Market volatility seen as Trump rolls out tariffs, but equities still a good bet: Analysts

SINGAPORE – Uncertainty over US President Donald Trump’s tariff policies and their consequences mean that global stock markets could be headed for a period of greater volatility in the coming weeks, but stay invested and do not give up on equities just yet, analysts said.

Minutes after an additional 10 per cent tariff across all Chinese imports into the US came into effect on Feb 4,

China imposed its own tariffs

of 10 per cent on crude oil, farm equipment, large-displacement vehicles and pickup trucks from the US and 15 per cent on US coal and liquefied natural gas. These tariffs will take effect on Feb 10. 

China also said it was

starting an anti-monopoly investigation in Alphabet Inc’s Google,

 and added that it is imposing export controls on some metals that are critical for electronics, military equipment and solar panels.

The move risks a renewed trade war between the world’s top two economies, even as Mr Trump 

suspended his threat of 25 per cent tariffs on Mexico and Canada

at the last minute on Feb 3, agreeing to a 30-day pause in return for concessions on border and crime enforcement.

“China’s retaliation to US tariffs announced today is not a surprise given that it had warned of countermeasures,” said Mr Vasu Menon, managing director of investment strategy at OCBC Bank.

“The Chinese will likely pursue a multipronged approach when responding to Mr Trump’s tariffs. It remains to be seen what Mr Trump will say and do in the coming days and this will offer a clue as to whether the trade war between the US and China will escalate.”

Greater market volatility is expected as this tit for tat unfolds, so investors should be cautious in the short term until there is more clarity on Mr Trump’s tariffs and upcoming immigration policies, Mr Menon added.

While investors should manage their risks by diversifying their portfolios, Mr Menon reckons that there are good reasons to stay invested in stocks.

“Remember that Mr Trump has a penchant for surprises and if he reverses or dials down on his tariffs as he has done by giving Mexico and Canada a 30-day reprieve, this could be a significant tailwind for markets,” he said.

Mr Menon added that stock market losses bother Mr Trump, and this could rein him in if markets fall sharply as a result of his policies.

He noted that in December 2018, after a sharp sell-off in the stock market in the fourth quarter, Mr Trump and Chinese President Xi Jinping agreed to a trade war ceasefire.

Mr Trump is also likely to extend his 2017 tax cuts after they expire at the end of 2025.

Mr Menon said: “This could bode well for US equities as they did in 2017 when tax cuts benefited stocks on Wall Street and other global markets.

“Overall, Mr Trump’s pro-business, anti-regulation and pro-market stance should augur well for risk assets, especially US equities over the medium term as he aspires to further America’s exceptionalism.”

Against that backdrop, OCBC remains positive on US and Singapore equities, and sees opportunities to invest, especially after any sharp pullbacks.

OCBC also prefers stocks to bonds, given that steeper tariffs and sticky or higher inflation could make it harder for the Federal Reserve to reduce interest rates in 2025.

To diversify, Mr Menon said that shorter-term bonds with durations of seven years or less are better options. High interest rates lower the value of long-term bonds because the fixed payments of existing bonds become less attractive compared with newly issued bonds with higher rates. 

Maybank’s head of research in Singapore, Mr Thilan Wickramasinghe, said that higher rates and increased policy uncertainty could bring more volatility to the local stock market.

“We believe Singapore stocks – particularly defensive ones such as the banks, telecommunications companies, and utility providers – may attract safe-haven flows.”

Mr Wickramasinghe said that the Singapore Exchange’s flagship real estate investment trusts (Reits) may see a limited impact from the volatility unless the Fed raises interest rates or keeps them high at current levels.

High interest rates can make Reits less attractive because they raise borrowing costs, reduce property values, decrease real estate demand, and make bonds more attractive to income-focused investors.

UBS analysts are bullish on stocks too. While urging investors to diversify, the investment bank is expecting the US S&P500 stock market index to rise to 6600 by the end of the year, from around 5994 on Feb 4.

“If implemented, tariffs on Canada and Mexico are unlikely to be sustained, resilient US economic growth should support stocks, and we continue to believe that artificial intelligence presents a powerful structural tailwind for earnings and equity markets,” UBS wrote in a Feb 4 note.