“Tariff” looks set to become one of those words that dominates the investing landscape during 2025.
Investors trying to decide where to invest for 2025 will be concerned about the potential impact of incoming president Trump’s policy agenda. Having previously described tariff as “the most beautiful word in the dictionary”, Trump has apparently few qualms about disrupting global trade by slapping them on just about every US import in sight.
The impacts could be severe: resurgent inflation, higher interest rates, and potentially a global trade war should other nations retaliate.
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“Some economists fear inflation will result from the higher prices,” Russ Mould, investment director at AJ Bell, tells MoneyWeek, “or that global trade flows will suffer as higher prices hurt demand, to the detriment of wider global growth.”
That, at least, was the conventional wisdom in the months immediately following his election win. However, the Washington Post reported on 6 January that Trump – whose bark is often worse than his bite – was in fact discussing a “pared-back” tariff regime that would apply only to critical imports with aides.
Trump moved quickly to rubbish the rumours, posting on his X account that tax cuts would be “ALL MADE UP WITH TARIFFS… FROM COUNTRIES THAT HAVE TAKEN ADVANTAGE OF THE U.S. FOR YEARS”.
Members of Congress are getting to work on one powerful Bill that will bring our Country back, and make it greater than ever before. We must Secure our Border, Unleash American Energy, and Renew the Trump Tax Cuts, which were the largest in History, but we will make it even…January 6, 2025
By 8 January, CNN was reporting that Trump will go as far as to declare a national economic emergency in order to enact his tariff agenda. However, Yahoo Finance reports that doing so could expose the administration to lawsuits.
“No-one, but no-one, knows what Trump is going to do,” says Mould. Even if Trump does attempt to put up steep tariffs, “we still don’t know whether Congress will help or hinder, not least because tariffs on Mexico and Canada may well contravene the USMCA agreement that Trump’s own first administration negotiated”.
So, is the Post’s report to be believed, or will Trump be true to his word and try to enact swingeing tariffs? If he does so successfully, how can investors protect their portfolios against any resultant trade war?
The impact of Trump’s tariff threats
While hard to predict with confidence, the likely impact of widespread tariffs on stocks would be negative: most large companies are dependent on global trade flows functioning smoothly. Equity investors, particularly in Europe, appear to be spooked by the prospect of tariffs.
‘’Stocks are riding the rumour rollercoaster when it comes to Trump’s tariff plans,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown, in response to the DAX falling into the red on 8 January.
“Hopes for a more contained policy which emerged earlier in the week have been dashed… European indices have fallen back, as investors mull the potential ramifications for trade and borrowing costs,” Streeter added.
However, UK investors might be a little more sheltered from the impacts of tariffs.
“According to US data, the UK is a top 10 trade partner for imports and exports, and the US runs a modest surplus across goods and services,” says Mould. “In this respect, the UK is not likely to be in the firing line in the same way as the nations that run a big trade surplus with America (which therefore runs a deficit in its dealings with them) – China, Vietnam, Mexico, Germany and Canada (and to a lesser degree Taiwan).”
A universal 10% or 20% tariff would, however, have a substantial impact on any UK stocks that derive significant income from US exports.
Why investors should keep it simple
UK-based investors might be best off ignoring the noise around Trump tariffs, for the time being at least.
For one thing, the uncertainty over what kind of tariff regime Trump will want, or be able, to implement means that positioning a portfolio to account for it is premature at best.
“Betting [on Trump implementing steep tariffs] is a dangerous proposition,” says Mould, adding that “betting” is a more appropriate word than “investing” because of the degree of uncertainty involved.
Factor in the notion that the UK could be relatively sheltered from tariff impacts, investors’ best bet might be the most counterintuitive: ignore them.
“The range of variables is just too wide right now, so investors’ best option is still to focus on fundamentals, especially if they are looking at individual companies,” says Mould.
In a recent Forbes article James Berman, president and founder of JBGlobal.com, similarly makes the point that attempting to take action in preparation for an unknown change is a common investing mistake that can lead to disastrous consequences.
Tariff trades
If investors do want to try to add stocks that could be shielded from any potential tariff fallout, Mould says that “one option would be to look at firms whose operations and customers are based solely in the UK, such as utilities”. While tariffs could impact some of their costs, depending on the location of their key plants and equipment supply chains, they are likely to have a lower impact than on companies that have a more international outlook.
Victoria Hasler, head of fund research, Hargreaves Lansdown, highlights two funds that could offer investors some protection against tariff impacts.
Troy Trojan is a defensive play with four pillars – large established companies, bonds (including US index-linked bonds which offer some inflation protection), gold and cash – making it a reasonable bet given the degree of uncertainty over the global trade picture this year.
“Rather than trying to shoot the lights out, the fund aims to grow investors' money steadily over the long run, while limiting losses when markets fall,” says Hasler.
The Artemis US Smaller Companies Fund invests in US companies with market caps below $10 billion.
“While tariffs are seldom a good thing for growth overall, they could potentially be good for US smaller companies because trade tariffs favour domestic businesses over international conglomerates, and smaller companies are usually more domestically focused,” says Hasler. “Combine this with a potentially more supportive monetary policy stance, it means this year could be a good time to invest in domestic-facing US corporates.”
On that note, while Berman’s first three “rules to survive tariffs” are conservative investing adages like ‘Don’t just do something, stand there’ and ‘Never speculate, only invest’, rule number four is simply ‘Small-cap stocks’.
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