Stagflation – the combination of low economic growth and high inflation – is a major investor fear, probably second only to deflation. Indeed, in the presence of stagflation, equities suffer due to low growth in corporate profits, while bonds lose value due to high inflation. It therefore becomes very difficult to defend the performance of portfolios.
If a real trade war between economic superpowers were to really open through an escalation of tariffs, one of the potential consequences to be taken into consideration would be stagflation. In fact, prices would rise (a good produced in the United States or Europe costs more than one produced in China), while margins and commercial opportunities for companies would decrease. The nervous reaction of the markets to Trump's threats of new taxes on imports is therefore understandable.
To date, however, these are threats, rather than concrete measures. The duties were actually imposed on solar panels and washing machines, and were later expanded to aluminum and steel, but remain small. Although the European Commission has announced firmness in responding to an increase in tariffs, those imposed by Trump so far concern exports that represent only 0,01% of European GDP.
In addition, the EU, Mexico, Canada and other major US suppliers have obtained exemptions on steel and aluminum tariffs, further diluting their impact. Indeed, after several months of negotiations, important progress has been made regarding the renegotiation of the North American Free Trade Agreement (NAFTA, which includes the United States, Canada and Mexico).
However, a couple of weeks ago Trump threatened a series of tariffs on Chinese imports worth between $50 and $60 billion. All this was accompanied by the resignation of senior American officials who had taken positions in favor of free trade. In the following days, the stock markets were weak, the MSCI China stock index lost more than 6% of its value, while the Chinese authorities reacted in an overall phlegmatic way, in turn announcing tariffs on imports from the United States for worth just $3 billion.
It must be said that the proposed tariffs on Chinese exports are provisional and subject to a consultation period and, therefore, the United States has left room for negotiations. Furthermore, if they were confirmed, the impact would still be limited, equal to 0,1-0,2% of GDP, and this helps to explain the measured Chinese reaction. In addition, it is possible that the tones used by Trump are also addressed to American public opinion in view of this year's mid-term elections and that, after this electoral deadline, they will be toned down.
Investor concerns are justified but, to date, the impact of the tariffs actually approved is very limited compared to the volume of imports and the GDP of the countries concerned. The US goal is to redefine trade relations, not to start a trade war that would hurt everyone, including America. We monitor developments in US trade policies but do not currently see any material impacts on the global economy. We maintain an overweight position in global equities with smaller overweight positions also in emerging markets and the eurozone.
°°° The author is Chief Investment Officer of UBS Asset Management
