2025 Market Outlook: The Age Of Tariffs

With the inauguration of Donald Trump as the 47th president of the United States on 20th January 2025, here are three key themes investors should watch out for in the markets this year.

Global Markets: Trump 2.0

As the saying goes – Don’t take Trump literally but take him seriously – the clear mandate for Trump has the potential to disrupt the political arena and global markets: tariffs, restrictions on migration, tax cuts and aggressive deregulation, all done in a way that might be more than willing to break with existing norms and conventions.

While the magnitude and details of how Trump will materialize his “promises” are unclear, what is certain is that Trump will carry out his “promises,” thereby resulting in more regionalization because of more protectionist policies and friend-sharing trends.

With the “proposed” introduction of tariffs up to 60% on China, 25% on Mexico and Canada, and 10% on the rest of the world, we can expect the global trade scene to experience massive disruptions in 2025. This will result in higher uncertainty in the global supply chain and, thereby, higher earnings volatility for any companies that export to the United States.

Here’s a cumulated 2025-26 direct export losses for the top 30 most impacted countries from increased US import tariffs excluding currency impacts (Source: Allianz Research):

Among these countries, sectors such as Pharmaceuticals, machinery & equipment, automotive, transport equipment and metals are most at risk as they are the strategic, labour-intensive sectors that were pivotal to the economic success of US states that voted strongly for Trump’s re-election.

On the flip side, the United States may also face a higher inflation rate because of the impacts of the tariffs. As a result, the Federal Reserve cut back on its ongoing rate cut timeline in response to a higher inflation rate.

This may cause interest rates in the United States to remain higher for longer which will spill over to the rest of the world, resulting in further economic drag at the back of higher borrowing costs.

Asia: New Alliances & Future Trade Partnerships

As Western Hampshire (USA & EU) adopts a more protectionist policy coupled with the ongoing friendshoring trend, an unintended alliance is slowly being formed to fill the gap that was created by the West.

Just as Western Hampshire has the United States, Canada, Mexico and the European Union, an economic alliance is being formed between countries within Asia, the Middle East (UAE & Saudi Arabia) and Latin America.

If we were to split the new world order into two separate factions, it would probably look something like this moving into 2025 and beyond:

As things stand, the bloc centred on the US is composed of comparatively larger players in global trade, while the bloc centred on China includes more next-generation trade hubs from the emerging worlds.

With the conclusion of the sixteenth annual BRICS summit, it is evident that there has been an increasing urgency to create a space for interaction that bypasses Western states and institutions among the participating members.

However, unlike the Western mainstream narrative of BRICS being an Anti-West establishment, overtly anti-western policies will probably not prevail in BRICS nor would it be the priority of the group as the overwhelming majority of the states within the bloc are not interested in aggravating relations with the West.

That said, the further development of BRIS will depend on many circumstances as not all member states consider their participation in the bloc a priority. However, the general movement toward diversification of the world order and away from anyone’s group domination will continue.

In the short run, it is likely that “non-western allies” will experience several shocks to their economy as a result of the ongoing restructuring of global trade and the impact of potential repercussions from the United States and European Unions, which insist on following their own visions and persecuting dissenters.

In the coming year, as with the previous few years, the volatility in Asia and other Emerging markets will probably remain elevated as they have always been and any meaningful gains in the equities markets will only be driven once the economy of the larger players (i.e. China) stabilizes.

China: Two Steps Forward One Step Back

While China is steering in the right direction, the magnitude and speed of its policy response to get the economy going thus far is unfortunately too conservative and slow. As a result, the impact of their stimulus package in 2024 is often met with short-lived economic recovery instead of a V-shaped recovery that we often see in the Western economies.

Moving into 2025, it is likely that China will have to step up their policy support to support its economy further largely to negate the negative impact of Trump's 2.0 policies. With the Federal Reserve now embarking on a path of lowering their interest rates, it has also provided the PBOC more room to be more supportive of their economy.

That said, given the savings culture and conservatism of the Chinese consumers, China’s recovery story is akin to a chicken and egg issue.

For the economy to experience any sustainable and meaningful recovery, domestic consumption must increase. However, the consumers are unwilling to spend as they prefer to save instead given the ongoing economic uncertainty.

Couple that with the incoming Trump presidency, China is probably going to face a bumpy recovery moving into 2025 just as they did in 2024.

While I am confident in China’s long-term recovery, I find it unlikely that they will experience a sharp recovery – like that of the West – given the difference in consumer culture as well as the headwinds that the economy has to deal with in the coming years.

In the short term, we can only bite the bullet and ride out the ups and downs in the next four years as the world and global trade structure change – hopefully for the better.

Conclusion: A Year Of Change

2025 will probably mark the year of change – for better or for worse – as the world shifts accordingly based on Trump's every action.

As long-term investors who invest in a globally diversified manner and through dollar cost averaging, the short-term turmoil in the global stage presents an opportunity for us to accumulate our investments at better prices which essentially spreads out our risk in the short run.

For now, all we can do is just stick to our strategy, sit back and wait for things to stabilise in the long term.

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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