Uncharted waters: What the Liberation Day fallout means for investor portfolios

What the Liberation Day fallout means for investor portfolios

The “reciprocal tariffs” announced by US President Trump last week were generally higher than what the market anticipated. All up, they effectively amount to an increase in the average US tariff of around 20%, compared to a 1.5% increase in Trump’s first term in office. 

The US share market is currently down 17% since late February with the ASX falling a similar amount. As of 07/04/2025.

What comes next 

While the tariff announcement answered some questions, continued market volatility should be expected as the financial markets and real economy come to grips with the full impact and the potential for trade war escalation remains. 

Most economic studies of Trump’s tariff increases in his first administration conclude that the tariffs were fully borne by either US households via increased consumer prices or corporate profits. Estimates suggest that these new tariff increases could raise consumer prices by up to 2% and lower economic growth by 1%. The overall hit to US economic growth increases the chance of a recession, although it’s not inevitable – avoiding one may depend on the speed with which either Trump and/or the Fed respond to deteriorating economic conditions. 

The Fed could cut interest rates to support the economy, which would also help shares. But given the risk to inflation caused by tariffs it won’t want to, unless unemployment starts to rise.

In any case, it appears that things would have to get worse before either a Fed or Trump kicks in.

Apart from the direct hit to the US, other countries will also be negatively affected by the potential reduction in US demand for their exports – though this will likely not be as great as the hit to the US economy itself. In the case of both China and the EU, for example, exports to the US account for around 3% of GDP. That said, the biggest concern is the lingering economic uncertainty and disruption to established supply chains that this tariff shock represents.

Potential for trade negotiations

We do think there’s a possibility that negotiation will lower some of these tariffs. However, successful negotiation will not arrive quickly, as it's not yet clear what the US would deem sufficient concessions from its trading partners. And even if tariff reductions succeed, it's still likely that tariff levels will be meaningfully higher than previously anticipated. We are of the view that Trump primarily views tariffs as a tool for reshoring manufacturing and raising revenue, rather than as a negotiating tactic.

Potential for tax cuts

The announced tariffs are much higher than was generally anticipated. From a revenue raising perspective some have estimated these tariffs will be close to matching Trump’s goal of bringing in US$500 billion. If he is successful in this, it opens the door for one of Trump’s more market friendly policies – tax cuts. Over the weekend, the US Senate passed a budget resolution which, if approved by the House of Representatives, may allow the fast tracking of Trump’s plan to extend existing tax cuts that were due to expire later this year. Also on Trump’s agenda are corporate tax cuts, that would boost US equity market earnings, lending support to stock prices.

Implications across Asset Classes

Bonds

In the market meltdown of last week, fixed rate government bonds were one of the few assets to rally. The protectionism and tariffs which are bad for global growth also push down long term bond yields. The risk of recession increases the attractiveness of fixed rate bonds as a safe haven and their role in diversifying equity risk in a portfolio.

Gold

Even before Trump was elected, gold was enjoying strong structural demand in a world of heightened geopolitical tension. After the invasion of Ukraine, central banks from emerging market countries stepped up their buying of gold in lieu of US government bonds and US dollars. 

Gold also serves as an inflation hedge, which is particularly relevant given the potential for increased inflation from tariffs. As pressure mounts on the US exceptionalism narrative, and by extension the US dollar, gold can certainly continue to grind higher from here.

Global Shares

There are few equity market winners from a trade war. At a sector level there has been a notable rotation, with traditional defensives outperforming cyclicals. Consumer staples and other less cyclical areas have held up relatively well, while companies with high supply chain exposure to Asia have been hit hard. 

Australian Shares

Australian equities may ultimately be relatively well-placed compared to other global markets over the intermediate to longer term. Firstly, the announced tariff rate for Australia was ‘only’ 10% and secondly, Australia's economic ties with China could provide a backstop for the Australian market as China will look to stimulate its economy over the medium term.