Welcome to this month’s edition of the True Potential Monthly Report. Within this, we discuss asset markets and the macroeconomic environment. Below is our Executive Summary.
- The Trump administration’s tariffs are likely to increase inflation and reduce economic activity. Reciprocal tariffs from other countries will exacerbate their impact.
- In the US, supply chains will be disrupted materially. Companies are already reducing their earnings forecasts.
- Europe is showing early signs of an economic upturn, although tariffs are likely to reduce earnings expectations.
- The excitement over artificial intelligence (AI) is dissipating, and large US technology companies are heavily exposed to the impact of tariffs.
- We have a modest preference for equities over bonds. We currently favour stocks listed outside the US. In fixed income, we prefer UK government bonds and high yield.
On 2nd April, Donald Trump announced sweeping tariffs of a scope and severity that was much greater than feared. The tariffs are likely to raise inflation and reduce economic activity, and their impact will be exacerbated by reciprocal measures.
On 4th April, China responded with tariffs of its own, starting an escalating tit-for-tat exchange. Trade wars threaten to create a different world order, with complex and long-term implications for markets.
If implemented, Trump’s tariffs will be equivalent to a significant tax on US overseas supply chains. But the sharp rise in long-dated US bond yields seems to have prompted Trump to announce a 90-day pause for all tariffs except those on Chinese goods. We expect Trump to extract substantial trade concessions from most countries, but uncertainty will persist over the 90-day period. The position with China appears untenable. We think de-escalation is the most likely outcome, but a prolonged and damaging trade war is a real possibility.
Although consumption and corporate profits are still healthy, US real GDP growth is expected to slow as the tariffs take effect. The risk of a US recession has increased significantly, but our broad expectation is for lower, but still positive, growth. Rising numbers of US companies have been withdrawing their earnings guidance, which shows how uncertain the outlook is.
In Europe, by contrast, there are early signs of an economic upturn. Despite the US tariffs, we expect European growth to be modestly positive. This should be achieved through disinflationary forces (lower energy prices and greater availability of Chinese goods), lower interest rates and increased government spending, especially in Germany. Corporate earnings continue to improve in Europe and Japan, but the US tariff regime is likely to reduce earnings expectations worldwide.
Although the AI exuberance that supported US earnings last year is fading, we continue to see a broadening of earnings beyond the big tech stocks. With their complex global supply chains, the tech giants stand to be some of the biggest losers from the tariff regime.
We continue to favour a modestly overweight position in equities, with a preference for stocks outside of the US. Fixed income valuations now appear reasonable. We take a neutral view on alternatives, given the risk of higher inflation in the near term and the expansion of fiscal deficits.
All data sourced from Bloomberg L.P. (25/04/2025)
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Opinions, interpretations and conclusions represent the views of True Potential Investments at the date of publication and are subject to change. Forecasts are not a reliable indicator of future results.
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