The S&P 500 hardly responded when Trump’s press secretary Sean Spicer announced yesterday afternoon that a 20% tariff on all Mexican exports to the US would be imposed to fund the wall. The index was down just -0.07% for the day, and is trading flat again today even though US annualised GDP growth came in at only 1.9%: lower than in the UK and the eurozone.
For Patrick Moonen, multi-asset strategist at NN Investment Partners, Trump’s bellicose rhetoric has been a sign to reduce his allocation to US equities to underweight.
Mexico has taken advantage of the U.S. for long enough. Massive trade deficits & little help on the very weak border must change, NOW!
— Donald J. Trump (@realDonaldTrump) January 27, 2017
“If investors were counting on lots of stimulus and little protectionism from the Trump administration, then their view on this policy mix may need to change,” he says. “Equity markets may need to reflect the very uncertain political environment in a higher risk premium for US equities, despite better than expected macro data and a strong start to the US earnings season.”
Jaap Bouma, senior portfolio manager at Optimix, is also ready to reduce his allocation. “Because there is so much uncertainty, we haven’t traded yet this year. We are now positioned close to the benchmark, which is very unusual for us. But it’s much more likely we will reduce our equity exposure than that we will be adding risk,” he says. “There will be a lot of volatility this year, be it because of a Trump tweet, protectionism, European elections or Putin so we have to be on guard.”
General Motors
A tariff on Mexican imports and retaliatory measures from the Mexicans would hurt the US economy and US companies that trade with Mexico, acknowledges James Davidson, manager of the JP Morgan Global Equity Income fund. Davidson’s third-largest holding, General Motors, imports car parts from Mexico and as such would see its costs increase if tariffs are put in place. The company also has assembly plants for cars exported to the US. Two years ago, GM announced it was investing $3.6bn to double production capacity in Mexico. Most of the cars produced there are exported to the US.
