Unintended consequences of tariffs could see US falter as market darling

Tariffs imposed by US President Donald Trump are likely to have a range of unintended consequences that could see the US falter as an investment market darling in the future.

This was the view of investment managers aired at the recent Morningstar Investment conference held in Cape Town and Johannesburg recently. While US markets continue to deliver returns in the short term, the longer-term unintended consequences of Trump’s tariffs will be higher inflation and a weakening economy, they said.

Investment managers have been predicting a slowdown in US returns for some time, while returns continue to be strong.  It may feel a little like they have been crying wolf, Roné Swanepoel Head of Sales SA, Morningstar Investment Management, said but eventually the wolf will show up.

Swanepoel says the Morningstar Investment team expects that in the decade ahead the US equity market will return six percent a year - less than half the 13.1 a year it has returned for the past decade.

The Morningstar research team expects emerging markets, on the other hand, which returned just 3.9 percent a year for the past decade to return 10.9 percent in the decade ahead, Swanepoel said.

Why Trump has imposed tariffs

Grant Slade, an international economist at Morningstar, said the aim of imposing the tariffs is to balance US trade with the rest of the world by reducing the US trade deficit.  The corollary to this is to inspire a renaissance in manufacturing and increase employment in that sector, which makes up a section of Trump’s voter base, Slade said.

Kevin Lings, chief economist at Stanlib, said the US manufacturing sector lost about five million jobs between 2000 and 2024.

He said Trump’s tariffs are an attempt to make Chinese goods more expensive while revitalising US manufacturing.

Over the past 24 years, global trade has shifted dramatically from the US to China, Lings said. In 2000 most of the world did more trade with the US than China. But last year most of the world was doing more trade with China than the US, contributing to China being the world’s second largest economy, Lings said.

When the US had the bulk of the trade, it gave them power and dominance, Lings said. But around the world people like to get things cheap from China despite the fact that the US typically makes a better product, he said. 

Sangeeth Sewnath, managing director and head of the Americas at Ninety One Asset Management, said the US tariffs are about protection and leverage. The aim is to protect industries and sectors that matter such as steel manufacturing, semiconductors and electric vehicles.

Leverage is about having an impact on certain countries you want to influence and interactions with Brazil and India have been about using tariffs for leverage, Sewnath said.

The impact of tariffs so far

Morningstar’s view is that the tariffs are going to have fairly limited success and a range of unintended consequences, Slade said.

This will most likely result in a stagflation scenario with a range of demand and supply shocks hitting the US economy in coming quarters, he said.

There was an initial significant tightening of financial conditions in April when the tariffs were first announced which subsequently reversed, Slade said. However, both US consumer and business confidence has taken a knock and this is starting to play out in the economic data - the consumer is pulling back on spending and growth is slowing, he said.

These demand side shocks are starting present a cyclical headwind to the US economy. However, the Federal Reserve is in a position to use its monetary policy to stimulate the economy and offset some of those consequences, Slade said.

Lings said before Trump came to power, the US economy was performing brilliantly, delivering economic growth of 2.5 percent a year over the past 10 years.

Before Trump, US household wealth and house prices were the highest they have ever been, while the inflation rate was on its way to two percent and interest rates were expected to be cut, he said.

The US economy cannot grow faster because there are not enough people to employ, he said. The US is currently looking for 7.1 million people to employ that they do not have and now they have cut a huge inflow of people from countries south of the US who would normally have supported their labour force.

Now the economy is weakening, the labour markets are weakening, inflation is going higher and Trump is fighting the Federal Reserve to force them to cut interest rates, Lings said.

The economic growth rate has come down since Trump came into power and is more likely to be 1.5 to 1.3 percent, he said.

More concerns

Slade said the unintended consequences on the supply side of the economy are more concerning as tariffs will impact free trade.

Freer trade benefits the economy, allowing businesses to specialise in industries and sectors where they have a comparative advantage and to build economies of scale there, he said.

Lings said tariffs do not give US businesses the certainty they need to invest in manufacturing because tariffs can change quickly and the Trump administration has been fickle in its negotiations.  

He said countries find ways to work around tariffs – exporting through countries with lower tariffs.

The US government is collecting a huge amount of money from tariffs, but companies and consumers will end up paying for this, Lings said. This will put company margins under pressure and affect equity valuations and increase consumer price inflation.

Trump would have been better off deregulating business, making it easier to do business in the US and revitalising key infrastructure, he said.

Impact delayed

Sewnath said there hasn’t really been much impact on prices yet because most companies are still trying to understand what the 200 executive orders that have been signed mean for companies and what they can and cannot do without being fined or sued.

Sewnath said this uncertainty means the impact on share prices will come through at a later stage, possibly in the next six to 12 months.

Investment market commentators often refer to the current period as one of US exceptionalism as returns from the US markets have been so strong. The US has been the most successful society over the past 80 years with phenomenal growth and stock market returns, Sewnath said. This is part of the fabric of American society and Americans continue to believe that the US will continue to dominate the world economically, he said.

Sewnath said he had also never seen capital being allocated to ideas so quickly anywhere else in the world than it is in the US.

He concluded that it's not a question of whether the US is going to falter or not. They will still do things really well, they just probably won't do it at the same pace as they have done in the past, he said. Ninety One also holds the view that the dollar has entered a long-term downward cycle.