Podcast: Tariff Talk: Politics and Global Trade

John Moninger: Hi, I'm John Moninger, head of U.S. Distribution for Allspring Global Investments, and welcome to SpringTalk. With me today are Alison Shimada, senior portfolio manager and head of the Total Emerging Markets Equity team, and Noah Wise, senior portfolio manager for the Plus Fixed Income team. And today, we're talking about global tariffs and what it means from here. Thank you for joining us today.

Alison Shimada: Thanks, John, for having me.

Noah Wise: Happy to be here.

John: So, there's a lot to digest from this past weekend and this week so far as it pertains to tariffs and the Trump administration's trade policies. In fact, on Saturday, Donald Trump announced tariffs on Canada, Mexico, and China. After speaking with leaders, the U.S. tariffs imposed on its NAFTA counterparts are now on pause for the month or at least for a month, anyway. We'll see how this goes. China's leaders, however, have already responded with retaliatory tariffs on U.S. imports. So. that's been an interesting turn of events. But with global news moving so quickly and markets reacting rapidly, investors are understandably anxious about what it means for them. Certainly, as an active manager, these events and the volatility that comes with it, it's an opportunity to do what we love and what we love best: to help clients navigate the markets and pursue their desired outcomes. Alison, to you, how are you thinking of all this activity going on and what does it send to you?

Alison: Yeah, I really think it provides a chance for active managers like ourselves to really differentiate our capabilities in helping investors navigate through these situations and talking them through the implications of such varied policies on portfolios. So, this is really why we're here to help and why we're in this business. So, it's one of many challenging times we've had over many years.

John: Noah, I'll start with you on questions. What do these tariffs and protectionist policies mean for U.S. prices and global trade? How is that playing into your thinking?

Noah: I'd say there is the textbook about what these should mean and then, there is what is likely to occur. And these things are different. We don't live in the textbook, but what the textbooks would say is this means higher prices, possibly lower growth, lower productivity, and, ultimately, a negative for the economy. Reality is a lot more nuanced and it's not quite as clear. Number one, we know from the first administration that there is a lot of bluffing that goes on. So, I think you do want to think about this as a little bit of a poker analogy. There is some poker aspects to this. You know that it is part of a negotiation. So, that's the first aspect. And then, the second piece is that we also know that there are ways to get around some of these tariffs. And we saw that in 2018 and 2019 as well. Even though policies were implemented, what actually happened was maybe not as big of an effect as you would have expected just if you used textbook economics.

John: Yeah. I mean, it looks like textbook negotiation tactics. We've got the balance of power in some cases, especially when you look at the partners who we’re competing with here, so it is interesting. Maybe, Alison, let me go to you. Let's drill in a little bit on China. Can you expand on how U.S. tariffs and the retaliatory measures that China's taken so far and how does that affect our own economic challenges or what it might mean for growth and headwinds across Asia? I see both being affected. The U.S. versus Canada and Mexico seems a little bit more workable. The China one looks very different to me and I'd love to get your take on that one.

Alison: Well, first of all, the U.S. imposed an additional 10% tariff on goods coming out of China. And as retaliation, China, it's really actually quite constrained or restrained, less than 10% equivalent of U.S. goods, including natural gas, oil, coal, and heavy equipment faced additional tariffs. And China also, in the past, restricted export of rare earth minerals that are used in many, many different technologies to the U.S. and also has initiated an antitrust investigation on Google. However, Google really doesn't operate in China and has less than 1% of its revenue coming from China. So, it sounds like a big headline, but it's not really a very big deal for China. So, I think that the interesting thing about this situation is the fact that people were surprised that Canada and Mexico were the first targets. And really, Trump may not be as hawkish as people think since the 25% on both of those countries, Canada and Mexico, can be more damaging if they're implemented. So, no one yet on the U.S. or the China side is blowing this completely out of proportion yet. So, both sides can have leverage to negotiate further. I think that is what is going on. The markets have already pulled back after the last 2024 September rally where China initiated more reforms domestically. So, basically, I think China and China investors assumed the worst case scenario, but it's not yet the worst case scenario. So, with regards to Asia, Asia Plus One or China Plus One countries, in other words, alternative supply chains, opportunities are unchanged. In other words, Southeast Asia still benefiting from a reshuffling of the supply chain in countries like Vietnam and Malaysia. So, that has not changed. And that's really not a big part of the deficit that the U.S. faces with other countries. So, it remains to be seen. I wouldn't say it's not going to happen, but trade has been restructured already since about 2017. So, we've had a lot of heads up on this. China already knew for a very long time that this was coming.

John: That's interesting insight, Alison. Maybe dig a little bit deeper on the dollar. Can you see the U.S. dollar strengthening, given these policies? And are there opportunities in Asia, particularly emerging markets., you're looking into as a result of the potential for the dollar strengthening from here on out?

Alison: Well, the dollar, we feel, probably has peaked as much as it's been reflected last year. A number of the currencies took a very big hit through the course of 2024. And other than the Chinese currency, which is actually managed by the central bank and pegged to other currencies, the Mexican peso and the Brazilian real have already started to strengthen slightly coming into 2025. But we do not assume that it'll be a weak dollar suddenly. The strong dollar could last for a while. And therefore, in lieu of that, we are active in the GCC (Gulf Cooperation Council) or the Middle East because that's a dollar peg. So, there's ways to position around that. But we don't see a massive devaluation of the dollar anytime soon. We'd have to see a lowering of interest rates by the U.S., which is maybe problematic now due to concern about inflation resurfacing. So, it could take some time. There might be a slight weakening of the dollar and that would help the emerging markets currencies.

John: When you think about the impact of the second order effects of a China-U.S. trade war, if this were to persist, how do you see that affecting the global economy, particularly other currencies beyond China itself and certainly the dollar itself?

Alison: I think at least in our world of emerging markets, it has uniformly negatively impacted the currencies already and none of the countries face a systemic issue from that. So, they can manage through that. We do see opportunities in other countries, such as India, which is not as affected as the other Asian countries because they have a multi-year structural growth story and domestic industrial catalysts going on. So, they're building out power infrastructure. They have a lot of very strong IT infrastructure. They are becoming an alternative part of the supply chain. And the U.S. and the current president don't have as much of an issue with India. They do have a slight deficit with the U.S., but it's not as large as other countries. So, I think India continues to be an interesting growth story. It will continue to grow as its population benefits from stronger government, rational capital markets, and a fairly good consumer sentiment environment. I think in terms of the rhetoric around the U.S. presidential campaign, many EM (emerging markets) countries already assumed the worst, as I mentioned earlier. And I think that one positive note for emerging markets countries would be it’s just not as bad as people thought it would be, which is kind of what we're experiencing now. That in itself is a catalyst.

John: Yeah, I can see that. And Noah, your thoughts on the same question. Again, global impact, how do you see that affecting other currencies? I’d love your take as well.

Noah: So, adding a little bit to Alison’s comments around the dollar, the dollar has strengthened. It is interesting because it's not necessarily what you would expect for a first order effect, but part of what the market seems to be reading through is higher inflation and higher rates. The Fed (Federal Reserve) can no longer cut as aggressively as they had been hoping and anticipating a couple of quarters ago. And so, those relative yield differentials have provided a boost to the dollar. But as we look forward, how much more of this can we expect to see? We think that we're at fair levels of yields. And I think that the next step is we need to see the actual follow through of these policies as opposed to just bluffing or renegotiating existing agreements that largely mirror what has already been in place previously, which we saw for the most part with NAFTA and following the U.S.-Mexico-Canada agreement. So, some of this is a little bit to be determined, but we would anticipate that a lot of the worst pressure on non-dollar currencies is probably behind us here moving forward. But I still think in terms of investors and impact, you do want to have some diversification here and what that diversification can allow you to do is take advantage of some of this volatility. And to the extent that we do see a headline cause dollar strength, we are at a point where that could tighten financial conditions within certain economies, not in a way that we would anticipate causes structural long-term damage to those economies, but very well may create investing opportunities for active managers.

John: Alison, we talked a little bit about China. You touched a little bit on India. I’d love your thoughts on the broader array of Asia specifically and where else you might be focusing your time and effort and where you might be seeing opportunities as well.

Alison: Well, John, it's interesting because within the benchmark, Asia represents 70% to 75%. So, it's quite significant. So, we think that there are a lot of opportunities with advanced technology, as well as a lot of structural growth stories, in Asia. However, outside of that, there're also opportunities. One of them is coming from Eastern Europe and the Middle East. In Eastern Europe, we see rebuilding opportunities following the wind down of the Ukraine war and particularly for Poland where there are construction companies, etc. that infrastructure build companies could benefit from that. That would be of interest. And also, we have some exposure to pharmaceuticals in Eastern Europe, which is also relevant to the developed markets. In terms of the Middle East, once again, the region being dollar-pegged is very helpful depending on where the U.S. dollar is always going, but it does have large investment plans domestically in Saudi Arabia and the UAE. So, going forward, I think that there will be a lot of CapEx spending in the region and we have relative inflows from people immigrating into the region and the setup of a lot of institutions, such as financial companies in the region. So, these are all catalysts for the Middle East. And, then in Latin America, we feel that Claudia Sheinbaum has done a better-than-average performance so far in terms of dealing with President Trump's demands. And she has always emphasized cooperation with the U.S. and how important the two countries’ relationship has been. But she has basically complied with what he has requested. And to the extent that they can continue to do so and be proactive, I think Mexico could be in a better place than we had expected initially before all of these tariffs were discussed. And with regards to Brazil, we do see a lot of very good companies in Brazil that have a lot of shareholder return that we like, in our case, and they have agricultural commodities there. There's a large domestic sector and consumption sector. There's also very advanced banking and fintech in Brazil. So, I think those opportunities continue to be of interest. So, we will just have to see a little bit about the noise around the political situation in Brazil, as there always is. But generally speaking, it's a very large country with a lot of opportunities and a lot of sectors.

John: Alison, your comments on Latin America are good. I think there's been some great examples there of great cooperation already. And that could lead to great investment opportunities as well, right? I mean, you can imagine great partnerships being developed over time in ways that maybe haven't in a long time. They could actually be catalysts for additional growth in those markets. So, it is an interesting one to observe and watch and we'll see how it develops out, of course. It’s early days, but it is exciting to see. Noah, I want to switch back to you a little bit, maybe more broadly on fixed income. You operate in the both domestic and global markets. I’d just love your thoughts more broadly on how you're thinking about fixed income and how you're riding the curve in 2025.

Noah: Absolutely. So, I’d like to really highlight three things that we think investors should be looking at. One is to diversify your interest rate exposure. And that's not just across the curve but globally as well. There are opportunities outside of the U.S. where the dynamics are a little bit different. We see relative values a little bit more attractive in places like UK gilts. So, there are a few opportunities for other government bond exposures outside of the U.S. From some of the sector examples, we do have a tilt towards higher-quality income. We've had a very strong risk sentiment backstopping a lot of risk assets. That's very true in the corporate credit market. And so, the additional compensation that investors get for default risk, ratings risk, that type of thing is at historically narrow levels. But where you can find value is in some of the higher-quality and more liquid sectors, things like agency mortgage-backed securities. There are also quite a few opportunities in other parts of the securitized market as well. So, the nice thing there is you can move up in quality and still be able to generate attractive income. And then, the last thing I'll touch on is while corporate spreads are tight, there're some pockets of opportunity that we see in Europe. They're better relative value than what we're seeing in the U.S. So, I think by broadening out your perspective as an investor, it does open up some of these other opportunities to really put together a more robust portfolio that can still hit the income and return targets that investors are looking for.

John: Yeah, interesting. So, finally, as we see the trends in policy change, potentially de-globalization, geographically potentially de-correlated even returns—which I think is very healthy, back to your comments on diversification—maybe 30 seconds here on how you're talking to investors about how to position themselves in the environment. Noah, you hit on it a little bit already. Maybe synthesize that down into 30 seconds and then, Alison, I'll go to you and ask you to do the same thing.

Noah: Certainly. So, I would go back to the poker metaphor. If you sit down and someone is betting really aggressively and you know that a lot of times they're bluffing, you do not have to put all of your chips on the table on every single bet. You can pick your spots. It does create a lot of volatility. There is opportunity, but you want to wait until the odds are in your favor. Fortunately, I think there's going to be a lot of these types of episodes and opportunities. We've already seen them in the last couple of weeks. We anticipate there's more of that moving forward.

John: Alison, for you?

Alison: I think that there's a few things that we're looking at. Number one, of course, is that you must, in this kind of condition, have a very resilient framework. And within that, you can position by stock selection and sector and country allocation correctly. Then, you can do quite well in this type of environment because, as Noah's mentioned as well, I think you look past this and with experience, you see the opportunities. You just have to be able to step up and take them. So, having a resilient framework. The way we do it is through shareholder return plus capital appreciation, which I think lends itself to quality. And also, diversification. I agree, away from the developed markets, particularly the U.S. based on valuation, is a good idea. And the fact that, in our case, with EM, there's nobody there. The flows have been negative for the last year and into the asset class and you can get both growth as well as exposure to many of these important areas, such as power infrastructure, things like AI, structural consumption stories. And so, there's growth, but it has to be done with a lot of prudence and careful oversight.

John: Thank you both for your thoughts. You’ve given us a lot to consider as the administration continues to implement policies while countries around the world react. Again, thanks for your time.

Noah: It was my pleasure.

Alison: Thank you.

John: And for our audience, thanks for joining us on SpringTalk. We look forward to seeing you next time.