Chapter 48: Separating Signal from Noise in the Tariff Uncertainties
Dear Clients,
April 2nd's "Liberation Day" tariffs caused a disorderly unwind of market valuations, across all companies regardless of sector or style bias. This was because originally, the market expected reciprocal tariffs on countries to mirror these countries' trade barriers against the USA; however, when the Liberation Day tariffs were announced, they appeared to be the much harsher variety of retaliatory tariffs. For instance, take Vietnam as an example of an impacted trading partner – rather than impose an equivalent tariff of 2.9% on its exports into the US, the Administration came up with the figure of a 46% tariff. This was calculated as the ratio of the country's trade surplus with the US against its total exports into the US. In this way, the tariff that the administration is proposing has the goal of eliminating the US trade deficit with all nations it does business with. This is what caused the significant systematic sell-off in global stock markets, since capital markets are by their very nature interconnected through capital flows, as are global supply chains.
While we have been preparing for heightened volatility in 2025, we will also reiterate our base case that the tariffs represent a starting negotiation stance, and in all likelihood, will be more targeted and streamlined at the end. We will also remind clients that tariffs by their very nature are stagflationary – they shrink economic growth and act as an inflationary price hike on the US consumer, since most tariffs are absorbed by the importer. Therefore, we believe it will be in the best interests of the US Administration and its trading partners to negotiate these trade barriers down to a sufficiently reasonable level, so as to prevent stagflation from taking hold of the economic psyche. Also, tariffs cause undue business and household uncertainty, as evidenced by the low level of confidence readings that will eventually affect the still resilient hard economic data.
In such a market climate, portfolio construction becomes an important consideration for risk management purposes. For that reason, since President Trump’s election win in November 2024, we applied our learnings from his first term by structuring the portfolio to intentionally avoid companies with export dependent revenues into the USA, whose business models could experience adverse shocks from an escalation of tariffs. We have also added on valuation dislocations resilient earners, such as in the software and services industry, which are rapidly adopting AI into their secular revenue streams, for a high return on invested capital. Finally, having a stable ballast of high dividend payers in the real estate and banking sectors may act as a volatility buffer in an environment of elevated variability.
We will also remind investors that valuation dislocations in a secular/thematic market tend to be shortlived. Such was the example today, wherein President Trump paused all tariffs for 90 days except for China, sending the S&P500 and Nasdaq up to 9.52% and 12.16% respectively as of this writing. In separating signal from noise, it's valuable for clients to recognize that markets tend not to trough when all the bad news is out; they trough when there has been an exhaustion of sellers, such that any newsflow that is less worse than what the market envisioned will spark a rally. Finally, in the long run, the earnings power of high-quality companies buttressed by productivity enhancements will likely extend the market's valuation and lead to prolonged growth. One of America's most noteworthy exports comes not from its goods sector but its services – its innovation, technology, and brand advantages. When a portfolio is properly stewarded, it recognizes these brand and innovation advantages in companies that can durably thrive in all market environments.
We hope clients have found this installment beneficial and are enjoying this new cherry blossom season.
Grace Wang | Senior Portfolio Manager
Samuel Jang, CFA | Investment Associate
Leslie Mah | Associate Advisor
Katherine Yang | Associate
Steven Bos | Administrative Assistant
Grace Wang Portfolio Management Practice of RBC Dominion Securities
Email: gracewangpractice@rbc.com
Phone: 604-257-2483
745 Thurlow Street, 20th Floor
Vancouver BC, V6E 0C5
gracewangpractice.com
