News Flash - April 2025 - Trump raises tariffs, increasing uncertainty
On Wednesday, 2 April, U.S. President Donald Trump announced "reciprocal" tariffs on America's trading partners. While he described them as "friendly," their scale came as a surprise. China is the most affected, facing a 34% increase, bringing its total to 54%.
At a Rose Garden press conference, Trump displayed a chart outlining the new tariffs: EU (20%), Vietnam (46%), Taiwan (32%), and Japan (24%). He argued these remain modest compared to the "actual" tariffs imposed on the U.S. The White House claims China's real rate is 67%, factoring in "trade barriers and currency manipulation," while Europe's would stand at 39%.
The term "currency manipulation" is controversial, but Trump argues that the current trade and monetary system disadvantages the U.S., creating a persistent deficit and strengthening the dollar at the cost of domestic manufacturing jobs.
The response from affected countries will shape global trade in the short term. Possible countermeasures, the length of negotiations, and potential new agreements introduce uncertainty for businesses and investors, signalling market turbulence before a new global balance is reached.
This loss of visibility disrupts previous economic forecasts. The U.S. was expected to see stable 2% growth this year, but recession risks are now more serious. In Europe, recent optimism driven by government spending could be undermined by tariffs, eroding much of the anticipated growth.
Despite equity markets trading 10% below historical highs, valuations remain above long-term averages, suggesting economic risks are not fully priced in. Earnings growth expectations remain high, adding pressure on stock performance. For example, achieving the forecasted 10% earnings growth for U.S. stocks will become increasingly difficult as economic expansion slows.
The U.S. administration is pursuing a radical policy shift: redefining global trade rules, cutting public spending, weakening the dollar, reindustrialising the country, and demanding greater defence contributions from allies. Once a new equilibrium is reached and economic risks are better reflected in prices, market conditions could improve.
For now, asset allocation moves from an "overweight" to an "underweight" position in equities, with particular caution on U.S. stocks due to high valuations and currency risks for European investors. With rising recession probabilities, these risks are not fully priced into markets. Cyclical sectors, such as consumer discretionary and U.S. banks, shift from "overweight" to "neutral" amid heightened uncertainty. Meanwhile, given the recent rise in sovereign yields, adding duration via European government bonds is advised to cushion potential economic shocks in the eurozone, which Trump has specifically targeted due to its trade surplus. Finally, we are increasing cash positions, allowing us to seize future opportunities once market conditions stabilise.
