César Pérez Ruiz, Chief Investments Officer Pictet Wealth Management.
3 THINGS TO KNOW
- The US tariffs announced on 2 April are the biggest trade shock the world has seen in 100 years and the risk of recession in the US has increased substantially.
- A tectonic shift is underway in the global economy as US policies undermine trust in the world’s largest economy, while a European revival takes hold, and Chinese innovations disrupt markets.
- In the near term, markets will remain volatile and global equities under pressure given the risk of recession. We recommend holding onto safe assets like the CHF and gold, and keeping some powder dry for once the dust settles. In fixed income, the rise in German Bund yields makes them more attractive.
INTRODUCTION
On 2 April, President Trump announced sweeping trade tariffs, dealing a major shock to the global economy and raising the prospect of retaliatory measures from other countries. This is happening at a time when tectonic forces are altering the global economic architecture as we know it, with Europe experiencing a structural awakening and China disrupting tech innovation.
CONTEXT
The new tariffs on US imports are more severe than expected and represent the biggest trade shock the world has seen in 100 years. The tariffs take effect on 9 April. China has already announced retaliatory measures. The Trump administration has so far shown no sign of softening its tariffs. Uncertainty about their impact could linger as negotiations and implementation may take time. There is a distinction to be made between the cyclical impact of US policy, and a longer-term structural shift underway in the global economy.
CYCLICAL SWING
The tariffs come on top of DOGE job cuts and tighter immigration, which are weighing on the US near-term outlook. Deregulation and tax cuts may help in time, but have yet to kick in. Uncertainty about the economic outlook is hitting business and consumer confidence, increasing the risk of recession in the US, and beyond. Fed Chair Jay Powell said last Friday the Federal Reserve was in no rush to act. Wary of inflation, he wants to review evidence of a slowdown before taking policy action. Meanwhile, the ECB is poised to cut.
STRUCTURAL SHIFT
This is happening at a time when a tectonic shift is underway in the global economy. The existing architecture – in which the US delivered economic stability, security guarantees and superior returns in exchange for foreign capital – is faltering as US policies undermine trust in the world’s largest economy. Given the scale of foreign holdings of US assets, amounting to around 90% of GDP, capital repatriation from the US is a growing risk.
At the same time, Germany’s new readiness to engage in fiscal spending is a potential “game changer” moment that could spill over across Europe, where lending growth and easing monetary policy are supporting a broader structural revival.
And in China, innovation has disrupted markets such that Chinese tech companies now appear more competitive against their US peers. What is more, China has all the tools – in terms of infrastructure, talent and computer power – to scale its innovation in AI across other industries even if the impact of tariffs is yet to be felt fully.
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INVESTMENT IMPLICATIONS
It is very hard to gauge a floor to the stock market given uncertainty about the full impact of tariffs, or how much US exceptionalism will be challenged. It is important to separate the cyclical impact from the structural. Markets will remain volatile and, with the probability of recession looming, global equities will be under pressure. Given that in the event of a recession, there will be no decoupling from the US, Europe and China will also be challenged. Selectivity is key.
We recommend holding onto safe assets like the CHF and gold and keeping some dry powder to reassess how to position strategically once the dust settles. The composition of the MSCI World indexi could structurally shift over time from 72% US stocks today to ca. 62%, with Europe the main beneficiary. This could also impact the USD and appreciate European currencies.
We are negative on global high yield as the market is not taking adequately into consideration the risk of a US recession. In the sovereign bond market, we favour European government bonds, especially for Europe-based investors.
CLOSING THOUGHTS
In the coming weeks, US corporate earnings will be important to watch. Some figures may be slightly skewed as some consumers and businesses pull forward purchases to avoid the impact of the tariffs. We expected a lot of sensitivity around companies’ guidance.
Comments from the White House and US trading partners in the days and weeks ahead will be crucial. The likelihood of the US finding, and taking, an immediate off-ramp is low. It is clear that the stakes are high and that we are witnessing an historical moment. In such a maelstrom, it pays to take stock, assess the big picture, and reset your compass.
