Global Allocation Insight

How will tariffs impact investors?

Jul 20, 2018

The reshaping of global trade could result
in unintended winners and losers.

We believe the imposition of reciprocal tariffs between the United States and China (and more broadly, between the U.S. and Europe, and its North American Free Trade Agreement partners) will, to the extent they remain in place for a sustained period, have a negative impact on overall global growth, global business confidence as it relates to investment, and on the margin, it will weigh on investor sentiment as it relates to risk assets. However, on the positive side, the sizeable corporate and individual tax cuts passed in late 2017 are helping to prolong the U.S. economic and employment expansion, and any acceleration in U.S. growth will contribute to overall global growth.

Given the complexity and geographic diversity of global supply chains and the breadth of trading channels, it is unclear whether the new trade tariffs will achieve their intended effects. Companies that have access to various sources for their product inputs have already begun reorganizing and reorienting their supply and trade channels to avoid tariffs. Ultimately, certain Southeast Asian countries may benefit from an acceleration of an existing trend that has production facilities moving out of China into Vietnam, the Philippines and the like. While China might suffer, the balance of Asia might benefit.

While global interest rates remain low (and bond prices remain high) relative to historical norms, many central banks are shifting their stance from “accommodative” to “tightening,” at least in nominal terms, both in major developed markets – the United States, Europe and Canada – and in emerging markets, where a rapidly rising U.S. dollar has compelled policymakers to raise rates in India, Argentina, Turkey, and Indonesia. A broadly rising rate environment is generally an unattractive backdrop for sovereign bond prices. (Bond prices fall as interest rates rise.)

Rising interest rates or a stronger U.S. dollar coupled with elevated geopolitical risk could lead to higher market volatility. In the BlackRock Global Allocation Fund, given heightened uncertainty at the macro level, we have increased the cash position since the start of the year, which not only helps to protect the fund against risks, but also contributes income as short-term Treasury bills are now providing a meaningful yield for the first time in a decade.

We still favor equities over fixed income in the fund. Within equities, the fund is moderately overweight in Asia relative to the benchmark (and moderately underweight in U.S. equities). Many Asian markets have materially underperformed the United States year-to-date, leaving valuations attractive relative to U.S. stocks. The fund’s Asian stock exposures are focused in specific countries that are not closely connected to the global supply chain and, at best, are only tangentially affected in the ongoing trade wars, and may even benefit once the dust settles.

Across the globe, there will be companies that stand to lose and others that stand to benefit depending on how the redefining of trade relationships collectively shakes out. We are watching carefully as the situation unfolds in order to identify the relative winners and losers, and we stand ready to act upon opportunities within the parameters of the fund’s overall risk profile.

View fund commentary

Global Allocation tools

See how the Global Allocation Fund has outperformed global stocks with one-third less volatility.*
Build a portfolio and then add the BlackRock Global Allocation Fund - see if it improved your results.
Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies ...
Global Allocation Monthly Insights

Subscribe to get timely market outlooks and portfolio positioning insights every month.