Is the worst of Trump’s trade conflict over?

UBS analysts report a recent easing of global trade tensions, particularly with the EU and Japan, where agreements cap tariffs at 15% and reduce the threat of a widespread conflict. While existing tariffs are projected to trim U.S. GDP growth by approximately 1% and raise inflation by a similar margin, UBS asserts this impact is insufficient to trigger a recession or halt the equity rally, allowing it to continue. Despite lingering risks from punitive duties on countries like India, the firm recommends investors leverage market volatility to add equity exposure, particularly in transformational innovation themes such as AI.

Analysis

According to a UBS analysis, recent de-escalation in global trade tensions has materially reduced the risk of a broad, retaliatory tariff conflict. The U.S. has reached agreements with the European Union and Japan that cap tariffs at 15%, half the previously threatened rate, and has extended negotiations with China, supporting the view that a more constructive path is being followed. Despite this improvement, UBS projects that existing levies will still create a headwind, trimming U.S. GDP growth by approximately 1 percentage point while increasing inflation by a similar amount. However, the firm's central thesis is that this impact is not severe enough to cause a recession or halt the ongoing equity rally. Lingering risks persist, notably from punitive duties on India, Brazil, and Switzerland, as well as the potential for future sector-specific tariffs targeting pharmaceuticals and semiconductors. Overall, with an expected effective U.S. tariff rate settling near 15%, the situation is viewed as a manageable drag rather than a catalyst for a market downturn.

Key Decisions for Investors

• Investors could consider using any market volatility stemming from trade headlines as a strategic opportunity to increase equity exposure, given the outlook that the broader rally remains intact.
• It may be prudent to focus allocations on long-term secular growth areas, such as the 'transformational innovation themes' of AI, Power, and Longevity, which are highlighted as potentially more insulated from cyclical trade disputes.
• Monitor specific unresolved risks closely, particularly the final outcome of U.S.-China negotiations and the potential for sector-specific tariffs on pharmaceuticals or semiconductors, as these could create significant idiosyncratic risks for certain holdings.