Article produced 31 May 2025. 

Key takeaways: 

• Over recent months, trade tariffs have been introduced, and then dialled back, with the policy-driven environment prompting volatility for global equities. 

• Despite said tariffs, US inflation has continued to moderate, albeit the US economy contracted in the first quarter of 2025 - it remains to be seen if these trends change over the coming months. 

• Local investors should remain alert to the impact of tariffs on specific sectors and industries, either directly or indirectly, as well as broader shifts in market sentiment and currency movements, and consider reviewing portfolio exposure and the effectiveness of diversification. 

• It is important to do your own research before making decisions to invest. Past performance is not an indicator of future performance 

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Over recent months, investors have faced notable bouts of market volatility. A major catalyst for this volatility has been trade tariffs, which have raised significant uncertainty for investors. 

On the one hand, tariffs have prompted inflationary concerns while central banks are in the midst of cutting interest rates.  Furthermore, the sudden shift in trade policy has had a profound influence on global trade relations, and in the process, giving rise to concerns about the global economic outlook. 

What might be the impact of these developments for local investors? First, let’s retrace recent major events. 

A timeline of US tariff developments 

• February 2025. The first major developments associated with tariffs imposed by the new administration were witnessed on February 1. By executive order, the US imposed 25% tariffs on almost all goods from Canada and Mexico — subsequently paused for 30 days — alongside a 10% tariff on Chinese imports. 

• Just days later, on February 4, China followed with tariffs on US goods, including a 15% levy on coal and liquefied natural gas (LNG imports), a 10% tariff on crude oil and agricultural machinery, and export controls for certain metals. 

• March 2025. Through March, trade tension increased as the US government reaffirmed a plan to implement broad tariffs on all its trading partners. Chinese imports were slugged with an additional tariff of 10%, resulting in a cumulative tariff of 20%. In response, China imposed tariffs on US agricultural goods. 

• April 2025. On April 2, the US government surprised observers with the scale and breadth of tariffs on its trading partners. Individual tariffs were imposed on every nation, with a universal baseline tariff of 10%. In a tit-for-tat process, the US and China both raised tariffs to triple-figure rates.  

• Days later, on April 9, the government softened its tariffs against all countries bar China, with every tariff reduced to a universal rate of 10% for a 90-day period to facilitate trade negotiations. 

• May 2025. Over the following weeks, product exemptions were carved out, and trade negotiations took place. In May, the first trade agreements surfaced, with the United Kingdom and China announcing trade deals with the United States. The deals have not halted the tariffs, rather, they make provisions for certain exemptions and lower trade barriers, while China’s tariff rate was lowered substantially to 30%. 

How has the US economy performed amid tariff developments? 

While many economists expected tariffs to lead to inflationary pressures — even if in the form of a temporary surge — said concerns have yet to materialise, with economic data presenting a different view thus far. 

For example, in December 2024, the US annual inflation rate was 3.0%. This dropped on each of the next four readings, and in April, was running at an annual rate of 2.3%, the lowest since February 2021. Excluding volatile goods and services, US core inflation has declined from 3.2% in December 2024 to 2.8% in April 2025.  

Another measure of inflation comes courtesy of the US Personal Consumption Expenditures (PCE) Price Index. Again, both the headline and core readings have dropped sharply from the end of last year, at 2.3% and 2.6% respectively, compared with 2.6% and 2.9% in December 2024.  

Nevertheless, some caution should be considered in analysing the disinflation trend. 

Firstly, retailers, especially those that built up inventory before the rollout of tariffs, may have yet to pass on price hikes. Secondly, energy prices — which represent a large portion of inflation benchmarks — have been subdued amid concerns about demand out of China. Thirdly, it could take several more months for inflationary pressures to appear, particularly if the US reverts to higher tariff rates. 

However, one area displaying an immediate impact from tariff policy was economic growth. During the first quarter of the year, US GDP declined by 0.3%. This was directly attributable to what is expected to be a temporary surge in imports — up 41% — as US companies ramped up imports ahead of the tariffs. With consumer and government spending also softer, the economy faced several headwinds, albeit business investment increased 21.9% over the period, and the jobs market remains resilient. 

What does tariff policy mean for local investors? 

Initially, as investors digested April’s tariff announcement spanning every country, with particularly high tariffs for China, markets quickly entered correction territory, and even ‘bear market’ territory in the case of the Nasdaq — a bear market is defined by an index decline at least 20% off its recent high. This was due to concerns about the global economy, including the risks of increasing inflation, and a recession. 

As the US administration softened its stance on tariffs, investor sentiment quickly improved and global indices returned to levels last seen around mid-to-late February. Despite this recovery, local investors should remain attuned to recent developments as uncertainty still surrounds the outlook of tariffs. 

For starters, while tariffs might have a modest direct impact on ASX-listed companies, the interconnected nature of the global economy means the indirect impact of said tariffs is arguably more potent. 

The clearest example of this relates to China, which according to the Department of Foreign Affairs, is Australia's “largest two-way trading partner, accounting for 26 per cent of our goods and services trade with the world in 2023-24”.  

As such, a slowdown in the Chinese economy not only threatens the global economy and disrupts supply chains, but has a disproportionate impact on Australia’s economy, especially across ASX sectors connected to exports — for example, mining, agriculture, and consumer staples. A deterioration in US-China trade relations could potentially weigh on the local share market. 

Meanwhile, in terms of sentiment, like most other global markets, the ASX tends to follow the lead of the US share market. According to Morgan Stanley, the ASX boasts one of the highest rates of correlations to US markets, with 34% of companies in the MSCI Australia “co-integrated with the Nasdaq”, effectively following its movement. This means that a negative shift in sentiment towards US stocks has a high probability of prompting a comparable outcome among ASX shares. 

Investors should also consider how their portfolios are exposed to different geographic regions and sectors, especially those that might be subject to tariffs, where earnings could face pressure, or where there remains a risk that tariffs increase once the 90-day negotiation period ends.  

Investors may also wish to assess whether their portfolios are diversified for adequate exposure to a mix of growth and defensive sectors. This is particularly relevant if market sentiment forces a rotation into assets with lower risk, generally with more stability in earnings, or limited exposure to tariffs. 

There are also currency implications for Australian investors to consider. Should the Australian dollar weaken, say in response to declining risk appetite, this would benefit ASX-listed exporters. Investments in US-listed shares would appreciate in AUD-terms. 

Finally, investors would be wise to remain on guard for stagflation — whereby, inflation remains persistent, alongside stagnant economic growth. In this setting, market sentiment would likely shift, with central banks having less scope to use monetary policy to balance low inflation and robust growth. 

All things considered, now is an opportune time to review one’s portfolio for exposure to segments that might be impacted by tariffs, either directly or indirectly, as well as broader geopolitical and economic uncertainty. Diversification remains a compelling investment strategy to account for sector and geographic risk, while currency and currency-hedged ETFs may be used to manage forex risks in a policy-driven environment like that of the last few months. 

Past performance is not an indicator of future performance and at this time undertaking your own research as well is important to help make informed decisions