Schroders multi-asset downgrades global equity outlook post Liberation Day
The Liberation Day tariffs set out by US President Donald Trump earlier this month sent shockwaves through global markets. Although we are starting to see some softening of his rhetoric since the announcement, Trump’s deliberation and on-again/off-again approach to tariffs could be causing significant damage to the US economy.
The longer Trump deliberates, the more likely he’ll have the recession he didn’t have to have
This is according to Head of Multi-Asset and Fixed Income investing at Schroders Australia, Sebastian Mullins, who was speaking at a recent Schroders webinar for South African investors. Mullins explained that before Liberation Day expectations were for total average tariffs goods imported into the US of 8-12%. “On ‘Liberation Day’ President Trump said he would use trade deficits to determine what reciprocal tariffs would be – completely shocking the market. Expectations then jumped to almost 30% after he spoke, and [as of a week ago] had reduced to about 20%.”
The problem, said Mullins, is the longer the period of uncertainty, the more chance there is of a US recession and real damage being done to both the US market and economy. “Proper trade agreements and bilateral discussions on trade usually take 1 to 2 years, so to assume that this will all be done and dusted in 90 days is more than optimistic. No one even knows how many trade deals are out there at the moment,” said Mullins.
According to Mullins, the current confusion and uncertainty could lead to reduced spending by corporates and reduced consumption by households. “Our concern is the longer tariff negotiations take, the more likely Trump is going to have the recession he didn’t have to have”, he said.
The risk of stagflation looms
Mullins pointed out that as we stand today, Schroders economists expect current tariffs to hit US growth by about 1% and to raise inflation by approximately 2%. “This would bring down the 2.5% previously forecast for 2025 to 1.5%. However, this figure doesn’t include the second order impacts of retaliation. So, essentially we are looking at a stagflationary economic outcome rather than a recession at this point,” said Mullins. Stagflation is an economic condition in which economic growth slows and inflation rises.
What has kept US growth strong according to Mullins was high consumption. “The US has enjoyed high wage growth off the back of job security from high corporate margins. Now, with all the uncertainty, this goes into reverse. Corporates are seeing their margins squeezed from tariffs which puts job losses on the table. In addition to this, companies are avoiding capital spending because they don’t know where the dust will settle. And then you have consumers holding back on spending amidst fears of job losses.
“The longer this goes on, the more of this economic retreat you will see. It is a race between Trump doing trade deals and the hard data rolling over to confirm a slowdown – which at that point will already mean a pricing in of a recession by the market,” said Mullins.
Increasing level of political risk in US eroding corporate trust
Added to this mix is a regulatory and business environment that is becoming increasingly erratic and less appealing to corporates. This is according to Vera German, Emerging Market Fund Manager on the Schroders Global Value Equities team, who referred in the webinar to the recent blow dealt to tech company Nvidia.
Initially, she explains that Nvidia were told by the Biden administration that there were going to be curbs on the types of semiconductors they could sell to China. Nvidia agreed to not sell their high-end semiconductor product to the Chinese market but would rather design a chip specifically for said market with US government considerations in mind. “They have invested substantial capital spending into this arrangement but were told earlier this month, ‘You know what? You’re not selling this to China either’. It’s almost a $6 billion write-down,” said German. While she conceded that Nvidia’s market capitalisation is currently around $2 trillion, she noted the detrimental effect of repeated hits to corporate confidence, which could put other companies off doing business in the US.
Who will come out winners?
According to Mullins, now that the US is shooting itself in the foot other economies may fare better. “Unlike the US, you have generally had central banks easing quite dramatically so far in 2025. As a result, companies in these countries are less likely to feel an inflationary shock from the tariffs, while the US will.”
Mullins explains that the Federal Reserve’s (Fed) options are limited compared to other central banks around the world, which is a relative positive for other economies. In terms of fiscal stimulus, he said that the US fired off all their bullets in the last recession so it is unlikely they will have much further to unleash in the way of stimulus. “The European Union, as well as countries like China however, have both monetary policy and fiscal stimulus on their side to help limit the damage from tariffs.”
In addition to this, Mullins said that while Trump’s goal of reshoring is a good sentiment in theory, he’s essentially put the cart before the horse. “Reshoring takes time and may happen in the long term, but in the short term you have this depth of despair where you have none of the products you need to buy onshore, and you are having to pay 150% extra on the price of the import. The sequencing of what he did is the wrong way around. If he built the capacity first and then instituted the trade war it would make more sense,” said Mullins.
Emerging markets looking increasingly attractive
For German, policy uncertainty is something that has always been punished by markets. “Policy uncertainty and a lack of fiscal discipline is something that has always been punished in the emerging world. But suddenly, you have the situation where the biggest, and ‘safest’ country in the world is displaying some budget issues and some policy uncertainty.”
As an investor, she said that other countries start to look increasingly appealing in light of this, particularly those with substantially lower sovereign debt, and better population and industrial dynamics. “Emerging markets don’t have to trade with the US in the longer term. They can just trade within the emerging block,” said German. She explains that a small area termed the Valeriepieris circle, covers less than 10% of the world’s area, but houses more than 50% of the world’s population, including some of the globe’s rapidly expanding economies such as India, China, Vietnam and Bangladesh. “If you have half of the world’s population in what is also a relatively compact region geographically, you may well see an inflection point where the emerging world starts trading within itself more so than with America or even perhaps the European Union. While there’s an economic dimension to it, there’s also a political one where, frankly, the US was a very interesting trade partner because it provided free safety guarantees. Now, these are no longer free and no longer guaranteed.”
For German, this spells good news for emerging markets from an investment perspective. “Emerging markets are starting off from a base of very low valuations but have good structural dynamics, versus arguably worse structural dynamics at a higher valuation in the US. For instance, places like Indonesia and Philippines are trading at their lowest valuations in decades but across emerging markets, there is a compelling valuation story overall. Then as a fund manager, your job, of course, is to find those where the risk-reward is the most attractive.”
US dollar and gold
Mullins said that in terms of currency, the US dollar is probably going to be structurally weak as people take money away from the US and put it into other assets. “Currencies like the euro and yen stand to benefit from all this uncertainty and market volatility,” he said.
And gold is also continuing to soar amidst the relative chaotic wake of Liberation Day. “We like gold, it’s a nice safety trade. You’re also seeing developed markets and Western buyers returning to the gold market, buying exchange-traded funds (ETFs), for example, and even consumers are buying gold bars and gold coins which could be supportive of prices going forward”, he said.
Not all doom and gloom
According to German, despite the doom and gloom, opportunities abound – especially for active, emerging market investors. “For emerging investors, it’s a fantastic time. You’re having a real re-assessment of the relative attraction of emerging versus developed markets. You have very low valuations in emerging markets and you have everybody thinking that the world is about to end. Historically, research suggests that it’s much easier to make money in emerging markets when there is a general turn in global sentiment rather than idiosyncratic issues in any individual countries. So, I think sentiment is on your side and valuations are on your side as an emerging markets investor. There are plenty of companies in emerging countries which are going to have great earnings growth that are deeply undervalued. I don’t see what’s not to like,” she concluded.
