As Donald Trump begins his second term, the fund manager warned that with multiple “conflicting dynamics” on his agenda, the markets should brace for a “wide distribution of risks” surrounding potential outcomes.
“We expect a focus on immigration in the first 100 days (border security, deportations, reverse Biden’s humanitarian visas),” said Sarah Shaw and Tim Snelgrove, chief investment officer and investment director, respectively, at 4D Infrastructure.
“There should be tariff noise all of 2025, with China tariffs implemented in the second half of the year and UBT introduced in 2026.”
While Trump’s immigration and tariff plans can be enacted through executive orders, his regulatory rollback and tax proposals still require congressional cooperation, creating control mechanisms that help “rationalise outcomes”, according to the pair.
Shaw and Snelgrove predict Trump’s aggressive immigration agenda, including deportations of 15 to 20 million people and a repeal of Biden’s “humanitarian parole”, will reduce labor force growth. However, they note that the pace of deportations under Trump’s first term was slower than under Obama.
Turning to tariffs, the duo doesn’t expect the imposition of tariffs on China until later in the year, with a universal baseline tariff (UBT) set to kick in next year. Moreover, they forecast that there will be “several exclusions and amendments in place”.
In November, the president-elect announced his intention to impose additional 10 per cent tariffs on China and additional 25 per cent tariffs on Mexico and Canada, countries which have large trade surpluses with the US.
“The timing and size of tariffs are still uncertain, as is the degree of bilateral negotiations and sector exclusions,” Shaw and Snelgrove said.
However, they argued, it is important to observe how US trading counterparts react to proposed tariffs and potential negotiations.
“There is less clear footing on the implementation of the UBT and there is the widespread expectation based on input from Trump advisers that Trump will use the threat of the 10 per cent tariff to negotiate concessions with major trading partners, rather than imposing them indiscriminately,” they said.
4D Infrastructure estimates that a 10 per cent UBT could significantly impact Europe’s gross domestic product growth, with Germany expected to face the largest hit. Additional tariffs on the European automotive sector could further harm the region’s largest economy.
Mexico is expected to be the most affected among emerging markets by proposed tariffs, due to its high integration with the US supply chain.
On the other hand, the pair said, long-term manufacturing orientated emerging markets could benefit from Western companies pulling production out of China.
Shaw and Snelgrove remarked that the first trade war had a reduced impact on aggregate export performance in China due to third-party countries that replaced US destinations.
“This time round, any weakness should be met with additional Chinese stimulus in line with its gradual approach of stimulus and meeting annual growth targets,” they said.
The 4D experts explained that tariffs, as a tax on imports, have the potential to slow economic activity as demand slows.
“Firms may pass on tariff-related expenses to the end consumer, resulting in a kick up in inflation; however, this may be short-lived if tariffs are reduced in the future,” the fund manager said.
