Short comments

US tariffs again in the spotlight

For many years now, economic trends in the most important regions for global capital markets have followed a pattern of robust economic growth in the US, while Europe and China have been growing at the lower end of expectations, with China's growth structurally slowing. In Europe, the growth potential would be higher if consumers were not primarily saving the current clearly positive real, i.e. inflation-adjusted, income growth. China will remain challenged for years to come, primarily due to past excesses in the property sector, although the economy benefited from special factors – government stimulus measures and advance purchases by US importers in anticipation of rising tariffs – in the final quarter of 2024.

The US President followed up on his rhetoric. Starting on 4 February, the US will impose tariffs of 25% on imports from Canada (with a reduced rate of 10% on energy products) and Mexico. Additional tariffs of 10% will apply to imports from China. While the US trade deficit with China has lost significance following the 2018 tariff rounds, the deficit with Mexico and Canada has increased significantly in recent years. A new trade agreement USMCA (United States-Mexico-Canada Agreement, the successor to NAFTA) with significantly lower trade deficits is likely the goal of the US government. The defence strategies of Canada and Mexico are based on selective tariff increases on imports from the US or exports to the US in order to target the Republican voter base, particularly in the swing states. Both countries were successful in this endeavour in 2018, when then-President Trump backed down. It is unclear how long the increased US tariffs will remain in force. It is also unclear which US lobby groups will succeed in obtaining exemptions. Higher tariffs make goods more expensive in the US. However, the effect largely depends on whether importers or consumers absorb the tariffs and what options exist for switching to other suppliers. We assume that the currently very robust US economy can absorb certain shocks and that the US government aims at avoiding a noticeably weaker US economy.

Tariff increases on US imports from Europe are also on the cards, although there is currently no discernible timetable. The weakness of European currencies against the US dollar is a buffer that can absorb some, say single-digit, tariff increases. The risk scenario based on US trade policy remains that the economic confidence of companies and consumers, particularly in Europe, will suffer further damage due to increased uncertainty. (February 2025)

Correction of AI infrastructure companies

In recent months it has become increasingly apparent that there are ways to train LLMs (large language models), which form the backbone of artificial intelligence (AI) applications, with far fewer resources – especially when it comes to the use of high-end chips – than the current standard. The focus is currently on DeepSeek(DS), a two-year-old start-up from China. Their latest app, which has become available in January, became the most downloaded app in Apples App Store, reminiscent of the time when ChatGPTwas made widely available over two years ago.

While it is unclear what the exact training costs of the DS apps are, it appears that they are many times lower than has previously been the case. Cheaper AI solutions have many advantages. The number of AI applications and demand increase with lower prices, and cheaper products are positive for users, i.e. consumers and companies. DS is not profit-orientated (similar to the initial position of OpenAI, the developer of ChatGPT). The code is open source and can be used freely.

If the prices for AI solutions become significantly cheaper, it is not clear whether the overall pie will grow, though it likely will, similar to the growth in computer sales, despite prices falling in recent decades. At the same time, it is likely that leading technology companies will rethink spending plans for data centres, which means at least a dip in demand (not necessarily immediately but later in the year), especially for AI chip manufacturers (first and foremost Nvidia, but also Broadcom as well as the leading Dutch high-end chip machine manufacturer ASML). Cloud providers (Microsoft, Alphabet and Amazon) are also affected, but probably to a lesser extent, and industrial companies benefiting from AI (e.g. Schneider Electric, Siemens and Amphenol), and even electricity suppliers. Conversely, technology budgets for digitalisation projects outside of AI could increase again. Market action supports this view, with a number of technology stocks of non-AI providers gaining during the AI infrastructure sell-off.

As the segment of AI infrastructure providers is overall not that large, we do not necessarily consider their correction to be negative for the market as a whole. Europe's relative position is improving (AI infrastructure providers have a larger weighting in US indices), although Europe's outperformance is not a foregone conclusion, with US tariffs still looming. (February 2025)

US tariffs to rise in 2025 and 2026, but selectively

The Trump administration's tariff policy likely will focus on imports from low-wage countries, particularly China, but also on shielding the US economy from foreign competition. In addition, tariffs will play a possibly significant role as a negotiating tool, as showcased in November when Donald Trump threatened Mexico and Canada with 25% tariffs.

Despite rhetoric to the contrary during the election campaign, the new US government will try to avoid hitting the US economy with tariff measures through higher prices and thus reduced consumer purchasing power. This line of argument favours a differentiated and gradual increase in tariffs. President Trump is also likely to keep an eye on the US stock market as an indicator of how economic policy is perceived. In our base scenario, we expect a significant increase in US tariffs on goods imported from China. As in 2018, goods that cannot simply be procured elsewhere (such as iPhones, which are still mainly produced in China) are likely to be subject to a lower or no additional tariffs.

Nevertheless, there is a broad scenario range with regard to US tariff policy. In a risk scenario in which all bilateral trade deficits are tackled by means of tariffs, a large number of countries would be affected, also in Europe. The full extent of trade interventions is not likely to become evident until 2026.

The effects of tariffs

Tariff adjustments cause one-off effects. Prices rise once, unlike inflation, which describes a sustained rise in the price level. A price increase also causes a one-off drop in purchasing power. It is worth noting that currency adjustments may compensate higher tariffs. If the euro, as an example, depreciates by 10% against the US dollar, a concomitant 10% increase in US tariffs will not change the price structure and thus the flow of goods. China is likely to devalue its currency in order to compensate for at least part of the competitiveness lost through higher US tariffs. However, as was the case in 2018 and 2019, higher tariffs may have a negative impact on confidence in the corporate sector and therefore the global economy. In addition to one-off effects, the US tariff policy will also trigger structural adjustments in the medium term, particularly in China's export industry. In the US, tariffs and a reduced international division of labour and competition will eventually lead to less prosperity than in a free-trade regime. (January 2025)

USA: Trade conflict with China since 2018

The United States has started to increase import tariffs on Chinese products in several steps since the beginning of 2018 under Trump, with the Biden administration continuing on this path. While the overall US trade deficit in relation to economic output has changed little in recent years, the deficit with China has fallen, although the deficit with other countries, especially Vietnam and Mexico, has risen in the wake of the expected circumvention strategies.

The decline in the global industrial purchasing managers index in 2018 and 2019 was likely related to the uncertainties associated with the tariff increases. In contrast, the trade conflict with China had only a minor impact on the stock market (MSCI World) following the announcement of higher tariffs, but the weaker industrial economy was a factor behind the setback at the end of 2018.

The Trump administration's tariff policy likely will focus on imports from low-wage countries, particularly China, but also on shielding the US economy from foreign competition. In addition, tariffs will play a possibly significant role as a negotiating tool, as already showcased in November.

Donald Trump's statements during the election campaign and the cabinet appointments made so far (which need to be confirmed by the Senate) suggest that massive tariff increases on imports from China will be announced soon after the administration takes office. Expectations are for average tariffs of 60%, with Trump mentioning a surcharge in November of 10% (the current average China tariff is around 20%). A differentiated approach is likely, with goods that cannot simply be procured elsewhere likely to be subject to lower tariffs, as was the case in 2018 (e.g. iPhones). Imports from Asian countries that have benefited from the relocation of production from China also face significantly higher tariffs. In addition to China, the US has high foreign trade deficits with many Asian countries, particularly Vietnam, but also Japan, Taiwan, South Korea, India and Thailand. While Donald Trump negotiated the USMCA (the successor treaty to NAFTA) with Mexico and Canada in 2020, he threatened these countries with a significant tariff increase in November.

It is unclear to what extent Europe's exports will be subject to higher US tariffs. During Trump's first term in office, only selected products, including steel, were affected. However, the US likely will threaten Europe with tariffs in areas where the US is hoping for concessions from Europe. Hardliners in the US administration are striving for bilaterally balanced trade flows. Germany and Italy have large export surpluses with the US, while the UK has a trade deficit.

A rapid increase in US import tariffs on goods from China appears to be on the cards (our baseline). An otherwise differentiated and gradual approach is favoured by the fact that the US government does not want tariff measures to have a visible negative impact on the US economy (reduced consumer purchasing power in the event of large-scale tariff increases) or the US stock market. Nevertheless, there is currently a wide range of possible scenarios with regard to US tariff policy. There remains a risk of more extensive tariff increases than in our baseline, especially if initial measures fail to have the desired effect. (December 2024)

Equities: Factors, styles and segments

Growth stocks in the MSCI World have outperformed value stocks this year, although this is true only in the US (due to the strong influence of the Magnificent Seven) and not Europe.

The strong showing of the Magnificent Seven also means that large-cap stocks in the US outperform smaller stocks and equally weighted indices. In contrast, the MSCI Europe shows a very similar performance to the MSCI Europe Mid Cap and the equally weighted MSCI Europe. (November 2024)