Endgame.

Tariffs have caught the headlines almost every week since ‘Liberation Day’, and with the apparent hard deadline of August 1st rapidly approaching, it appears that the topic may have played out, and markets may have a more predictable end of what has thus far, been a volatile year.

Deals, Deals, Deals

Should the talks ongoing in Stockholm with China prove fruitful, the August 1st deadline will turn into, for the most part, a non-event as all the significant agreements with the US’s major trading partners will have made agreements over tariffs and concessions.

Whether it was the threat of a hard deadline, where countries feared that President Trump would for once not live up to his TACO acronym (Trump always chickens out), which they saw with the July 9th deadline, that drove trading partners to the table, or an embattled President desperate for some positive headlines to divert attention away from the Epstein files, is up for debate. Nonetheless, taking time out from his golfing holiday in Scotland to sign a ‘major’ deal with Ursula von der Leyen was a significant event as Europe had thus far been willing to walk away from agreements and impose its own raft of tariffs on the US. Despite the leaders of France and Germany decreeing that the deal was damaging to the EU, it is probably better than an all-out trade war and a situation where it would be more difficult to make decisions to invest in Europe.

As China has its own bespoke deadline of August 12th, which no doubt the spin doctors in Washington will be preparing to declare as their own ‘Glorious 12th’, there may yet be some uncertainty over tariffs. The Chinese press is reporting that they may yet be granted a further 90-day extension, but over the past few weeks, the US administration appears to have slightly softened its stance towards China so this extension may prove unnecessary.

With the number of deals signed over the past few weeks, the number of letters needing to be sent from the White House once the President finishes playing golf, has significantly reduced. We may yet see more deals signed this week, which will be taken well by markets, but the administration may not be able to work through all those who want deals in time.

Markets and companies, which are currently in the midst of reporting the results of their first quarter under the President’s new tariff regime, have proved to be remarkably accepting about the 10% baseline being the new normal, and most have been able to make efficiency savings or have raised prices to offset the effect on their cost bases. With most of the major trade deals now completed, the predicted weighted global tariff rate now stands at 15.7% (or 13.5% according to Bloomberg Economics), which is a considerable improvement on the previous estimate of 22% prior to the deal, and 31% in late May.

Not so fast.

There may yet be more deals thrashed out, but to throw a large curveball into ongoing negotiations, this coming Thursday, the day before the deadline, the US Court on International Trade (and the world) will find out from the US Appeals Court as to whether their ruling that the use of an emergency declaration to impose tariffs was unlawful, will be upheld.

What effect this would have on deals already struck, should it be upheld, is unclear, however we would expect that the administration would seek to impose tariffs by alternative measures, so we do not expect this to dramatically change the current state of play, but it has the potential to elongate the whole tariff implementation process.

What now for companies and markets?

The uncertainty caused by all the chatter around tariffs has made it difficult for companies to know with any certainty what their cost bases will be and thus many have held off planning decisions. We also saw significant pre-stocking and selling in the run up to July as companies took advantage of the temporary pause at 10% causing a large trade imbalance and therefore inventory levels are likely to be temporarily higher than companies would like.

These inventories will work their way through the system, but it is likely to distort trading patterns and Free Cash Flows for a few months yet. More positively, companies can now invest with a degree of certainty and have greater visibility over the path ahead which will be a constructive development.

One of the other consequences of all the worries about tariffs is that many companies have committed to build production facilities and invest in US manufacturing in a move to reduce their tariff exposures, and have more balance to their regions of production and sales.

This will prove to be beneficial to the US economy, and for the overseas companies committing to this spend, a large increase in capital expenditure, but probably with a better return on capital than if they had continued to produce offshore and face the import tariffs.

Once all the dust settles, the market will be able to focus on company fundamentals once again, rather than flipping between baskets of tariff winners and losers or the most shorted, highest beta stocks. We are positive on the outlook for the rest of the year as the dust settles.

The VT Tyndall Global Select Fund continues to invest in quality companies, which should be beneficiaries of a more normalised trading environment with greater visibility, especially given the strength of their balance sheets, that has enabled them to continue investing in future growth opportunities through the mist that is now parting.