Investor call - Market turbulence
As everyone knows by now, on April 2, President Trump announced a wide range of import duties in the Rose Garden, on almost all countries in the world.
The tariffs were calculated by dividing each country's trade deficit by the total amount of imports, and dividing that percentage by two. A calculation that can ask the necessary questions, but it is what it is.
The introduction of these tariffs caused a lot of anxiety and threatened to bring the economy to a standstill. Meanwhile, many countries showed their willingness to renegotiate trade relations with the US, and a break was therefore taken yesterday, delaying most tariffs by 90 days.
The big exception here is China, which resisted strongly and immediately introduced countermeasures, and where the escalation continues to escalate happily by auction for now. But here, too, sooner or later, both parties will have to sit down to the negotiating table. It is important to note that the US depends more on China's imports — because it mainly imports products — while China also imports from the US, but that it is mainly raw materials that can also be purchased elsewhere in the event of an emergency.
Historical context
If we zoom out and put things in a historical context, we see that import duties are nothing new. In particular, Herbert Hoover introduced the Smoot-Hawley Tariff Act in June 1930, which imposed import duties of an average of 60% on more than 20,000 products in an attempt to protect the domestic market. Back then, these levies were primarily counterproductive: U.S. exports fell by more than 60%, and ushered in a period of rising unemployment and deflation. In particular, farmers were severely affected because they were no longer able to dispose of their surpluses abroad.
Today, the economy looks completely different and has become much more complex. But it certainly cannot be ruled out that the result is the same, and import duties may just cause the opposite effect. Something that the markets were clearly afraid of last week. But at the same time, it is also a reason to reach a negotiated solution that is acceptable to all parties.
Impact on markets
Of course, the consequences of the announced import duties and increased uncertainty immediately made themselves felt in the markets, which have become increasingly nervous in recent days. With a blood-red chart as a result. The stock markets in particular suffered, with declines of between 10%-20%. After the announced 90-day break on the import of tariffs, around half of the loss could be made up in one fell swoop. But the markets remain volatile, and the situation changes every day. To monitor the situation, we keep three things in mind.
- The first aspect is the VIX index. This is a measure of how volatile options are priced. In the past, we've seen that the days that the VIX peaks are often when stocks have had the most emotional response. Even now, that seems to be the case again, given today's relief rally. Although it is still too early to draw clear conclusions here.
- The second aspect is: see what the interest rate is doing. In the event of a recession, the logical response is that interest rates fall sharply. That was also the initial reaction, but shortly afterwards, interest rates started to rise sharply. As a result, bonds do not provide a buffer in portfolios, and what also makes it more expensive for governments to finance their deficits. Perhaps that is mainly what pressured President Trump to press the pause button. Although in recent days, there had also been the necessary opposition within his party (and among important donors).
- And a third measure is US high yield bonds. That's where we saw the spreads increase: We went from a very low level to a more average level. But we are still a long way from the levels that appeared during the banking crisis or coronavirus pandemic. So the credit markets are not yet worried that a recession would arrive. On the other hand, due to the rise of private credit, this market has become a slightly less reliable indicator.
Potential impact on companies
As an investor, it is difficult to assess the exact impact of the import duties on companies. Even for most companies internally, this is a difficult task. Questions that can be asked are:
- What part of the turnover is realized in the US? And what part of this sale is produced outside the US?
- How quickly can production from outside the US be transferred to the US, or to countries with a more favourable import tariff?
- To what extent is the supply chain exposed to import duties?
- How price-sensitive is the consumer?
An example: Almost all textiles are produced in Vietnam and China, so that, for example, Skechers, Nike and Adidas are similarly impacted. Even with the duties, it is too expensive to produce shoes in the US, so the import duties will regular are charged to the consumer. But the question then becomes: to what extent are consumers buying fewer shoes? And will he stay loyal to the brand, or will he shift to the cheaper brands? And are some brands using this to only partially calculate the price increase, in order to try to gain market share, or is there price discipline in the sector?
Many questions, to which no one can formulate an exact answer at the moment. And the situation regarding the rates also changes every day.
How to invest
As an investor, it is a matter of trying to estimate all these things. But at the same time, certainly not to lose sight of the longer term in favor of the rate of the day.
Focus on companies with a healthy balance sheet, so that a more volatile period without too much scathed can be passed through. Keep in mind that the high volatility may persist for a while. And that also creates opportunities to pick up healthy companies at low valuations.
And last but not least, be aware that panic is a bad advisor. The initial recovery is often the strongest (as we saw in the markets yesterday), and missing that initial recovery (when temporarily exiting the market) results in a significantly lower return in the longer term.
