{"id":13991,"date":"2025-03-10T13:59:51","date_gmt":"2025-03-10T17:59:51","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/?p=13991"},"modified":"2025-03-10T13:59:52","modified_gmt":"2025-03-10T17:59:52","slug":"tariffs-bracing-for-market-impact","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/tariffs-bracing-for-market-impact","title":{"rendered":"Tariffs: Bracing for market impact"},"content":{"rendered":"\n<p><strong>Joseph Wu, CFA and Josh Nye<\/strong><\/p>\n\n\n\n<div class=\"well b-blue-tint-4 mb-3\">\n        <ul class=\"list-spaced\">\n      <li>\n        2018 saw significant market volatility driven by the U.S.-China trade\n        war, with worsening sentiment denting valuation multiples despite\n        relatively stable earnings.\n      <\/li>\n      <li>\n        Central banks face a difficult balancing act in responding to potential\n        tariff shocks, needing to manage inflation and economic growth.\n      <\/li>\n      <li>\n        While markets have been relatively resilient, elevated equity valuations\n        and low credit risk premiums suggest potential vulnerability if trade\n        tensions escalate sharply.\n      <\/li>\n      <\/ul>\n      <\/div>\n      <!-- SECTION -->\n      <h2>Equities: A test of confidence<\/h2>\n      <p>\n      The U.S.-China tariff war jolted equity markets in 2018, sending investors\n      on a turbulent ride. The initial optimism stemming from the Trump\n      administration\u2019s Tax Cuts and Jobs Act \u2013 enacted in early 2018, slashing the\n      top federal corporate tax rate to 21 percent from 35 percent \u2013 faded as the year\n      progressed, overtaken by concerns over the fallout of the tariff battle\n      between the world\u2019s two largest economies.\n      <\/p>\n      <p>\n      By the end of 2018, global stocks had declined by 11.2 percent in U.S. dollar\n      terms, with the S&amp;P 500 faring somewhat better, down 6.2 percent, while\n      global ex.-U.S. equities slumped by 16.4 percent. A stronger greenback and\n      greater economic sensitivity to trade flows acted as additional headwinds\n      for markets outside the United States.\n      <\/p>\n      <div class=\"well my-2\">\n        <p>\n          For more on tariff-related economic dynamics and our views on the 2018\n          U.S.-China trade conflict, please see <a href=\"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/us-tariff-give-and-take\" \n          title=\"U.S. tariff give and take\">part&nbsp;one<\/a> of our analysis.\n        <\/p>\n      <\/div>\n      <p>\n      Notably, the correction in equities, concentrated in the latter half of\n      the year, was driven less by outright corporate earnings weakness and more\n      by deteriorating sentiment. Valuation multiples compressed sharply under\n      the weight of mounting uncertainty, even as earnings estimates held\n      relatively firm.\n      <\/p>\n      <p>\n      A \u201chawkish\u201d Federal Reserve added to the unease. The central bank pressed\n      ahead with monetary tightening, raising interest rates four times over the\n      year. This one-two punch of tighter financial conditions and policy\n      uncertainty stoked fears that the U.S. and global economy \u2013 until then\n      resilient \u2013 were at risk of slowing. This eroded confidence about the\n      outlook for earnings as investors responded by marking down the\n      price-to-earnings multiples across major indexes.\n      <\/p>\n      <p>\n      Volatility became a defining feature of the year. Markets lurched up and\n      down in response to tariff announcements and reversals.\n      <\/p>\n      <!-- EX 1 -->\n      <h3>\n      Valuation multiple contraction accounted for much of the equity decline\n      <\/h3>\n      <h4>Change in forward 12-month metrics in 2018<\/h4>\n      <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n        src=\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/us-tariffs-bracing-for-impact-en-chart-1.png\"\n        alt=\"Change in forward 12-month price-to-earnings multiple and the earnings-per-share for the S&#038;P 500 and the MSCI All Country World Index in 2018\"\n        class=\"img-fluid mb-1-half\"\n        aria-describedby=\"chart-1-desc\"\n      \/>\n      <p class=\"sr-only\" id=\"chart-1-desc\">\n          The bar chart shows the change in forward 12-month price-to-earnings multiple and the earnings-per-share for the S&#038;P 500 and the MSCI All Country World Index in 2018. It illustrates that earnings-per-share moved higher by roughly 3 percent and 17 percent, but the price-to-earnings multiple fell by approximately 20 percent, which resulted in a negative year for both indices in 2018. \n      <\/p>\n      <ul class=\"rbc-legend rbc-legend-inline\">\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-bar c-dark-blue-tint-1\"><\/div>\n              Earnings per share\n          <\/li>\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-bar c-warm-yellow\"><\/div>\n              Price-to-earnings ratio\n          <\/li>\n      <\/ul>\n        <p class=\"disclaimer\">Source &#8211; RBC Wealth Management, Bloomberg<\/p>\n      <\/div>\n      <\/div>\n      <!-- SECTION -->\n      <h2>Fixed income: Central banks walk a fine line<\/h2>\n      <p>\n      When it comes to protectionist trade policies, one of the key questions\n      for fixed income investors is how will central banks respond. The\n      \u201cstagflationary\u201d impact of a tariff shock \u2013 initially putting upward\n      pressure on inflation and eventually causing economic growth to\n      stagnate \u2013 is challenging for monetary policy to address. Central banks\n      can\u2019t use interest rates to simultaneously restrain inflation and support\n      economic activity, nor is monetary policy well-suited to tackle the\n      long-term productivity headwinds associated with higher trade barriers.\n      <\/p>\n      <p>\n      The typical response to a one-time price shock is to \u201clook through\u201d the\n      temporary inflation impact and focus instead on the hit to growth. Indeed,\n      the Fed\u2019s September 2018 Tealbook suggested a \u201csee-through policy would\n      seem an appropriate response to a tariff hike.\u201d The Fed continued to\n      normalize monetary policy in 2018 as the U.S.-China trade war intensified,\n      but it paused rate hikes in 2019 as the global economy showed increasing\n      signs of strain. Other central banks, such as the Bank of Canada and Bank\n      of England, also ended their rate-hiking cycles below estimated neutral\n      interest rates. The Fed ended up lowering its policy rate by 75 basis\n      points in H2 2019 to, in Chair Jerome Powell\u2019s words, \u201cinsure against\n      downside risks from weak global growth and trade policy uncertainty.\u201d\n      <\/p>\n      <!-- EX 2 -->\n      <h3>Central banks shifted toward easing<\/h3>\n      <h4>Net percentage of central banks raising rates<\/h4>\n      <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n        src=\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/us-tariffs-bracing-for-impact-en-chart-2.png\"\n        alt=\"Net percentage of central banks raising rates from 2017 to 2019\"\n        class=\"img-fluid mb-1-half\"\n        aria-describedby=\"chart-2-desc\"\n      \/>\n      <p class=\"sr-only\" id=\"chart-2-desc\">\n          The line chart shows the net percentage of central banks raising rates from 2017 to 2019 based on 30 central banks. More central banks around the world were raising interest rates than cutting rates in 2018, but as trade tensions increasingly dampened economic growth, more central banks shifted towards cutting rates in the second half of 2019. \n      <\/p>\n        <p class=\"footnote\">\n          Based 30 central banks. Represents the number raising rates minus the\n          number lowering rates; a central bank is considered to be raising\n          rates if the three-month change in the policy rate is positive, and\n          cutting rates if the three-month change is negative.\n        <\/p>\n        <p class=\"disclaimer\">Source &#8211; RBC Wealth Management, Bloomberg<\/p>\n      <\/div>\n      <\/div>\n      <p>\n      The 2018\u20132019 monetary policy cycle caused U.S. and global bond yields to\n      follow the same up-and-down pattern that we noted for inflation and\n      economic activity. But the \u201cdown\u201d move \u2013 lower yields and, thus, higher bond\n      prices \u2013 was contingent on inflation expectations remaining well-anchored\n      and monetary policy having the latitude to look through temporarily higher\n      inflation.\n      <\/p>\n      <p>\n      That\u2019s not a foregone conclusion today, in our view, as a fresh tariff\n      shock would follow closely on the heels of the worst bout of inflation in\n      40 years. Firms might be quicker to pass along higher input costs to\n      preserve their margins, and households\u2019 inflation expectations might not\n      be as \u201cwell anchored\u201d as they seemed to be back in 2018\u20132019. In the U.S.,\n      long-term (5- to 10-year) inflation expectations are already a full\n      percentage point higher than at the start of 2018, according to the latest\n      University of Michigan consumer survey.\n      <\/p>\n      <p>\n      So far, central banks have been guarded in how they might respond to\n      potential tariff shock. At the very least, the recent bout of inflation\n      could give central bankers some pause as they assess the duration of any\n      tariff shock and how inflation expectations are evolving.\n      <\/p>\n      <!-- SECTION -->\n      <h2>Corporate credit vulnerability<\/h2>\n      <p>\n      Another key variable for the fixed income outlook is credit spreads. As in\n      2018, the additional compensation investors receive for taking on credit\n      risk today is historically low. Back then, credit spreads were tightening\n      as the market continued to recover from the 2015\u20132016 oil price shock and\n      global economic data was generally improving. The prospect of U.S. tax\n      cuts also supported an appetite for corporate bonds.\n      <\/p>\n      <p>\n      However, riskier assets eventually took notice of slowing global growth\n      and margin headwinds, leading corporate spreads to widen over the course\n      of 2018 as equities sold off. After two years of delivering strong excess\n      returns over government bonds, the corporate index underperformed by the\n      most since 2011 and matched its worst overall performance since 2008.\n      <\/p>\n      <!-- EX 3 -->\n      <h3>\n      Corporate bonds underperformed as the U.S.-China trade war intensified in\n      2018\n      <\/h3>\n      <h4>Bloomberg Global Aggregate Corporate Bond Index<\/h4>\n      <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n        src=\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/us-tariffs-bracing-for-impact-en-chart-3.png\"\n        alt=\"Global investment-grade corporate bond performance\"\n        class=\"img-fluid mb-1-half\"\n        aria-describedby=\"chart-3-desc\"\n      \/>\n      <p class=\"sr-only\" id=\"chart-3-desc\">\n          The bar chart shows global investment-grade corporate bonds\u2019 annual total return performance and relative return performance compared to global government bonds. Global investment-grade corporate bonds underperformed global government bonds in 2018 as the escalation of the U.S.-China trade conflict weighed on economic growth.\n      <\/p>\n      <ul class=\"rbc-legend rbc-legend-inline\">\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-bar c-dark-blue-tint-1\"><\/div>\n              Excess return vs. government bonds\n          <\/li>\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-bar c-tundra\"><\/div>\n              Total return\n          <\/li>\n      <\/ul>\n        <p class=\"disclaimer\">Source &#8211; RBC Wealth Management, Bloomberg<\/p>\n      <\/div>\n      <\/div>\n      <p>\n      A key difference relative to the 2018\u20132019 trade war is that yields are\n      significantly higher today, so investors are much better compensated in\n      the relative safety of fixed income, particularly government bonds. Recall\n      that there was around $7 trillion in negative-yielding debt globally when\n      Donald Trump took office for the first time. Today\u2019s higher yields offer\n      some compensation for inflation risks, and a greater return buffer against\n      any further increase in yields \u2013 which would cause bond prices to decline \u2013 if\n      central banks are ultimately constrained in their ability to lower\n      interest rates. Even in corporate bonds, where widening spreads could\n      weigh on returns, today\u2019s attractive all-in yields make negative outright\n      returns (as seen in 2018) unlikely, in our view.\n      <\/p>\n      <!-- EX 4 -->\n      <h3>\n      Today\u2019s higher yields make the relative stability of fixed income more\n      attractive\n      <\/h3>\n      <h4>Bloomberg bond index yields<\/h4>\n      <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n        src=\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/us-tariffs-bracing-for-impact-en-chart-4.png\"\n        alt=\"Yield to maturity for global government and investment-grade corporate bonds since 2005\"\n        class=\"img-fluid mb-1-half\"\n        aria-describedby=\"chart-4-desc\"\n      \/>\n      <p class=\"sr-only\" id=\"chart-4-desc\">\n          The line chart shows the yield to maturity for global government and investment-grade corporate bonds since 2005. It underscores a key difference relative to the 2018\u20132019 trade war in that yields are meaningfully higher today, which means investors are much better compensated in the relative safety of fixed income today, particularly government bonds.\n      <\/p>\n      <ul class=\"rbc-legend\">\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>\n              Global Treasury Aggregate\n          <\/li>\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-line c-tundra\"><\/div>\n              Global Corporate Aggregate\n          <\/li>\n      <\/ul>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg; data through 2\/21\/25\n        <\/p>\n      <\/div>\n      <\/div>\n      <!-- SECTION -->\n      <h2>A bumpy path ahead<\/h2>\n      <p>\n      The Trump administration\u2019s trade agenda is starting to take shape, yet the\n      range of uncertainties runs wide. As we contended in <a href=\"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/us-tariff-give-and-take\" \n      title=\"U.S. tariff give and take\">part&nbsp;one<\/a> of this\n      report series, trade policy is likely to remain a persistent source of\n      downside risk to the economic outlook, with potential knock-on effects for\n      corporate fundamentals.\n      <\/p>\n      <p>\n      Financial markets, for now, appear relatively unfazed. This may be a\n      function of investors experiencing \u201ctariff fatigue,\u201d a byproduct of timing\n      more than outright indifference \u2013 as market participants focus on\n      implementation rather than the steady stream of threats \u2013 or possibly some\n      degree of complacency.\n      <\/p>\n      <p>\n      With global equities trading at 18.5x forward 12-month earnings\n      estimates \u2013 well above their long-term average of roughly 15x \u2013 and\n      compensation for taking credit risk in corporate bonds near historically\n      modest levels, it looks to us that risk assets are leaning into an\n      optimistic outlook for the economy and corporate profits.\n      <\/p>\n      <!-- EX 5 -->\n      <h3>Global equities are trading above their long-term average<\/h3>\n      <h4>MSCI All-Country World Index<\/h4>\n      <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n        src=\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/us-tariffs-bracing-for-impact-en-chart-5.png\"\n        alt=\"Forward 12-month price-to-earnings multiple for the MSCI All Country World Index\"\n        class=\"img-fluid mb-1-half\"\n        aria-describedby=\"chart-5-desc\"\n      \/>\n      <p class=\"sr-only\" id=\"chart-5-desc\">\n          The line chart shows the forward 12-month price-to-earnings multiple for the MSCI All Country World Index. Global equities are currently trading at an elevated level of around 18.5 times forward 12-month earnings estimates, well above the long-term average of roughly 15 times, suggesting investors are currently discounting a relatively optimistic outlook for both the economy and corporate profits. \n      <\/p>\n      <ul class=\"rbc-legend rbc-legend-inline\">\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>\n              Forward P\/E ratio\n          <\/li>\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-line c-tundra\"><\/div>\n              Long-term average\n          <\/li>\n          <li class=\"rbc-legend-item\">\n              <div class=\"rbc-legend-line rbc-legend-dashed c-tundra\"><\/div>\n              \u00b11 standard deviation\n          <\/li>\n      <\/ul>\n        <p class=\"disclaimer\">\n          Source &#8211; RBC Wealth Management, Bloomberg; data through 2\/21\/25\n        <\/p>\n      <\/div>\n      <\/div>\n      <p>\n      News about the economy or policy typically moves markets to the degree\n      they are expected to impact earnings. Whether prolonged trade policy\n      uncertainty will eventually challenge the current confidence remains to be\n      seen, but most would agree that markets dislike uncertainty \u2013 especially\n      prolonged uncertainty. Along these lines, we believe the market dynamics\n      in the 2018\u20132019 U.S.-China trade conflict offer useful insights for what\n      investors can potentially anticipate over the coming quarters.\n      <\/p>\n      <p>\n      While trade barriers have not necessarily served as a long-term hurdle for\n      the stock market \u2013 the corporate sector has a long track record of\n      adaptability \u2013 they tend to result in less optimal economic growth, rising\n      costs, and creating sales headwinds in the near term.\n      <\/p>\n      <p>\n      So far, investors are largely tuning out the trade-related noise, but rich\n      valuations suggest to us that markets are likely more vulnerable to\n      volatility should a worse-case tariff scenario materialize. Much like the\n      economy, tariff uncertainty can impact markets through the sentiment\n      channel, pushing valuation multiples lower even if the earnings impact\n      turns out relatively manageable.\n      <\/p>\n      <!-- SECTION -->\n      <h2>Investment implications<\/h2>\n      <p>\n      For equity portfolios, we believe \u201ccautious, watchful, but invested\u201d\n      remains the appropriate stance. Given the potential for persistently\n      elevated trade uncertainty to weigh on the economy and corporate\n      fundamentals, we view an \u201cup-in-quality\u201d approach to allocations as\n      sensible. Within equities, this can be expressed through a preference for\n      companies with more consistent cash flows, stronger pricing power, lower\n      debt levels, and\/or growing dividends \u2013 quality and defensive attributes\n      that can enhance resilience if economic conditions begin to undershoot\n      market expectations.\n      <\/p>\n      <p>\n      In fixed income, we think high-quality bonds offer an appealing source of\n      stability. Short- and intermediate-maturity bonds offer reasonably\n      attractive yields for stable income, with capital appreciation potential\n      should economic growth disappoint. Buy-and-hold fixed income investors\n      that purchase high-quality corporate bonds can typically look through\n      periods of temporary credit spread widening. Tactical investors, however,\n      might want to scrutinize their corporate exposure a bit more closely.\n      <\/p>\n","protected":false},"excerpt":{"rendered":"<p>The 2018\u20132019 U.S.-China trade conflict underscored how tariff uncertainty can dampen sentiment, depressing valuations even if the earnings impact turns out to be modest. Given an unusually wide range of potential tariff outcomes, what approach should investors take?<\/p>\n","protected":false},"author":15,"featured_media":13992,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2025-03-10T11:29:49","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[136,475],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-13991","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-market-volatility","tag-tariffs","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The 2018\u20132019 U.S.-China trade conflict underscored how tariff uncertainty can dampen sentiment, depressing valuations even if the earnings impact turns out to be modest. Given an unusually wide range of potential tariff outcomes, what approach should investors take?","rbcwm_post_author":"","rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":[],"disclaimer_footnote":""},"rbcwm_insight_cta_id":[8376],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.8 (Yoast SEO v26.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Tariffs: Bracing for market impact<\/title>\n<meta name=\"description\" content=\"The 2018\u20132019 U.S.-China trade conflict underscored how tariff uncertainty can dampen sentiment, depressing valuations even if the earnings impact turns out to be modest. 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