Trump's tariff war heats up. What it means for investors?

What happened?

After returning from the Chinese New Year holidays, I couldn’t help but notice the major news that unfolded over the weekend.

US President Donald Trump has announced tariffs on imports from Canada, Mexico, and China, with the details as follows:

• A 25% tariff on most imports from Canada and Mexico, with Canadian oil exports taxed at 10%
• A 10% tariff on all Chinese goods

While tariffs were a frequent topic during Trump’s campaign, markets were initially relieved when no tariffs were implemented following his inauguration. 

However, with the announcement of these tariffs, global financial markets have reacted negatively.

As of 10 a.m. on Monday, the markets were already feeling the impact:

• Hong Kong’s Hang Seng Index dropped 1.7%
• Japan’s Nikkei 225 fell by 2.1%
• South Korea’s Kospi Composite Index decreased by 2.7%
• Singapore’s Straits Times Index slid as much as 1.5%
• US stock futures also pointed to sharp losses.

In this post, I’ll delve into how Trump’s tariffs could impact the markets and share some thoughts on how we can adjust our financial portfolios in response to such unexpected events.

How will Trump’s tariffs affect the markets? 

#1 – Tariffs may help to push up inflation

One of the biggest concerns surrounding Trump’s tariffs is the potential for increased import prices, which could make it harder for central banks to control rising inflation. 

According to Bloomberg Economics, the tariffs are expected to impact trade worth approximately $1.3 trillion, accounting for 43% of US imports and about 5% of the US GDP.

As a result of these tariffs, the average US tariff rate would increase from its current level of around 3% to 10.7%. This change may trigger a significant supply shock to the US economy.

BBVA Mexico's Chief Economist, Carlos Serrano, highlighted the risks this poses to the US economy. He noted that the 25% tariff on imports could have a major inflationary effect, particularly on food prices, as 40% of US agricultural imports come from Mexico.

Barclays Research also weighed in, predicting that the tariffs will modestly push inflation higher in the US.

Bloomberg Economics, using model parameters similar to those employed by the Federal Reserve Board, suggests that these tariffs could add around 0.7% to the core Personal Consumption Expenditures (PCE) inflation rate. 

Ryan Sweet, Chief U.S. Economist for Oxford Economics, expects that the tariffs would push the Federal Reserve’s preferred inflation measure—currently at 2.8% in December—up to 3% by the end of the year.  

He had originally expected inflation to fall to 2.2% without the tariffs, closer to the Fed’s target of 2%.

#2 – Slower pace of economic growth 

Barclays research suggests that the tariffs could reduce US GDP growth by 0.25-0.50%. 

Similarly, the Tax Foundation forecasts a 0.4% decrease in the US's long-term economic output, assuming no foreign retaliation. 

The impact is felt not only in the US, but also in other major economies including China. 

Bloomberg Economics estimates that a 10% tariff on Chinese goods could result in a 40% reduction in Chinese exports to the US, putting approximately 0.9% of China's GDP at risk.

#3 – Slower pace of rate cuts 

At the January Federal Reserve meeting, the Fed decided to pause its rate cuts.

In the post-meeting statement, the Fed noted that U.S. economic activity “has continued to expand at a solid pace,” while inflation “remains somewhat elevated.”

According to the CME Fedwatch Tool, traders are currently anticipating one additional rate cut in 2025, likely in June. 

However, if inflation continues to remain high, the chances of further rate cuts this year may decrease.

As a result of the reduced likelihood of rate cuts, US government bond yields have remained elevated. 

The US 10-year government bond yield is currently around 4.5%, close to where it started the year, after peaking at 4.8%.

#4 – US Dollar may continue to strengthen 

With US inflation remaining elevated and interest rates staying high, the US dollar has strengthened against global currencies.

In fact, the Bloomberg US Dollar Index reached its highest level since November 2022, following the recent tariff announcements.

We’ve also observed a surge in the US dollar against the Singapore dollar, with the USD/SGD pair nearing 1.37 on Monday.

What would Beansprout do? 

#1 – Watch for escalation of trade war

In response to the U.S. tariffs, Canada and Mexico have announced retaliatory measures, including tariffs on U.S. goods such as agricultural products and alcohol.

China is also preparing countermeasures and plans to challenge the tariffs through the World Trade Organisation.

We will closely monitor whether last-minute negotiations between China and its trade partners lead to a reprieve in the tariffs or if retaliatory measures are introduced.

As mentioned earlier, retaliatory tariffs could further exacerbate inflation and slow down global economic growth.

Additionally, there are concerns about the possibility of tariffs being extended to other markets. Trump has also indicated that tariffs on the European Union are "definitely happening," though he has not specified the level or timeline.

Estimates from Citigroup strategists suggest that 10% tariffs on European goods could reduce earnings per share by 1% to 2%.

#2 – Most analysts expect tariffs to be short-lived for now

Despite the widespread implications for the global economy, stock market reactions have been relatively modest.

This is largely because many analysts believe the tariffs are unlikely to last for an extended period.

According to UBS, the Trump administration "would not want to jeopardize U.S. economic growth or risk higher inflation by keeping tariffs in place long-term," and the significant stock market volatility could prompt a change in approach.

#3 – Bond yields may remain elevated

We have observed a rebound in the yield on both the 1-year Singapore T-bill and 6-month Singapore T-bill.

With ongoing inflation concerns, the Singapore T-bill yield may remain high in the near term.

The 10-year average return of the latest Singapore Savings Bond (SSB) has risen compared to the previous issuance. 

This presents an opportunity for investors to lock in attractive yields at elevated rates.

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#4 – More volatility ahead

This situation highlights the increasing importance of managing geopolitical risks within investment portfolios.

As markets become more volatile, it is crucial to focus on portfolio diversification and hedging strategies.

For now, most banks remain optimistic about the S&P 500, expecting the index to reach 6,400 to 7,100 by year-end, with the expectation that the tariffs will be short-lived.

You can check out the latest technical analysis on the S&P 500 with our weekly market review here. 

For REITs, higher inflation and elevated bond yields may continue to impact market sentiment. We would look for REITs with strong assets that can demonstrate an ability to increase distributions despite high borrowing costs. Screen for top Singapore REITs with highest dividend yields here. 

In addition, diversifying with high-quality dividend stocks can offer both capital preservation and yield. Screen for top Singapore dividends stocks here. 

Gold remains a reliable hedge against geopolitical and inflation risks, and bond funds can help insulate portfolios from uncertainty. Learn more about investing in gold in Singapore here. 

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