When someone like the President of the world’s biggest economy throws a potential curve ball at the global economy and worldwide stock markets, including Wall Street, which is the maker and breaker of other markets, it reminds me of what the great economist J.K.Galbraith said to me when the 1987 market crash happened.
As a young radio commentator, I caught up with JKG, who was residing in his Swiss home, I think on Lake Geneva. Over the phone I asked him what the crash would mean for economies? His answer was a ripper and delivered in his deep, slow, thoughtful, Canadian drawl. It went like this: “There are those who say they don’t know. And then there are those poor fellows who don’t know they don’t know.”
So, when it comes to these tariffs that today are 25% on Canadian and Mexican exports and 10% on China’s products sold into the US, you have to ask how many other countries could end up in the sights of Donald Trump with his trade taxes?
But it’s not just countries or economies affected. It’s also companies, and today we’re told Rio Tinto is going to feel the impact of the Trump tariffs if they extend to aluminium. And local pharmaceutical companies could be hit by these trade levies on their products as well.
This what I revealed about this subject in Switzer Daily today: Stocks-wise, Rio Tinto supplies aluminium to the US and the AFR reported that “the United States accounts for $13.9 billion of Rio Tinto’s overall revenue, and aluminium sales represent $12.4 billion of the company’s revenue”.
This won’t be great for the company’s share price and ahead of today’s trade the local stock market was expected to open 101 points down.
In reality, the negativity from these tariffs could have small short-term effects, but if President Trump extends his tariff plays to more countries and a global trade war results, the inflation and interest rate effects could be troubling to exporters, those who play stocks and anyone with a mortgage praying for the four rate cuts the CBA is now predicting for 2025.
Over the course of this week, some companies will reveal threats and opportunities because of these tariffs and so long as they don’t develop into a global tit-for-tat tariff war, then what we’re seeing marketwise will be volatility.
We can make money out of volatility, especially if you’re not stock picking but playing the overall market. Inside a market there’ll be winners and losers but for the overall market, say invested in ETFs such as EX20 or VAS, if the winners outweigh the losers, then 2025 could be a positive one.
I support the arguments of US-based Carol Schleif of BMO Private Wealth, who expects an up year for stocks, despite the tariff threat and the likelihood of profit-taking after two huge years for share prices. However, like me, she believes in the broadening of the market is coming, where the share prices of companies that haven’t risen significantly will benefit from falling interest rates, AI applications, Trump’s lower taxes and regulation, and even the possibility of the ending of the Ukraine war and peace in the Middle East.
Schleif thinks this year we’ll see volatility triggered by the likes of Trump tariffs but he’s not seeing a systemic or structural risk for higher share prices.
Of course, that would change if the President’s tariff tirade targeted at many economies materialises into tough real-world action and a wide global trade war results.
I’m ruling that out because Trump’s advisors would be talking through the Wall Street reaction to a global trade war, tariff-created inflation and fewer interest rate cuts. These tariffs are revenue raisers, if they persist, but they’re also bargaining chips for the US President to cut better trade deals worldwide.
For Australia, the US has a $40 billion trade surplus so we should be safe from a Trump trade attack, though the tariff slugs on China could hurt some of our exporters.
Clearly, if I’m proved wrong, I’ll alert you and would suggest you escalate your defensive holdings. For some of my financial planning clients, who’ve gone from balanced to very growth exposed, I’m suggesting term deposits and bond funds, such the Bentham Global Income Fund and the Realm High Income Fund, because the outlook for bonds remains promising.
This is what Realm strives to achieve: “The Fund seeks to preserve capital and provide a return exceeding the RBA cash rate by 3% (net of fees and after franking), achieved by investing primarily in domestic investment grade asset backed, bank issued and corporate bonds. Notwithstanding this primary emphasis, the Fund may also invest in Commonwealth and State government securities, inflation linked securities, hybrid securities, revolving credit facilities, bank term deposits, international agency, supranational debt and derivatives.”
Both funds have a good track record, with Bentham’s performance over 15 years being 6.56% a year.
I’d also look at income funds such as Vanguard’s High Yield Fund (VHY) and others like SWTZ, but remember with these funds, if the share market crashes, then the on market prices of these funds will fall too, though the income paid could still be better than term deposits, thanks to franking credits.
It’s at times like these when you have to decide whether you can live with the ups and downs of your capital as stock markets boom and then head into a doom spiral. If you invest for income, you can live through these bad times for stock prices.
If you don’t want to see your capital shrink too much, you should be reducing your exposure to growth stocks and building up your defensive holdings.
The really scared investor would chase term deposits and conservative bond funds, but you might have to cope with a 4% or 5% return for a year or two, while stock markets could rack up 10% plus gains over that timeframe.
Despite my admission that I don’t know what President Trump is cooking up with his tariffs, I’m sticking to growth and increasing my exposure to local stock plays, because I think rate cuts will be a plus for Australian stocks, as the gains of the past two years for many of our top 20 stocks broaden to other companies.
That said, if Donald worries me that his trade play is going to get out of hand, I will go defensive — very defensive.
Watch this space.
