The industry fund has taken a 49 per cent stake in subscription vehicle provider Splend alongside IFM and other co-investors as it looks to build a 10 per cent exposure to climate solutions in its global portfolio.
After years of powering super returns into the double digits, US equities are walking a tightrope, and one misstep could send them plunging to earth. But the story that put them up there in the first place still holds true.
How to stop worrying and learn to live with (if not love) tariffs
When it comes to tariffs, investors can take comfort from the familiar – we have seen this movie before.
During the previous Trump administration, various tariffs and trade policy tools were threatened against both Mexico and China. In respect of China, despite a material increase in effective tariff rates, the economic impact was rather muted. Inflation remained stable, largely because the Chinese renminbi depreciated and absorbed the lion’s share of the impact, while countermeasures and substitution were also an effective mitigant. Chinese economic growth remained on a positive trajectory and resilient, despite the Federal Reserve’s tightening cycle at the time. In short, the Chinese economy, while experiencing some pressure, did not collapse, and a wholesale repatriation of supply chains back to the United States did not materialise.
Similarly, tariffs – initially on steel and aluminium, and eventually on all Mexican goods – were imposed or threatened but were never in force for any meaningful duration. NAFTA was eventually replaced by the United States-Mexico-Canada Agreement (USMCA), and total trade volume increased by 51 per cent following its implementation in July 2020 – resulting in Mexico surpassing China to become the US’s largest trading partner. While the Mexican peso experienced an extended bout of volatility, its cumulative move from the day before the 2016 presidential election to the signing of the USMCA was around 1 per cent. No major tariffs or border closures between Mexico and US were ultimately implemented.
An evolving and nuanced story
Secondly, even if this sequel follows a different plot line and more tariffs are ultimately implemented (instead of being merely threatened as a prelude to negotiation), any tariffs implemented by the second Trump administration would likely be rolled out gradually, as happened previously. This gradualism is likely to be driven by several factors, including a desire to minimise market volatility and to provide businesses with greater clarity over the path for tariffs, enabling them to adapt and adjust their supply chains accordingly. We can also expect the private sector in the US and beyond to advocate resolutely in favour of mitigating any unnecessary frictions to global trade. Therefore, the finer details of any tariffs and other trade restrictions are likely to be negotiated over an extended period, in contrast to the strident immediacy implied by newspaper headlines. Furthermore, any final impact would be dependent on eventual countermeasures and policy reactions from the affected trading partners.
As a case in point, while headlines might suggest that the current tariffs on Chinese imports are in the range of 18-20 per cent, in reality, nearly half of Chinese imports to the US are subject to tariffs of 0 per cent and the trade-weighted tariff is closer to 10% than 20%.
A likely delay between the initial threat and eventual delivery should allow emerging markets to acclimatise gradually to the changing trade landscape, rather than being subjected to a sudden, disruptive shock. Markets might of course jump the gun as they price in various outcomes, but as we saw in the first episode; one person’s mark to market anguish could well be another’s attractive entry opportunity.
A heterogenous impact
A further key consideration for investors trying to make sense of tariffs is that emerging markets are not a homogenous monolith. Today, emerging markets comprise a diverse collection of economies – a broad, indiscriminate tariff increase from the US would have a different impact for each country.
Some economies, like India, boast robust domestic demand, making them less reliant on exports and therefore less susceptible to tariff-induced disruptions. Others, like Mexico, have deep economic ties with the United States, and may be able to leverage those relationships to negotiate more favourable trade terms. Even China, which suffered most directly in the prior episode, still commands an ample supply of economic tools that should allow it to adjust and react. In addition, it now also has the additional benefit of preparedness as a result of global supply chains that have already partially, if not substantially adapted.
A renewed trade shock from the US might even accelerate China on its transition towards a more domestically driven economy, reducing its dependence on exports. This would not only make China less vulnerable to US tariffs in the future, but also potentially create new opportunities for other emerging economies to pick up some of the slack left by China in the global supply chain. Again, if history is a guide, emerging markets are likely to be more resilient than would first appear.
Just another chapter
A new US tariff regime, while potentially creating some turbulence, need not be the existential threat that some might fear. While investors must acknowledge the challenge that any change to the global trade order might present, they should also recognise that such challenges also create opportunities for emerging markets to adapt, innovate, and ultimately emerge stronger and more resilient.
While tariffs might be making another return to prominence, active investors would be best served by looking beyond the fear and uncertainty, and instead be alert to the opportunities that may present themselves in the volatility and disruption. Investors should also take some comfort from the adage: “This too shall pass”. After all, not all sequels are worse than the original.
