Measure Twice, Cut Once
Why tariff threats might be stronger than realised execution.
As markets brace for the next twist in U.S. trade policy, all eyes are on the looming tariff announcements set for April 2nd. Under President Trump’s administration, economic strategy has often been unveiled in distinct phases, each with its own ripple effects across global markets. Now, we find ourselves in the heart of what we identify as “Phase 3.”
The focus has shifted to a high-stakes game where tariffs serve as both a bargaining chip and a potential economic disruptor. Investors are left to navigate a landscape riddled with uncertainty: Will tariffs be mild and phased in gradually, or will they arrive in force, jolting sectors and reshaping global trade flows?
In our article Trading the Tariff Man, we identified XAU as a winner of any trade war, and that the worst was behind Europe. In both these respects, we were correct. XAU touched the milestone of $3,000, while Europe has been one of the best-performing markets this year.
In our second instalment under this tariff trend, we noted that it would be the consumer who is most negatively impacted, but we felt that Trump would allow a way for exceptions as part of negotiating leverage. Inflation expectations have continued to rise, and we have had a strong of headlines over the last few days that Trump is already walking back an aggressive tone.
So, we bring this article to you as “Part 3” in our tariff series. For investors, positioning ahead of such a pivotal event is a delicate balancing act. Equity strategies need to weigh the risks of tariff escalations against the possibility of a more benign outcome. In this article, we break down the potential scenarios, model market impacts, and explore where risks and opportunities may lie.
Trump sequencing: Thinking in “Phases”
Trump 2.0 is well underway, with many new actions already in place under the new administration. Deregulation is what we would call “Phase 1” of this presidency. This was a large part of Trump’s rhetoric during the campaign, and we saw executive action in the initial days of his taking office. Deregulation included exiting the Paris Climate Accord and WHO, opening up America’s energy supplies, and supporting M&A activity (the latter has underwhelmed, as a quickly changing economic outlook complicates the dealmaking environment).
“Phase 2” was focused on immigration, with domestic deportation operations quickly underway.
“Phase 3” is the regime we find ourselves in now, one of the tariff trade wars—both broad and narrow. Having already dealt with the news flow concerning Phase 1 (border and drugs) and Phase 2 (national security), April 2nd will be crunch time for Phase 3 (reciprocal).
“Phase 4” of Trump 2.0 will involve taxes: extending TCJA, lowering corporate taxes from 21% to 15%, eliminating taxes on social security benefits, and taxing tips.
For now, Phase 3 is this article’s focus area, with a lot to consider regarding the tactical side of allocation.
We model three scenarios: no tariffs (implying delayed or minimal sectoral tariffs), a 10% increase in the average effective U.S. tariff rate, and a 20% increase.
While many variations are possible, these three categories offer a reasonable sense of potential outcomes. We anticipate the effective tariff rate will settle around 10% and believe the economic impact on growth may be less severe than the economic projections have suggested due to factors such as deregulation.
Market impacts
It’s not entirely clear what the market has priced in. At first glance, the price action—particularly the strong performance of European and Chinese equities, as well as EUR and CNH—might suggest that tariffs aren’t heavily reflected.
However, beneath the surface, companies sensitive to tariffs have significantly underperformed.
In commodities, the copper arb indicates that a 17% tariff is priced in, and importers from China in the U.S. are also underperforming. This makes it difficult to draw a definitive conclusion about market expectations. While the details matter, it’s evident that some tariffs are expected, especially regarding Europe.
This is also informed by the fact that the 2025 behaviour is somewhat curious. It can likely be explained by some specific idiosyncratic factors (fiscal in Germany, increasing growth estimates in China on the AI story), but likely also due to falling growth estimates in the U.S., to which tariff uncertainty is at least contributing.
Broad tariffs may also hurt the U.S. more than the RoW. Additionally, some of this dynamic may stem from the expectation that tariffs won’t be in place for long. This perspective might be more relevant for Mexico or Canada, where tariffs have been more flexible, unlike the 20% tariffs on China, which have seen no rollback. Generally, when a market doesn’t respond as anticipated to certain news, it indicates that the information is already factored into prices.
While we can’t completely dismiss this scenario, we choose to adopt a cautious stance leading up to the tariff announcements in early April. Entering this period with minimal risk offers us the flexibility to take decisive action once the situation becomes clearer.
We remain neutral equities into tariff resolution. Over the last month, we have downgraded our view on U.S. equities to neutral on the transition from the Trump sentiment trade to the Trump tariff trade.
Risks for equities are two-sided, though, as some tariffs are priced. Of course, the market has already priced a tariff shock to some extent. However, the experience so far has suggested that tariffs are not necessarily overly long-lasting and may change if U.S. corporations are impacted too significantly. The market may, therefore, still underprice the tariff outcome. On the other hand, the tariff announcements could be more benign than expected because tariffs get phased in over a more extended time period at not-too-aggressive levels. We would rather buy back the market on a benign outcome than go very long into the tariff decisions.
Who will underperform? While the case for being cautious about tariffs is relatively easy to justify, the question of who will underperform is more challenging to answer. In 2018, China and international markets underperformed in response to tariffs, while the U.S. outperformed (though in a negative context). So far, 2025 has played out differently. The chart below shows that the main tariff targets have outperformed this year, while the U.S. has been the main underperformer. One plausible reason is that a 10% broad tariff would impact U.S. growth more negatively than the rest of the world.
Below the paywall, we’ll examine our views on global indices further ahead of the April 2nd tariff implementations.
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