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Navigating tariff volatility: What it means for investors

How should investors approach tariff risk?

With tariffs becoming an increasingly unpredictable US policy tool, investors can expect significant market volatility in response to newsflow. Behind all the noise, the key considerations for investors are twofold: the likelihood of a country being subjected to tariffs; and the potential impact tariffs would have on the country’s economy. Our EM Fixed Income team has developed a Tariff Vulnerability Framework to assess both aspects.

Certain economies, particularly in Europe and Asia, are both highly exposed and vulnerable to tariffs, given to their reliance on global trade. Others – such as India, Indonesia, and South Africa – may be at significant risk of having tariffs imposed, but are less vulnerable in terms of the potential economic damage of tariffs. The market response to any tariff-related announcements is likely to over/underestimate the longer-term economic risks; the Tariff Vulnerability Framework helps to distinguish between genuine risks to economies and short-term market noise. In this way, it provides a structure and a starting point for further analysis to assist in the investment decision-making process.

How will tariffs affect the US economy?

In the short term, it is broadly accepted by economists that tariffs push up import costs, leading to higher inflation. Over the medium term, businesses face rising costs, supply chains become disrupted, and consumer spending may decline, ultimately dragging on GDP growth. We see a significant risk of stagflation that is currently being discounted under the banner of ‘US exceptionalism’. Ultimately, the economic impact of tariffs on the US economy depends on how severe tariffs are and how this compares with eventual fiscal stimulus/deregulation policies.

Financial markets will react accordingly – with all risk assets facing headwinds related to the uncertain growth outlook – and in today’s world, US markets are unlikely to be immune to this. As for Fed policy, on balance, we do not think tariffs pose an immediate threat to the current easing cycle and given tariffs will be seen as a one-time adjustment to prices akin to a VAT increase we expect over time that the growth impact from tariffs will outweigh inflationary concerns within the Fed framework.

How are other economies and financial markets likely to respond?

The effects of tariffs extend beyond just trade. Debt and equity markets often react negatively, with higher borrowing costs and increased volatility. Currencies of affected nations, particularly those heavily reliant on exports to the US, can weaken significantly. The hardest-hit sectors are typically manufacturing, technology, and raw materials, given their exposure to global supply chains.

If tariffs escalate into a widespread trade war, the consequences could be severe for global economic growth. European and Asian economies, which are more dependent on exports, would likely face the sharpest downturns. Equity markets could see a sustained period of volatility, while credit spreads may widen as investor sentiment deteriorates.

A prolonged trade war would also test the belief that the US economy can remain resilient in the face of global disruptions. Given the interconnected nature of modern supply chains, the negative impact of tariffs would eventually feed back into US growth projections.

How has the team adjusted its portfolios?

Rather than reacting to individual tariff announcements, we integrate tariff considerations into our broader investment process, alongside a multitude of other qualitative and quantitative considerations. Over the short term, this has seen us do the following:

• Reduce exposure to Asian currencies, which are relatively vulnerable to trade disruptions.
• Increase holdings in European government bonds, which may offer more stability in a tariff-heavy environment.
• Pursue opportunities in resilient emerging markets such as South Africa and Indonesia, where strong domestic economies can buffer against external volatility.
• Continue to monitor carefully risk premia, ensuring that investments in higher-risk markets are adequately compensated.

How different is the situation today?

The use of tariffs as an economic policy tool is not new. The most relevant precedent is Trump’s first term, where tariffs were initially inflationary but ultimately slowed economic growth. Historically, markets tend to adjust over time, but volatility remains high. The Federal Reserve’s response is crucial — if inflation rises sharply, it may be forced to raise interest rates, adding further pressure on growth.

However, Trump’s new economic team appears more structured and coordinated, with a clearer execution plan for tariffs. Markets may be underestimating the potential severity of upcoming policies, assuming that tariffs will remain a bargaining tool rather than a long-term economic strategy. If policies become more aggressive, investors could be caught off guard.

How should investors navigate this uncertainty?

Over the short to medium term, key signals to monitor include:

• Upcoming trade negotiations — March 4 and April 1 are important dates for potential policy shifts.
• Public opinion and political pressure — if tariffs become unpopular among key US voter groups, they may be adjusted.
• Market expectations — if investors continue to price in only moderate tariff risks, any escalation could lead to sharp market corrections.

That said, investors should focus on long-term trends rather than short-term headlines. While tariffs introduce uncertainty, they also create opportunities for those who can navigate the risks effectively. A disciplined investment approach, focused on resilient economies and risk-adjusted returns, will be essential in the months ahead.