President Donald Trump on Thursday ordered new tariffs to be levied against Chinese imports in response to the nation’s supposed “economic aggression.” Details on implementation will follow within 15 days and will likely target a USD 50bn annual figure, near 10% of total annual US imports from China.
The S&P 500 declined 2.5% into Thursday’s close, and the risk-off trade spilled over into Asia and Europe on Friday, with declines in the Nikkei 225 (–4.6%) and the Euro Stoxx 50 (–1.5%). But it's important not to overstate the direct impact of these tariffs on the global economy or equity markets at this stage.
- Initial headlines may be worse than the end result. Further country exemptions to US steel tariffs have been announced, and China’s response so far has been restrained, with limited tariffs targeting some USD 3bn of US imports.
- Asian export growth could fall to 5–10%, from 12–13% now. But a significant downward re-rating of Asian earnings-per-share appears unlikely. And the global economy is still on track for its best year since 2011.
- Central banks may yet temper their tightening bias given the threat to global growth from escalating trade conflict. The Federal Reserve, European Central Bank and Bank of England have all warned recently of the risks to growth from a trade war.
We remain watchful for further escalation and assign a 20–30% probability to damaging retaliation. In the risk case, diversification and our counter-cyclical positions should help protect portfolio returns. However, our global tactical asset allocation remains pro-risk, and we prefer China and Asia ex-Japan equities within our Asia portfolio.