Tariffs and trade wars: What do they mean for investors?

President Donald Trump's announcement of new tariffs, including a 10% baseline tariff on all imports and higher tariffs on specific nations like China, Japan, and the EU, is expected to induce significant market volatility and apply downward pressure on risk assets. The tariffs are seen as a bargaining tool rather than a long-term measure, suggesting potential for future negotiation and reduction. However, the immediate impact includes increased uncertainty and potential stagflation risks in the US, with the US dollar expected to weaken as growth slows.

The tariffs have prompted responses from affected regions, such as the European Union, which is preparing countermeasures to protect its economic interests. This situation underscores the importance of Europe becoming more self-sufficient, with recent spending plans in Germany and other parts of Europe potentially offsetting some negative impacts. In Canada, the focus is on fostering innovation and broadening trade alliances to mitigate the impact of US tariffs on key exports.

For investors, the current environment suggests a cautious approach, with a focus on defensive factors like low volatility and quality. There is potential for non-US assets to outperform in a weaker US dollar environment, particularly in emerging markets and China, assuming fiscal stimulus supports growth. Commodities are also impacted, with potential opportunities in gold and other hedges against stagflation.

US trade policy continues to pose a risk to global markets, with the potential for further depreciation of the US dollar and varying impacts across emerging markets. The dispersion of returns among these markets may be significant, depending on their ability to navigate trade policies and economic challenges. Amidst this uncertainty, municipal bonds are highlighted as a diversification strategy to mitigate risk and capture growth opportunities during periods of volatility.