Our immediate reaction to the Liberation Day announcement, from the point of view of private firms and markets, is concern.

The level of tariffs (it seems calculated as ‘country trade deficit with the US divided by exports’) are larger than expected, and punitive for European and especially China and even Japan and India.

A further worry is that the application of the tariffs is economically damaging, and the risk of a recession is now high. From the point of view of textbook economics, this level and scope of tariffs is puzzlingly bad for the US economy, and many investors may question the rationale and possibly the competence of the White House policy team.

There are two avenues ahead.

One is that the application of 20% tariffs on the EU (GB looks to have escaped with 10% and strangely pharmaceuticals have escaped tariffs) and 34% on China (on top of earlier tariffs) will necessitate a strong response from both regions¹. This has the potential to worsen the geopolitical environment and to trigger an unwanted global demand shock. One development may be that other countries form coalitions against the US in the trade process, that demand for US goods and services in Asia and Europe suffers. An open question is specifically how China responds, given the ways in which it can disrupt supply chains.

A more positive scenario is that the high level of tariffs is the first step in a grand ‘deal’, or negotiating process. The difficulty with this view is that diplomatic relations between the US and other regions are already strained, and the credibility of the US is now in question.

From the point of view of corporates, a minor positive is that the rate outlook is changing to a path of lower rates in 2025 (pricing in a demand shock), but the concern is that the extreme level of uncertainty will cause companies and private investors to put investment plans on hold. We note that the Fed chair speaks publicly on Friday, and the response of central bankers to this potential shock is another open question.

Equally, capital market activity may also see a hiatus until there is clarity on the trade outlook. Additionally, given the premise that the application of tariffs is to help US firms, this policy move creates a very difficult environment for them. That said, the vast majority of portfolio companies in our ambit have very high recurring revenue, resilient business models, long-term contracted cash flow, ability to pass through cost increases, and localized customer and/or supply bases.  Our sense is that long term stable assets alongside the most experienced partners are still the best way to weather this storm over the mid-to-long term.

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