US president Donald Trump has sparked a global market sell-off by launching a trade war.
Mexico and Canada have received a one-month reprieve on 25 per cent tariffs on exports to their neighbour, but 10 per cent tariffs on the US’s economic rival China have gone ahead and prompted immediate retaliation.
Trump has suggested tariffs on the EU may follow, but that he might work something out to avoid this with the UK.
US markets recovered some losses but finished in the red overnight. The FTSE 100 and other European markets are down for the second day running today, while safe-haven assets such as gold are hovering close to a record high in value.
In the face of turbulence, investors look to the long term. The conventional wisdom is to ensure you are well-diversified, maybe keep an eye out for opportunities, and otherwise sit tight during market convulsions.
We asked finance experts to explain what Trump’s trade war could mean for markets and economies, the fallout when he last unleashed tariffs in 2018, and which investments might thrive under US protectionism.
US president Donald Trump has sparked a global market sell-off with tariff threats
General consensus is tariffs are ‘bad news’
‘The threat of a trade war did not come out of the blue,’ says Fidelity International’s investment director Tom Stevenson.
‘What has taken the markets by surprise is the speed of the proposed delivery of the tariffs. The market reaction has been meaningful.’
Stevenson says the general consensus is that tariffs are bad news, and certainly for investors they come at a bad time.
‘The AI narrative is reeling from the Deepseek blow a week ago. The risk is that the combination of the two unnerves investors, already fretting about the durability of the bull market.’
But he says it is important to view the threat to markets in context, as the S&P 500 rose by 2.8 per cent and global shares by 3.4 per cent in January.
He adds that part of the market’s strength is another positive earnings season, as we are about 40 per cent through the fourth quarter round and 80 per cent of the companies reporting so far beat expectations.
Steven says: ‘During times of uncertainty, returning to those fundamental investment principles can provide reassurance.
‘Therefore however difficult the idea of “doing nothing” may seem, staying invested and taking a long-term approach throughout times of volatility is the best strategy.’
He says to ensure your portfolio is well-diversified across a mix of assets – from shares and funds to bonds and cash, and across sectors and geographies – as this spread can help mitigate some of the risk from market volatility.
What happened during Trump’s last tariff round?
‘Trump’s launch of tariffs in 2018 did raise revenues for America but US corporate profits took a hit that year,’ says AJ Bell’s investment director Russ Mould.
‘America’s S&P 500 index fell by a fifth, so markets have understandably taken fright this time around.
‘Weirdly, stock markets have begun Trump’s second term in boisterous form, in marked contrast to 2016’s election result when they approached the Republican candidate’s win with caution.’
Mould says ultimately the S&P 500 gained 56 per cent during Trump’s first term, but there was a big wobble in 2018 with a mini bear market that autumn as threats of tariffs on China became reality.
‘This may have been because the best cure for high prices is just that – high prices – with the result that consumers and companies refused to pay them and sought out cheaper options – which is precisely the Trump plan this time around.
‘But it may have also been because American importers and foreign sellers into the US elected to take the hit on margin and did not pass on the cost impact of the tariffs.’
Mould points out US corporate profits stalled in 2018 and shrank as a percentage of GDP, which suggests companies did take the margin hit and didn’t run the risk of losing revenue if they jacked up prices.
‘US stock markets did not like that at all,’ he says. ‘This is a worry. According to data from Standard & Poor’s, the US equity market started 2018 on 23 times forward earnings and ended it closer to 19 times, thanks to the autumnal slump.
‘This time around, markets are welcoming, not worrying, about Trump. Analysts expect 17 per cent corporate profits growth in 2025, and the S&P currently trades on 24 times earnings, based on that 17 per cent growth assumption.
‘Any disappointment could have the same impact, if not greater, than it did seven years ago.’
What could be the fallout from a trade war now?
‘The question is whether this is the beginning of a damaging trade war or something less sinister,’ says Neil Wilson, analyst at TipRanks.
‘It seems from the selling pressure that the market underestimated Trump – not for the first time. But whether this is resolved in short order or drags out and spirals is unknown.’
He says if the tariffs remain it will mean a significant redrawing of trade terms and currencies will adjust to reflect that.
‘Whether or not you think tariffs are dumb and that Trump was elected as “Tariff Man”, you would still have to think that the policy will push up inflation in the US, even if currency fluctuations soften the blow.
‘Retaliation and escalation will be the key now – Trump has played a card and has more. We don’t know exactly how many cards other countries have.’
Last week, the US Federal Reserve kept interest rates on hold, against the wishes of Trump who broke with US presidential convention by openly calling for a cut.
In a bulletin issued today, the economics team at asset manager Payden & Rygel notes: ‘Federal Reserve chair Jay Powell said last week that policymakers must wait for more details before determining the economic impact of new tariffs.
‘Powell is correct that the unknowns are vast. Countries will retaliate, consumers and businesses could shift buying preferences, imports could be substituted for other inputs, export nations could re-route their goods via other countries, chaos could ensue as companies scramble to find alternative inputs, Trump could change his mind, and so on.’
They go on: While the dust may take some time to settle, short-term and longer-term interest rates will likely head lower once investors realise that tariffs impede growth.
‘We also suspect the US central bank will “look through” one-time price increases and focus on negative growth risks — as long as inflation expectations remain in check.
‘The bottom line is that the tariff toll will land on consumers and businesses, reducing economic growth and raising downside risks for the US and global economy.’
What are the investing opportunities?
‘Trump’s trade war will ripple far beyond the US, Canada, Mexico and China,’ says FundCalibre managing director Darius McDermott.
‘Uncertainty over how well global markets, supply chains and ordinary consumers can withstand the impact looms large. In times like these, adaptability is key.’
He says Trump’s ‘America First’ approach and tariffs may create advantages for US-based small and mid-cap companies,
‘This protectionist stance could shield them from international competition and potentially boost their market share.’ He tips:
Artemis US Smaller Companies (Ongoing charge: 0.87 per cent)
T. Rowe Price US Smaller Companies Equity (Ongoing charge: 0.95 per cent)
McDermott also believes strategies like multi-asset and absolute return could shine in this environment.
‘Multi asset funds, unrestrained by a single asset class, offer broad diversification and allow for the flexibility to navigate volatile market conditions.
‘Meanwhile, targeted absolute return funds are designed to minimise losses during downturns and deliver steady, modest returns on the upside, making them a powerful tool in an all-weather portfolio. They short companies they don’t like and back companies that have solid investment cases.’
On the multi asset front, he tips:
BNY Mellon Multi-Asset Balanced (Ongoing charge: 0.69 per cent)
Liontrust Sustainable Future Managed (Ongoing charge: 0.85 per cent)
In the absolute return fund sector, he tips:
BlackRock European Absolute Alpha (Ongoing charge: 0.91 per cent)
Janus Henderson Absolute Return (Ongoing charge: 1.07 per cent)
BullionVault’s director of research, Adrian Ash, points out that the gold price is breaking new records. It was trading north of $2,800 today.
‘The mere threat of Trump’s tariffs lit a fire beneath the price of gold starting in early December.
‘The reality of a US-led trade war is only boosting the bid for the safe haven metal. It’s also accelerating the flood of metal into New York warehouses, keeping London vaults exceptionally busy trucking metal to Heathrow.’
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