Latest on trade and tariffs
Investors don’t like uncertainty, so we shouldn’t be surprised if we see a pickup in equity market volatility as November’s US election nears. In addition, geopolitical tensions, including the ongoing wars in Gaza and Ukraine, have the potential to trigger market volatility. The rise in gold prices following the death of Iranian President Ebrahim Raisi in a helicopter crash this month serves as a reminder of this potential.
As the election nears, market focus on specific policy measures is likely to increase. In the past month, US President Joe Biden announced new tariffs on imports of Chinese electric vehicles, advanced batteries, solar cells, steel, aluminum, and medical equipment. Duties on EVs are to be increased to over 100%. China vowed retaliation, with the Ministry of Commerce saying Beijing would take measures to defend its interests.
With only 4% of US imports from China and less than 1% of China’s total exports impacted, the economic ramifications of the latest tariffs are small. However, the wider trend is that, regardless of which candidate wins the US presidential election, we expect to see more protectionism, more obstacles to free trade, and a fracturing of the status quo ante. We note that while former President Trump initially introduced several tariffs, President Biden retained most of those when he assumed office.
That said, there are likely to be some differences in the way in which protectionism is implemented. We would expect Biden to continue using tariffs on a more targeted basis, with a focus on China and a limited number of other countries. Trump may use tariffs more broadly as a point of leverage to extract concessions, and while his primary focus may be on China, he would likely not exempt geopolitical allies, including in Europe. (For our analysis of the potential outcomes under different scenarios for control of the White House and Congress, see our ElectionWatch report, “Politics beyond borders,” published March 2024.)
Portfolio construction is best treated as an apolitical exercise, but differing policies are likely to mean a different impact on markets depending on the victor. With stock market volatility currently at low levels, this speaks to considering capital preservation strategies within equities, as well as being both selective and diversified in international market exposure.
Gold and oil remain valid geopolitical hedges, in our view. Gold should additionally benefit from strong central bank demand and falling rates. We expect gold prices to reach USD 2,600/oz by the end of the year, as the aforementioned market dynamics likely drive fresh exchange-traded fund inflows. We also see upside for oil prices (we forecast Brent crude at around USD 87/bbl by the end of the year) amid solid demand and efforts by OPEC+ to balance the market. Risk-tolerant investors can consider selling Brent’s downside price risks for yield.
