modest decreases in forward earnings, possibly due to lower tariff impacts or strong domestic growth drivers that outweigh this.
Unfortunately, it is still too early to draw any significant conclusions. The Trump administration immediately declared their intention to appeal the court’s announcement and a subsequent judgement on Thursday afternoon seemed to suggest the tariffs may actually end up staying in place for the time being.
Investors should stay informed of the latest developments in the US political space but the only obvious thing to expect here is continued ‘volatility’. So, the focus should be on the fundamental factors driving the investment performance. Maintaining a balanced portfolio with some well-structured hedges should help defend against market fluctuations allowing volatility to provide opportunities to exploit.
Sacha is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Prior to joining Quilter Investors in 2011, Sacha worked at Broadstone with their team of economists before moving into asset allocation and fund manager research.
Sacha is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. Sacha has a degree in Maths from the University of Bath.
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