Responding to Trump’s tariffs

As with any investment, your capital is at risk.

Recently, the global economic landscape and investment markets have been significantly influenced by the policies and decisions of political leaders, particularly US President Donald Trump's imposition of tariffs.

Research experience with the Bank of England’s Monetary Policy Committee and managing the UK’s foreign exchange reserves has helped shape my thinking on how these tariffs might impact various sectors and markets, and on their implications for the Managed Fund’s investment approach.

As the head of income research and joint manager for the Managed Fund at Baillie Gifford, I was delighted to discuss the recent developments on an episode of Upfront, Baillie Gifford’s live TV show for intermediary investors.

The impact of uncertainty

The uncertainty surrounding Trump's tariffs has been a significant concern for both markets and companies. Nobody really knows the full impact, and that uncertainty affects markets.

Markets don’t like it, and companies don’t like it in terms of their investment plans. Several management teams have lowered or ditched guidance after the tariff announcement.

This uncertainty has led to fluctuations in market sentiment, affecting investment decisions and strategies.

One of the immediate effects of the tariffs has been on US gross domestic product (GDP). In the first quarter of 2025, GDP was just below zero as the anticipation of tariffs led to a surge in imports, detracting from GDP growth.

However, I believe that despite the tariffs, the underlying growth rate in the US remains close to 2 per cent.

Trade relationships, US fiscal policy, and deficit concerns

Clearly, Trump likes tariffs because he can impose them without going to Congress. However, Trump’s administration has also shown that it wants to reset trade relationships.

Because of this, we are monitoring trade policies and their potential impact on the Managed Fund more closely.

US fiscal policy under Trump's current administration has been more restrained than markets expected. Everyone was expecting him to come in with big tax cuts, but, at least for the moment, Trump’s been focusing more on cutting expenditures.

This focus on cutting expenditures and concerns about the US running a deficit of between 6 per cent and 7 per cent of GDP have pushed up long-dated bond yields. Our underweight position in long-term bonds added to performance in the first quarter of 2025.

European stimulus and sovereign debt markets

Europe’s economic landscape has also changed significantly, with Germany's stimulus package leading to increased spending on infrastructure and defence. This could potentially add 1 per cent to Germany’s GDP annually.

This is significant for a region that has grown slowly for many years. This stimulus has implications for bond supply and yields, with the dispersion in government bond markets creating opportunities for the Managed Fund.

We closed our underweight position in European government bonds after yields rose sharply, helping performance.

Concerns about Trump and the tariffs have also affected Mexico. The Mexican currency weakened, and bond yields rose significantly.   We had a more positive view on the Mexican economy and this situation allowed the Managed Fund to capitalise on high-yielding Mexican bonds, reflecting our opportunistic investment approach.

Despite the uncertainties, the underlying potential remains

Our Policy Setting Group meets quarterly to discuss asset allocation and guide the Managed Fund's investment approach.

We’ve had a couple of ad-hoc meetings recently because so much is happening. It’s not always possible to have a very clear view on what’s going to happen, but we have to be aware of how the outlook for equities or bonds might change.

This proactive approach ensures that the fund remains responsive to market changes and uncertainties. 

Over 90 per cent of companies in the Managed Fund are profitable and can finance their own growth. They hold less debt than the market average, paying less in expensive interest, and spend more on innovation.

In fixed income, the companies we lend to are creditworthy – our average credit rating is BBB – and have a lower risk of default.

Our equity managers are still optimistic about their companies’ underlying potential despite the uncertainties.

However, we reduced our equity exposure slightly, increasing cash holdings to maintain flexibility in the face of market volatility.

On the fixed income side, the opportunities look good from here, so we are maintaining our long-duration position.

This balanced approach between equities and fixed income ensures that the fund is well-positioned to navigate the complexities of the current economic environment.

Inflation risks and artificial intelligence (AI) impact

Inflation risks remain a concern, but I believe weaker growth in some countries and tight central bank policies will help contain inflation.

Additionally, artificial intelligence could affect efficiency gains and prove to be disinflationary, slowing down price increases across the economy.  

Over the past few years, NVIDIA has been the main character in the AI story. We began trimming the US chipmaker early in 2024 because we were already considering what could happen next.

We’ve bought Globant, an Argentinian IT company that provides the software behind Disney’s park bracelets and Ferrari’s pitstop monitoring. We think Globant will be part of a new generation of companies that help others make the most of AI.

Trumping Tariffs

Trump’s tariffs have undoubtedly created challenges and uncertainties for investors, but the Managed Fund remains focused on the long term. We’ve honed our approach to navigating turbulence since 1987 and remain patiently focused on bottom-up stock and bond picking.

By closely monitoring developments, analysing their implications, adjusting asset allocations, and capitalising on opportunities in debt and equity markets, the Managed Fund remains resilient and well-prepared to face the evolving economic landscape.

Important information and risk factors

This communication was produced and approved in January 2025 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, and Baillie Gifford and its staff may have dealt in the investments concerned.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

Investment markets can go down as well as up and market conditions can change rapidly. The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.

A Key Information Document is available by visiting bailliegifford.com

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