We have constantly communicated to clients since the start of this year, the first quarter / first half of 2025 was going to be volatile (see below) and therefore we had safeguards in our portfolios. This view hasn’t changed and to state the obvious is playing out. We would recommend clients to continue exercising a hold and see approach in April.
Our analysis suggest the sell off may have little more downside. As we presented at our recent monthly investment webinar, current investor positioning is very much defensive. Hence at some point the selling will exhaust itself and will need a new reason to move lower (or higher). With respect to Australian shares, Banks, REITs and Utilities are likely to be least impacted. Further, as we discuss below, if global central banks start to cut interest rates in response, that will also benefit these sectors. Healthcare, global earners and supply chain operators are more exposed. However, we have had several company management teams provide initial assessments noting that the impact is manageable. We are looking for opportunities in the current sell off to deploy small amount of cash where we have conviction.
In times like this investors should stick to their investment process, risk profile and investment time horizon. As reminded clients in our recent investment webinar, corrections are common place (on average 3-5 market corrections every decade) but remaining invested in line with your strategy / time horizon is always the best course. Being active ahead of these correction obviously helps – which is what we have done.
Reminder – Cost of missing the best 10 days of the year can materially impact returns…the best and worst days usually happen close to each other…so if you sell after the worst days, it likely means you will miss out on the eventual coming best days. Chart below shows S&P 500 24 year average – yearly returns +9.8% p.a. versus yearly returns (excluding missing best ten days) -12.5% p.a.
Banyantree Multi-Asset Strategy Quarterly report published on 23 January 2025:
“Given the many permutations and combinations of potential outcomes, our approach would be to continue to have safeguards in our portfolios (cash & liquid alternatives being our preferred plays) whilst looking for attractive risk adjusted investment opportunities in other classes. Along with fundamentals, we are also paying close attention to liquidity flows, pricing patterns and incentive structures of the market… Finally, we continue to use cash tactically whilst global interest rates remain high. Our view on cash is likely to be very much non-consensus..“
Since the start of our this sell off (19th Feb-25) to date, our risk on strategy Banyantree’s Moderate Growth Multi-Asset (70/30) strategy is down -1.8% versus Vanguard Diversified Growth ETF (70.30) down -5.1% (proxy for market beta).
Banyantree Global Core Equity strategy is also very well positioned and materially outperforming. Our exposure to U.S. markets is ~38% vs benchmark ~72% and our exposure to U.S. Magnificent 7 (which have copped most of the downside thus far) is ~11.03% versus benchmark ~20.99%. We our outperforming since the market correction started and over the past 1 year we are outperforming our reference benchmark (MSCI All Country World Index AUD) by ~4.0%. We are closely watching stock specific stories and good value is starting to emerge in high quality companies.
Liberation Day. The much awaited “Liberation Day” arrived this week and U.S. President Donald Trump announced extensive reciprocal tariffs across the globe – see table below. The initial market reaction was positive after investors saw headlines noting “10%” tariffs on countries.
However, as hours passed it soon became clear this was the minimum level of tariff to be imposed on all countries exporting to the U.S. (versus current U.S. effective tariff rate of 2.3% in 2024) including higher reciprocal tariffs on some countries (matching approximately half the level applied of tariff and non-tariff barriers by the trading partner).
Worst case scenario. We would note that the tariffs announced, as they stand today, are probably the worst case scenario from the markets perspective. U.S. Treasury Secretary Scott Bessent commented following the U.S. President’s tariffs announcement – “I wouldn’t try to retaliate. As long as you don’t retaliate, this is the high end of the number”.
Whilst it’s difficult to second guess what President Trump is thinking, comments from the Treasury Secretary suggest they have adopted the “shock & awe” strategy from the very start and are willing to negotiate lower depending on what trading partners offer. The response from the rest of the world now determines if we get into a tit-for-tat trade war, which frankly no one wins. So far the response from world leaders has been more rhetoric.
U.S. economic impact. There are many moving parts to this story to be able to put a definitive number on the actual impact. However, a Fed model from 2018 highlighted that for every 1% increase in tariffs impacts GDP growth by 0.14% and increases PCE prices by 0.09% over the medium term.
For example, if the current effective tariffs rate rise from 2.3% to 20% – that is ~17% rise – this would equate to a GDP impact of 2.38% and increase prices by 1.53%. We do stress the 20% tariff estimate is just that, an estimate at this stage. There are estimates out there which are a lot more aggressive on the downside (chart below).
In any case, an aggressive stance by the U.S. Administration will most likely drive the U.S. economy into a recession – which they wouldn’t be oblivious to and will test the patience of the broader Republican party). Whether this downturn is by design, negotiating tactic or whether the U.S. administration does a u-turn remains to be seen.
Rest of the world impact
According to economists, the impact of 20% tariffs on goods imported from the European Union could reduce U.S. consumer demand by 50% for these goods and points to a potential hit to the GDP of approx 1.1%. Using similar thinking and its exposure to U.S. markets, the UK’s GDP could be impacted by 0.2%.
China hit hard
President Trump has increased tariffs on China by 34% and according to economists China’s growth could be hit by 1-2%. The U.S. will also end on 2 May-25 the ability for small packages worth $800 or less from China & Hong Kong to enter the U.S. duty-free. Clearly a negative for online marketplaces. China has obviously responded that it will retaliate but we believe China will try to show some restraint. What we do expect is that the significant increase in tariffs will force Chinese policymakers into more stimulus (including running deeper budget deficits to support the economy which they have resisted in the past).
Australia’s impact is modest
Australia will be subject to the standard 10% tariffs leveled across the globe by the U.S. The impact to Australian exports is modest – in 2024 Australian exports to the U.S. amounted to ~$25bn, equating to ~5% of total exports. This equates to about 1.38% of Australian GDP. The downside risk to the Australian economy will manifest from a weaker global economy (particularly threats to China) and our share market will directionally follow global markets (we have a high correlation to the U.S. market).
Global central banks’ response
Due to the market and economic implications, global central banks are expected to provide support by fast tracking the easing cycle, including the Reserve Bank of Australia. Obviously the outlook for inflation could complicate how quickly these interest rate cuts will come (see below for inflation implications from tariffs).
The Tariff Framework
(1) Inflation – a 10% baseline tariff immediately raises prices on imported goods. Unlike targeted tariffs on specific sectors, this broad-based approach affects virtually all consumer goods, manufacturing inputs, and capital equipment. We are already seeing manufacturing input prices spike on the tariff talk (see figure below). Additionally, tariffs shield domestic producers from international competition, allowing them to raise prices more aggressively without losing market share, trade tensions typically pressure the dollar, making imports even more expensive beyond the tariff impact, and imposing of retaliatory tariffs leads to exports becoming more expensive in foreign markets, reducing demand thus forcing domestic producers to raise prices in home markets to maintain profitability. Additionally, tariffs compound as they cascade through supply chains in non-linear ways (as in Figure 2), amplifying the inflationary pressure.
(2) Impact on growth – global supply chains optimized over decades cannot be reconfigured overnight, thus the sudden imposition of broad tariffs creates bottlenecks, production delays and inefficiencies that constrain output, with the uncertainty of policy stalling activity (which may already be showing up in the data as in Figure 3).
Companies forced to source from higher-cost or less efficient suppliers experience reduced productivity (a dangerous outcome when productivity growth is already sluggish) with retaliatory tariffs reducing the competitiveness of U.S. exports, leading to production cuts and job losses in export-oriented industries. And with inflation pressures mounting, the Fed would likely maintain higher interest rates, further constraining economic growth.
Key events to watch:
(1) Initial Implementation (April 5-9) – market will begin pricing real-world impact. If reciprocal tariffs are already significantly reduced by April 9th (potentially through successful negotiation) the repricing in the market should occur pretty quickly.
(2) First Round of Retaliation (likely April-May) – will confirm trade tension escalation (already seeing countries come back with response with China vowing to retaliate and urging the U.S. to “immediately cancel” tariffs and resolve trade differences through dialogue, EU announcing it is considering various options, including a digital services tax on U.S. companies, retaliatory tariffs and deploying the bloc’s anti-coercion instrument to defend its interests, and Canada announcing it will impose 25% retaliatory tariffs on U.S.-made vehicles that don’t comply with the US-Mexico-Canada Agreement), ensuring the trade war goes on longer than what is priced in.
(3) 2Q25 Earnings (July-August) – first corporate reports reflecting tariff impacts.
