Background
In recent days, global share markets have experienced a sharp ‘correction’ or fall. This was clearly a strong negative reaction by investors to the news that the new administration in the US under President Trump was intent on implementing what in many cases would be sharp increases in tariffs on goods and services imported into the US. The reasons for this lift in tariffs appear to be at least twofold:
- The first aim appears to be to try to reverse at least to a degree what has become over time a severe imbalance in US trade. In recent years, the value of imports into the US has become excessive relative to the value of US exports. For example, in the December quarter of 2020 (4 years ago), the US trade deficit was 2.4% of GDP (a manageable level), whereas by December 2024 this had risen to 5.2% of GDP, a historically high proportion. Over this same period, the current account deficit for the country also widened from 2.3% of GDP to 4.1% of GDP. In particular, the trade deficit with a single country, China, a strategic rival, had jumped significantly, to over $US300 billion in 2024.
- In recent years too (in particular since the advent of the pandemic in 2020), the fiscal deficit (budget deficit) has ballooned and is forecast to be around 7.3% of GDP this year (IMF data). As a consequence, government debt has also risen to unsustainably high levels, reaching around 102% of GDP (IMF forecast for 2025 for federal debt only) and requiring over 3% of GDP (or 12% of total government outlays) just on net interest expense (over $US1 trillion per annum). This also clearly has to be addressed, and the administration appears to be taking the (correct) view that tariffs are a tax and will provide revenue to offset part of the country’s excessive fiscal deficit (even a flat 10% tariff on all imports could be expected to raise over $US400 billion per annum). Some of this ‘tax’ would likely be absorbed by exporters and some paid by US consumers but either way it could help to significantly reduce the annual deficit. With the additional savings from efficiency gains being sought by the new advisory Department of Government Efficiency (DOGE) it could be expected to bring the deficit back to manageable levels within a short period of time and also potentially allow scope for tax cuts to be introduced later this year.
In terms of the actual announcement, the level of tariffs outlined by the president on 2 April appears to have been higher than expected by the market. The aim appears to be to have a minimum 10% tariff on all imports from across the world. So-called ‘reciprocal’ tariffs, which we anticipate to be somewhat negotiable, are also to be imposed on specific countries running trade surpluses with the US. Some of the highest of the new imposts include a 34% tariff on imports from China, 26% on India, 25% on South Korea, 24% on Japan and 20% on the European Union. Key trading partners, Canada and Mexico, however, were not included in these new tariffs, having already had 25% tariffs imposed on steel, aluminium and auto imports earlier this year.
Stock markets mostly fell after the 2 April tariff announcement. On 3 April, the broad US market (S&P500 index) dropped by 5% and the technology-focused Nasdaq index fell 6%, while European markets fell less heavily (the UK and France by 2%) and Germany (3%). Asian markets also declined (Japan down 3%). However, bigger falls were recorded on 4 April after some countries announced that they would introduce retaliatory measures. In particular, China announced that it would impose a 34% tariff on all US imports to counter the 34% US ‘reciprocal’ tariff on Chinese imports. Cumulative moves for key markets from the start of the year to 4 April, included declines of 14% for the broad US market, 19% for the Nasdaq, 15% for the Japanese market, 2% for the UK, 1% for France and 6% for the Australian market, while the German market was up 4% and the Chinese market was flat.
These declines for most markets will have had a negative flow-on effect on our Fiducian Funds, including our diversified funds, which all have exposure of a greater or lesser extent to equities. While markets have been volatile in recent days, this is to be expected as short-term market volatility is the price investors pay for better long-term returns than are provided by other investment opportunities, such as bonds or cash. In the current environment, investors are understandably nervous about the economic outlook, with some commentators even predicting the potential for a global ‘trade war’ leading to sustained higher inflation and global recession (‘stagflation’) for a time. However, in our view this still seems unlikely as we expect that negotiations will come quickly between major governments, which could lead to some significant softening in tariff regimes over coming weeks. Furthermore, some rebalancing of global trade is clearly needed and there is some legitimacy to US complaints about ‘unfair’ trade policies creeping into international practices. While the implementation of these new US tariffs seems to have been somewhat clumsy, there does appear to be a need for the US to ‘onshore’ more production of vital products, including essential steel and aluminium production, as well as the manufacture of strategic inputs to military and high technology products that are necessary for defence purposes.
Fiducian’s positioning
For some months, our diversified funds have been overweight in international equities, where we saw better value than in the domestic market, particularly given our view that the Australian dollar could potentially decline further (which has proved to be the case in recent days with the drop in the $A to around $US0.60). As a defensive strategy, our allocations to both domestic and international bonds had been raised, which has also proved prescient. While this slightly overweight positioning in international shares has clearly led to a setback in recent days, we expect to see some market recovery over the near-term. This is because we do not see a global trade war developing and instead expect that negotiations will likely lead to some softening in tariff barriers being imposed on most trading partners by the US, with the possible exception of China (due to the expressed desire of the US administration to try to lower dependence on trade relations with this potential adversary).
Furthermore, we see excellent value returning to many markets after some sectors, especially the broad US market, had become relatively expensive by early this year. This return of value particularly applies to top quality international technology stocks, where we regard the recent investor reaction to have been overdone. This negative market impact has been exacerbated by what are known as ‘short sellers’ who have been very aggressively adding to downward pressure on markets. In due course, these market traders will have to move to terminate their stock positions by buying stock back and, thereby, putting upward pressure on markets. Fundamentally too, we regard the global economy as being reasonably healthy with solid ongoing growth prospects. We also anticipate that further interest rate cuts (and in the case of the US, an end to ‘quantitative tightening’), are likely to be implemented by at least some of the world’s major central banks, which could help to underpin share markets.
For most investors, this period of market stress should be a time for holding our positions as we wait for negotiations to ease trade frictions. However, there could be ongoing market volatility for a while, at least until investors see clear signs that growth is likely to be sustained and recession avoided. Any sign that geo-political issues, including the ongoing wars in Ukraine and the Middle East, could be headed towards some sort of resolution could also help to stabilise markets. As and when the outlook for these various market and geo-political convolutions begins to improve, markets could begin to trend up again. Trying to time the start of any sustained market recovery is an impossible task. We should keep in mind that the longer-term outlook remains positive and we remain focused on the potential market boost to be provided by an easing in global trade and geo-political tensions.
Conclusion
Recent share market falls and general market volatility appear to have been caused by the announcement of new tariff barriers to be implemented by the US, which has seen the US market fall substantially and further than other major markets, reflecting a potential over-reaction by investors (although the US market was seen as very much fully valued prior to the recent correction).
While there could be further heightened market volatility and investor nervousness for a time, as always, our advice to investors is to stay well diversified. We recommend that a core part of an overall portfolio be held in our diversified funds, which comprise the Fiducian Capital Stable, Balanced, Growth and Ultra Growth Funds. Other asset sector and specialist funds that have greater risk can be used to capture further upside, as we continue to see good potential value in many equity sectors around the world.
Our asset allocation positions and moves are designed to benefit longer-term returns for clients and we recommend staying invested and riding through the current period of market turbulence, after which share markets could be expected to resume an upwards trajectory in time. For those investors who have particular concerns in the current environment, dollar-cost averaging into markets, as always, could represent a sensible way to gain market exposure.
Disclaimer
Issued by Fiducian Investment Management Services Limited ABN 28 602 441 814 AFSL 468211 (FIMS). The information is provided for general information only and does not have regard to any investor objectives, financial situation or needs. It does not purport to be advice and should not be relied on as such. Investment and tax advice should be sought in respect of individual circumstances. Except to the extent that it cannot be excluded, FIMS accepts no liability for any loss or damage suffered by anyone who has acted on any information in this document. Past performance is not a reliable indicator of future performance and we do not guarantee the performance of the Funds or any specific rate of return. Potential investors should obtain and consider the relevant Target Market Determination (TMD) and Product Disclosure Statement (PDS) (available at fiducian.com.au) before making a decision about whether to acquire or continue to hold any financial product.