Conclusion up front: Although there is room for discussions, it seems likely that US effective tariffs, even after negotiations, are likely to rise to ~20-25% (vs ~3% in ’23). This returns US beyond levels of Smoot-Hawley Act that meaningfully disrupted the world in the 1930s. The ultimate impact depends not only on the level but how tariffs are applied to final vs intermediate goods (more than half of US imports) and systems to collect them. It will also depend on the response by others, especially, EU and China.
Our back of the envelope calculations suggest that EPS cuts on the back of this announcement with no retaliation is circa 9%. Combined with some multiple derate suggests that our rough target of 5100 on the S&P500 is intact.
There will be more to follow as information comes to hand.
Summary
- Trump is applying a 10% minimum tariff on all imports coming to the US.
- Additional rates for the following counties at half the full ‘grievance rate’ as per the table below:
- This brings for example the full China rate to 54% (34% plus the 20% already imposed) which is very close to the 60% President Trump campaigned on.
- There were carve-outs for Canada and Mexico to protect USMCA (~28% of US imports). Neither cars (25%), steel nor aluminum are subject to reciprocal tariffs.
- The baseline 10% levy will take effect after midnight Saturday and the higher duties will kick in at 12:01 a.m. on April 9, according to administration officials.
- Canada and Mexico dodged a worst-case scenario. Those two nations already face 25% tariffs tied to drug trafficking and illegal migration. Those will remain in place and the US’s two largest trading partners will not be subject to the new tariff regime as long as those levies are in effect. There’s also a big exemption for goods covered by the North American trade agreement. That lessens the risk of retaliation from Canada and Mexico.
- Exclusions: for energy or minerals that the US can’t produce itself, as well as semiconductors and lumber.
Scott Bessent has been out warning on retaliation:
“My advice to every country right now is, do not retaliate. Sit back, take it in, see how it goes, because if you retaliate, there will be escalation. If you don’t retaliate, this is the high watermark.”
According to Citi the average tariff rate looks to be ~25% which is higher than expected, they estimate the market was discounting 10%. Citi’s base case assumption was 10-15% which would have caused a -5% EPS headwind all else equal. According to 42Macro this level of tariff should see a cut to GDP of 2% and a boost to core PCE by 1.2% over the same time frame. According to Macquarie given US$3.3trn of imports and assuming some margin absorption, US inflationary impact might be at least 150bps while Yale Budget Lab estimates that US’s real GDP growth might drop by ~50-100bps pa over the next few years. The impact on EU will be greater but less in China.
Stock specific commentary:
Domestic Stocks
JP Morgan
Losers – Ansell and CSL. F&P unclear given no update on Mexico. ResMed and Cochlear relative winners with 10% tariff. No assumptions made about mitigations.
- CSL: The 31% tariff for Switzerland is a problem for CSL as this accounts for 25-35% of it plasma fractionation cost base. The UK 10% is better than feared for Seqirus. Vifor is harder to pin down. In very rough terms we see a tariff cost of 2-3% of revenues.
- ANN: The bulk of manufacturing takes place Malaysia (tariff 24%) and Sri Lanka (44%). Ansell is also building its production in India (26%). Overall this reduces the perceived advantage the company had over Chinese producers which are the key competition on the industrial side.
- COH: The 10% tariff on Australia is reasonable result for Cochlear. One competitor Sonova has its cochlear manufacturing in the US based awhile the other, Med-EL manufactures in Europe.
- RMD: Australia and Singapore at 10% makes it a relative winner as well. It competitors are based in China (React), US (Philips) and Mexico (F&P).
- FPH: There was no mention of Mexico which has raised hopes of a better outcome than the proposed 25% tariff. We also note the impact of the tariff has been priced in.
- Largely unaffected – RHC, and probably SHL
International Stocks:
- Amazon’s share price has dropped by nearly 13pc since the start of the year as investors bet on tariff pain. The e-commerce giant is far more exposed to tariffs on China than any other internet seller, according to Morgan Stanley. Roughly a quarter of the cost of its products come from China, more than double the industry average of 10pc. Etsy, by comparison, gets less than 3pc of its products from China. For many of Amazon’s biggest sellers, the trade war could be existential. Nearly half of Amazon’s 10,000 largest third-party sellers are based in China, according to Marketplace Pulse.
- Apple is highly exposed to Mr Trump’s tariffs on China, where it makes 70 per cent of its iPhones. But it may well be able to escape the worst of them. In February, Tim Cook pledged to invest $500 billion in manufacturing and AI development in the US over the next four years in a bid to try and evade Mr Trump’s tariffs. Apple was granted exemptions from tariffs during the first Trump administration, and Morningstar thinks it may well be able to again. But even if Apple can get a carve out, Mr Cook could still get caught out by a slump in consumer spending, which would likely hit iPhone sales.
- So far this year, GM shares are down by more than 8 per cent and Stellantis is down by nearly 14 per cent. Ford has dropped by 4 per cent in the last five days.
- Ford is the most protected of the Big Three. The final assembly of 80 per cent of its vehicles are within the US, compared to just 54 per cent for GM. But it is still exposed because it relies heavily on foreign parts.
From MST
- Good for bonds, bad for credit. Tariffs will weigh on global trade and US domestic demand. The growth outlook is set to weaken and we expect bond yields will edge lower, despite the like increase in inflation in the short-term. Lower bond yields should be positive for high income stocks in Australia. Stocks currently in our advanced income portfolio include Amcor, JB Hi Fi, Medibank, Origin and Vicinity. At the same time credit spreads remain unusually tight given the economic uncertainty and likely to widen further. This will weigh on those companies that rely on tight spreads and abundant financial liquidity to flourish. Macquarie is a stock we have resisted buying so far. We expect valuations to come off further with wider spreads.
- Domestic shelter. We currently forecast three more RBA rate cuts, but a step change in global protectionism raises the risk of more. The Aussie domestic demand backdrop is likely to become even more buoyant and this is further supported by the recent budget which will provide additional stimulus in each of the next three years. Our preferred domestic demand stocks continue to be Breville, Origin, JB Hi Fi, Viva Energy and, Vicinity Centres.
The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.
