There are many headlines about the threat of a trade war under the new US administration. However, Julius Baer’s Yves Bonzon believes that Trump’s second term will be different, stressing that tariffs are ineffective under the current global regime.
US President-elect Donald Trump has been threatening trade tariffs left and right. He has pledged to slap a 25 percent tariff on Mexico and Canada. He also previously said he would impose a 60 percent tariff on all goods coming from China.
Will rhetoric result in reality? According to Yves Bonzon, Julius Baer’s global chief investment officer, this may not necessarily be the case after experience from Trump’s previous term.
«What the US did in the first Trump administration was counterproductive because it increased the cost to the US consumer. I don’t believe that US officials don’t understand this by now,» he said in an interview with finews.asia.
Trading With New Partners
In addition to the damage done to the US, exporters to the world’s largest economy have also managed to recalibrate trade to withstand political shocks. China is a notable example. According to public data, the ASEAN bloc was its largest trading partner in 2023, accounting for $523.7 billion of exports followed by the EU ($501.2 billion) and the US ($500.3 billion).
«Tariffs don't work in a multi-polar world. They can work in a unipolar or bipolar world because allied countries are aligned. But today, countries can independently circumvent tariffs by trading with new partners,» Bonzon explained.
US Rates Outlook
According to Bonzon, there are four key points to consider for the markets and economy moving forward. First, there are too many rate cuts discounted in the US.
«I think we need to be careful with forward guidance because you’re easing at a time when credit spreads, equities and gold are at record levels while the private sector has borrowing capacity on its balance sheet,» he said.
Bifurcation With Europe
Second, there is a complete bifurcation between the US and Europe as a result of the American election's outcome.
«If Europeans were the voters of the US election, Kamala Harris would have been elected with 80 percent of support,» Bonzon commented. «Trump 2.0’s agenda is clearly to improve the efficiency and size of the US government. In contrast, Europe wants more state intervention, more welfare, more regulation and more government transfers.»
Do Not Frontrun US Policies
Third, Bonzon advises against front-running US policies with the belief that this will be a different Trump administration compared to the last one.
He notes following the lessons learned about inflation from previous tariffs, Washington could «use tariffs more as a bargaining tool this time».
China: Balance Sheet Recession
Fourth, Bonzon highlights that China is in a balance sheet recession which occurs when high levels of private sector debt result in greater focus on saving and repayment rather than spending or investing, resulting in slower growth.
«As China is, understandably, now focused on value distribution rather than value creation, bailing out investors with a transfer of wealth from the public balance sheet is also highly sensitive,» Bonzon said.
«We believe that the Chinese economy will grow modestly and muddle through but we do not expect a swift turnaround in domestic demand. Unlike other economies, China is way too big to compensate with exports because the rest of the world cannot make up for the consumption deficit.»
Investment Outlook
In terms of its investment outlook, Julius Baer is overweight equities with a mix of stable defensive and quality growth segments. On China, the bank exited and eliminated a standalone allocation since June 21 but it notes that there is likely another leg for its equity rally. Within fixed income, it is underweight with neutral duration and an emphasis on credit quality.
The bank is also positive on Bitcoin with Bonzon calling it «gold but better».
«It’s digital gold for millennials and generations thereafter. It will remain their version of gold as a store of value. So I think the bull market continues for the foreseeable future. It's just one additional tool in the asset allocation toolbox,» he added.
