A tariff battle has been raging over the last few months as President Trump has carried out a comprehensive trade review and imposed trariffs on almost all goods imported into the US. Tariffs—taxes imposed by governments on imported goods—have wide-ranging implications not only for global trade but also for investors. While their immediate effects are often seen in trade balances and consumer prices, the ripple effects on investment portfolios, corporate earnings, and market sentiment can be significant. Investors must be keenly aware of how tariffs influence the economic landscape and the companies within it.
One of the most direct impacts of tariffs on investors is through corporate profitability. When tariffs are imposed on raw materials or components that companies rely on for production, costs can rise. For example, the U.S. tariffs on steel will create higher input costs for American manufacturers that use steel, such as carmakers or construction firms. These increased expenses can lead to reduced profit margins unless they are passed on to consumers in the form of higher prices—something that may not always be possible in competitive markets. Lower profitability can, in turn, reduce a company’s share price, directly affecting investors. It all depends on how much of the increased cost manufacturers can pass on to consumers. No doubt there will be some element of sharing between manufacturers and consumers of the increased cost. Del Monte, one of America’s largest canned food companies, have recently filed for bankruptcy as the 50% tariff on imported steel and aluminium was just the last straw for an already struggling company.
Tariffs can also lead to shifts in supply chains, prompting companies to relocate manufacturing or sourcing to countries with lower tariffs. While this can create new investment opportunities in some regions, it can also introduce instability or delayed production, especially in the short term. For investors, this creates both risk and opportunity: risk in terms of uncertainty and potential losses, and opportunity in terms of identifying new winners in the shifting trade landscape. However, Trump’s dream of large scale investment in the US to fill the gap left by reduced supply of imported goods is unlikely to come to fruition. That’s because manufacturers need a long lead time to build the necessary plant and equipment and over that time, the political landscape could well change. There is just too much uncertainty and risk.
Market sentiment is another critical area influenced by tariff announcements. Markets are forward-looking and often react sharply to the anticipation of tariffs or trade disputes. Negative sentiment can lead to selloffs in equities, especially in sectors that are heavily trade-dependent, such as technology, industrials, and consumer goods. Indeed, we saw a massive drop in share prices immediately after the tariff announcements. Yet, strangely, markets have now recovered from this drop. Does this mean that investors see the tariffs as a one-off shock to the system that both suppliers and consumers will adapt to? Time will tell.
Tariffs can put downward pressure on currencies, affecting returns for international investors. Countries such as China whose exports will suffer significantly will likely see downward pressure on their currency value. The Chinese yuan is currently at its lowest point in two years. However, the US dollar is also down 10% this year due to political and economic uncertainty. For New Zealand investors holding US dollar denominated investments, this means a drop in investment value when converted to NZ dollars.
On a broader scale, prolonged trade disputes can dampen global economic growth. Slower growth can reduce demand for commodities, hurt multinational companies, and increase uncertainty, all of which are negatives for investors. Central banks may respond with policy adjustments—such as cutting interest rates—which in turn affects investors.
Tariffs have complex and often far-reaching impacts on investors. They can influence everything from individual company performance to global economic growth, leading to volatility in markets and loss of investment return. At times like this, it pays to get good advice on how to reduce risk in an investment portfolio by looking at sectors and regions which may be less exposed to change. Investment strategies will also need to be flexible to adapt to any change in policies.
