Q1 2025 Review & Q2 2025 Outlook

Market & Macro Review for Q1 2025

With a volatile Q1 just ended, please see below – in the usual layout – the periodic table of returns by various asset classes / styles:

Q1 has been an extension of Q4 ’24. Tariffs have dominated headlines the moment President Trump assumed office (20th January). The latter has resulted in investor-led uncertainty (on the back of inflation, interest rate and growth uncertainty) translating into market mayhem. So, when you dig a little deeper into underlying financial assets, what worked and what didn’t is very clear:

As one would expect during times of uncertainty, the winners are precious and certain industrial metals such as copper. The imminent threat of tariffs on copper (see below) has meant a surge in imports to the US. Bonds, especially government bonds have performed well as one might expect from safe-haven assets. The losers are clear – equities, especially Tech!

As of 5th April (following President Trump’s Rose Garden “Liberation Day” address when he announced his much-awaited retaliatory tariffs plan), the tariff picture is as follows:

There are two main parts to the tariff story as shown by the different columns in the above table – the specific tariffs (country specific, metal specific, the USMCA trade agreement specific and Auto & Auto-parts specific) and the retaliatory tariffs. The latter is to “level out” the tariff playing field - as spelled out by President Trump in his Rose Garden address. Key points emerging from his address:

• There is a baseline 10% tariff on all imports into the US regardless of which country. This is effective 5th April. Additionally, as of April 9th, higher rates apply to countries identified as “worst offenders”. There are 60 of them and include the EU (+20%), China (+54%) and Japan (+24%). These new tariffs seem to have been decided on the basis the “additional tariff is equal to the ratio of the US bilateral trade deficit with that country divided by the US imports from that country”.
• The reciprocal tariff policy will impose a weighted average tariff of 18.3% on all imports. However, as approximately one-third of all imports are exempt, the effective tariff rate is reduced to 12.6%. Taking everything together, the tariff increase is 18.8%.
• For Canada and Mexico, while tariffs are set at 25%, there are no new tariffs and where its products are USMCA-compliant, they will be subject to just a 10% tariff. The same Executive Order states if the exemption ends in the future, the USMCA-compliant goods and energy components would become duty-free. The non-compliant products would have tariffs of 12%. This might signal an upper limit for Canada and an improvement on where things stand now.
• Asian countries have been hard hit. China was already on a specific tariff of 20%. With the retaliatory tariffs, this more than doubles in total. Others too have been badly affected (e.g. Vietnam, Taiwan, Thailand & Indonesia). India is now seeking to secure a trade deal quickly to minimise the blow from the 26% tariffs announced on them. Trump’s argument is that India charges tariffs of 52% on the US creating an unfair situation. This has been the central theme for most other nations.
• Other tariffs still imminent / proposed include importing Venezuelan oil - effective 2nd April, an EO was issued to grant the Secretary of State the discretion to impose a 25% tariff on imports from any country directly or indirectly purchasing Venezuelan oil. These tariffs will expire one year after the last date on which the country imported said oil. Also under consideration are Digital Services Taxes aimed at certain countries (e.g. France, Austria, Italy, Spain, Turkey & the UK) as they do the same on the US and Copper where a section 232 investigation has been initiated and might lead to tariffs of 25% on copper imports to the US.

The backlash to the above announcements has been swift and sharp. The EU has said “the consequences will be dire for millions of people around the globe” and is finalising its response; China has promised “resolute countermeasures”; Canada’s new PM said it is “essential to act with purpose and with force” while Australia said “this is not the act of a friend”. Q2 will be characterised by how countries around the world react!
‍
There are three possible outcomes:

1. Other countries remove their tariffs on US goods and Trump reverses these above-announced tariffs.
2. Negotiations take place resulting in concessions which in turn means Trump reverses the announced tariffs.
3. This seems the most likely outcome and one where everyone will claim “victory” but, actually, there will only be one victor – the US. We get into a bitter, never-ending trade war – which will be nasty but much more painful on the Rest of the World than the US. Who blinks first? It won’t be the US!

What does it mean for the US?

The US wants to address trade imbalances while also encouraging domestic manufacturing. Look at the car market as an example. Over 90% of Canada’s passenger cars and truck exports head to the US. Last year alone, Canada shipped some $35bn of cars to the US. Nearly half (48.4% to be precise) of Japan’s exports to the US will be impacted. The bulk of this (34.1% out of the 48.4%) is comprised of autos and auto parts. A 25% tariff will be significant. How this affects Japan from a price-competitiveness perspective depends on how many countries are also hit with the tariff. If it ends up just being Japan, the impact will be high and the overall impact on Japan’s GDP around -0.4%. Japan accounts for roughly 10% of the US car market. A 25% tariff imposed on this will increase the price from between $3,000 per car to over $10,000 per car. The same maths applies to other car imports. It remains to be seen whether it has a material impact on the likes of Japan’s CAPEX – probably not given the hi-tech nature of the economy and its need to invest in industry for greater productivity due to its ageing demographics.

It’s the larger tariffs that are most likely to hit GDP across nations simply because they naturally have a larger impact on consumer prices (i.e. inflation). Canada and Japan are good examples – with Europe following closely – because of their auto and auto parts sectors. Unless trade negotiations (outcome no. 2 above) can bring these tariffs down, there will be a second wave of volatility – and that’s the one which could trigger genuine recession concerns as consumers everywhere tighten their belts more severely – for longer. For the US, this could result in a GDP hit of close to -1% taking its 2025 GDP forecast to well below 2%. The hit will be even higher if tariffs end up settling at around the 25% mark. As it currently stands, recession probabilities have not risen hugely in light of recent economic data prints. It’s the forward-looking data that is of concern and its resulting impact on earnings! This is the strongest case for all countries (including the US) to reach an agreement on a lower, tolerable level of tariffs.

So how long can we expect this to continue?

As referenced above in scenario 3, it’s a case of who blinks first – and I don’t think it will be the US. The US has higher consumerled GDP growth vs the RoW. This gives it more margin to “play”with. Furthermore, for other countries to take corrective action (e.g. ramping up investment in domestic manufacturing and infrastructure) will take time – time they don’t have. There is no time for poker here "I will see you and raise you even more”.

For Trump, tariffs are not just a bargaining weapon to correct (in his eyes) a gross injustice perpetrated by others on the US. They are also a way of raising revenue – revenue that the US badly needs given its mammoth debt mountain and / or reduce taxes. How much can they raise? Look at the chart below:

In Biden’s final year, a mere $81bn was collected in tariff revenue. Under Trump, even the lowest forecasting scenario generates $352bn. The best case (for the US, not so for the RoW) is $1.077tn. Interestingly, the difference between the announced rates plus or minus the reciprocal tariffs is not huge – they both generate around $1tn give or take. This is another reason I think Scenario 2 (resolution by negotiations/deals) will prevail.

Finally, where does this leave inflation, bond yields and growth?

From the consumer viewpoint, tariffs hit the lowest incomes the most. Hence why Trump wants to extend earlier tax cuts (from his first term in office) as soon as possible. At the same time he needs to keep inflation under control – otherwise this too will affect lower incomes disproportionately more than higher incomes.In theoretical terms, the pass-through effect of inflation tends to be worse than the actual. Why? Because (1) importers and exporters tend to absorb some of this increase but there is only so far they can go, (2) his stated aim to bring down oil prices is a big move in this direction (so far, they have been coming down of their own accord) and (3) the US$. If the latter rises (e.g. improved fiscal picture, improved trade balance, etc.), every +1% move in the US$ negates the effect of tariffs by the same amount. At the moment, theoretical forecasts of inflation are naturally pessimistic. All this is another reason why Scenario 2 (resolution by negotiation/deals) is the path of least resistance globally – not just the RoW. There is another factor at play which hasn’t been spoken about much and which trump spoke of in his Rose Garden address: investment in the US. The list of companies that have pledged investment in the US is impressive:‍

Apple: $500bn domestically over the next four years, produce AI servers and hire 20,000 new workers.
Stargate Project: a new joint venture between OpenAI, SoftBank and Oracle to develop AI infrastructure across the US. $500bn over the next four years.
Meta: $65bn on AI related projects. This includes a data centre (said to be so large it would cover a significant part of Manhattan).
Damac: $20bn (min.) into data business centres.

The list comprises many other names and one can’t overlook the impact of this on job creation, higher CAPEX spending and upside pressure on the US$. Between domestic investment, lower energy prices and lower taxes, this is how he wants to keep growth strong.