Donald Trump has been President of the United States for just over a month now – and is putting words into action with amazing speed and great zeal. While his efforts focused initially on domestic policy measures, we’ve known for a couple of weeks that he’s serious about his threats to impose duties and punitive tariffs.
So far, the financial markets have reacted with admirable calm to the unilateral tariffs. But it’s important for everyone to understand that tariffs on foreign goods lead directly to higher prices and only increase domestic production after some time. It means the impending rise in consumer prices is particularly untimely. Even before President Trump took office, inflation rates in the USA had already risen. With core inflation standing at 3.3 percent, inflation is well above the US Federal Reserve’s target. That’s bad news for the financial markets: we can no longer expect stock and bond prices to be driven up this year by aggressive central bank interest rate cuts.
On top of that, the retaliatory measures taken by the countries targeted will have an impact on inflation in their own domestic markets. We have to hope that the response from China and Europe is smarter and more prudent than this provocation from the USA. And there are signs that this is actually happening. China reacted by launching an antitrust investigation against Google, rather than simply escalating the conflict with blanket tariffs. America’s tech giants won’t like this move at all. Similarly, during Trump’s first term in office, European countries responded with targeted punitive measures against individual companies and economic sectors rather than imposing blanket tariffs.
So far, Switzerland has only been affected by these developments indirectly, but that could change. The pharma industry, in particular, is threatened by the Trump administration’s potential targeting of the high selling prices for medicines manufactured in Switzerland. Switzerland is exposed with its agricultural exports and protection of the domestic market against cheap US imports. And there’s also the threat of Switzerland being cast as a currency manipulator, which isn’t actually that much of a stretch: we’ve got a large trade surplus with the USA, and the SNB has repeatedly tried to weaken the franc.
After an excellent start to the year, we are therefore reducing our overweight in the Swiss equity market. We see profit-taking as advisable because several large Swiss companies would be particularly hard hit by potential US tariffs – and the impact of Trump’s trade war could, in turn, be disproportionately high.
