Tariff madness

Recent political events have cast a shadow over the world’s financial markets as a number of issues rattled investor’s nerves.

Neil Worsley Hedley & Co

By Neil Worsley, investment strategist, Hedley & Co

The election of a populist and anti EU government in Italy sent European equity markets and the Euro into a tailspin while the trade tariffs imposed by the Trump administration caused anxiety, particularly in the developing markets of Asia and Latin America.

Fresh from saving the world with a ‘tremendous’ deal with North Korea and making the region look a much safer place in which to invest, President Trump promptly sent investors scurrying for the exit with his trade tariffs, which are likely to hit the developing Asian economies the hardest.

While it is probable that the new Italian government will be heavily constrained in what they are able to achieve, the trade issues are more disturbing for international trade and global growth.

In imposing tariffs, President Trump is trying to gain some economic rebalance in favour of the USA, mainly at the expense of China; this also plays well to his electoral base, especially with the midterm elections on the horizon.

However, while the present round of tariffs is unlikely to have much economic impact it is the escalation which investors (and consumers if they only knew it) fear the most.

There is certainly a danger that the United States backs other nations into a corner so that an escalation becomes inevitable as no one wants to climb down.

However, there are already some unintended consequences appearing from this policy such as Harley Davidson shifting some manufacturing to Europe and job losses in the US because of the rise in steel prices.

President Trump, at the end of the day is a businessman and a capitalist, he is surrounded by free trade advocates and a Senate which is becoming increasingly nervous of this policy.

The tariff situation may get worse before it gets better but I believe that a compromise will be found over coming months – which presents a great long term entry point for some of these battered markets over coming weeks. For regulatory disclosures, please visit www.hedleyandco.co.uk/publications and click on Hedley Regulatory Disclosures.