Are Trump’s tariffs and Ukraine stance shifting the economic outlook?
Damien Hennessy
The Trump administration’s recent policy decisions on tariffs and its approach to the Ukraine-Russia conflict are generating uncertainty in financial markets and raising questions about the trajectory of the global economy, Damien Hennessy, head of asset allocation at Zenith says.
“The anticipation and implementation of new tariffs are already influencing economic data. Notably, imports surged ahead of the tariff rollouts, which has led to significant downward revisions of Q1 GDP forecasts. Federal job losses have begun to take hold, consumer and business confidence is wavering, and new orders may also be facing headwinds,” he says.
“The potential spillover effects on financial markets could tighten conditions and impact near-term growth.”
Although it is too early to tell, Mr Hennessy says the key issue remains whether the recent uptick in capital expenditure will be sustained, or whether businesses scale back investments due to elevated uncertainty.
Most critical to the outlook, however, is the soft-landing scenario assumption that tariffs were predominantly seen as a negotiating tool for the US to achieve a number of policy goals. Recent comments from the US administration that there would be some collateral damage and perceptions that President Trump was not “measuring” himself on stock market performance has challenged this assumption.
“On the positive side, there are counterbalancing factors. Interest rates look set to decline, the US dollar has softened slightly, and productivity is showing signs of improvement,” he said.
“Meanwhile, China’s economy appears to be stabilising and Europe is demonstrating signs of recovery, assisted by more stimulatory fiscal policy with a focus on defence and infrastructure spending. However, the worst-case scenario would see these recoveries in China and Europe undermined by widespread and prolonged tariff escalations. The domestic economy also appears to be emerging from its trough.”
Entering 2025, the base case was for a soft-landing and continued US equity market leadership. Until a fortnight ago, the key risk to the US rally continuing in 2025 was a potential halt in interest rate cuts from the US Federal Reserve, reflecting strong growth in the US economy and persistent inflation.
“US stock gains in 2024 were largely driven by earnings expansion, which was helped by lower interest rates. The Magnificent 7 contributed more than half of the return of the S&P 500,” Mr Hennessy says.
As markets navigate these complex dynamics, investors must remain agile in reassessing risks and opportunities.
Mr Hennessy says that while uncertainty looms, strategic positioning in diversified assets and active management could play a pivotal role in achieving sustainable long-term returns.
“Our recent review of our Strategic Asset Allocation highlighted that active management strategies are gaining renewed relevance, offering alpha opportunities across various asset classes, particularly in small-cap equities, long-short strategies, hedge fund strategies and mid-cap stocks.
“Portfolio diversification also remains crucial, with bonds not to be totally relied upon in all scenarios, instead seeking diversification through opportunities in short-duration credit, loans, gold, commodities and infrastructure.”
