Insights

“In Mexico, if tariffs are put in place, that will be very negative for GDP and the consumer environment, as Mexico had previously benefited from nearshoring for businesses that exported into the U.S.,” says Addington Jerahuni, a consumer sector analyst, who adds that Brazil is relatively insulated, since “there is no direct tariff fight with the U.S.”

Another country supposedly bearing the brunt of White House policy is China. And while it does face acute uncertainty over the future direction of U.S. trade rulings, it’s possible the burden of tariffs here could be relatively muted.

“The direct impact is limited as my companies are more exposed to domestic demand,” explains Alex Dong, an equity analyst who covers the consumer sector in China. “The second-order impact depends on how tariffs develop. If a higher tariff is imposed, the Chinese government would need to do more demand stimulation in the domestic market, which could be positive for consumer companies in China.”

Tariffs weigh on North American sentiment.

There is less positivity among North America-focused analysts.

“Tariffs are driving cost inflation, which is creating concerns that there will be a pullback in consumer spending,” says Robert Glatt, a fixed income analyst who covers retail and leisure companies.
“Tariff negotiations are creating uncertainty,” agrees Chase Bethel, who covers consumer staples. “This could cause consumers to be more apprehensive about spending and companies to be more apprehensive about making certain investments.”

In all, 65% of North America-focused analysts say their financial forecasts for their companies are now based on modelling for an economic slowdown or for recession. This compares to 67% for EMEA/Latin America, and 52% for Europe. By contrast, the figures for Asia-Pacific, China and Japan are 31%, 13% and 14%, respectively.

And while it may be a blip brought on by the present uncertainty around trade policy, our monthly management sentiment indicator shows a sharp drop for North America.
 

Analysts outside North America also express concern about the second-order effects tariffs could have on the economic environment.

“The direct impact of tariffs is largely manageable due to the pricing power of these companies,” says Oliver Trimingham, who looks at European capital goods makers. “However, knock-on effects to economic confidence and customer capex are more concerning.”

“U.S. recession, irrespective of what causes it, would be a risk to exporters,” agrees Priyadarshee Dasmohapatra, an Asia Pacific-focused equity analyst who covers the textile, apparel and jewellery industries.

Winners and losers

At a sector level, it’s energy where most analysts are pessimistic about the tariff effect.
 

“A trade war likely hurts oil demand,” says European energy analyst James Trafford. This effect could be amplified by other geopolitical developments. Notes Trafford, “Bringing Russia in from the cold is a wildcard and could be negative for gas prices in the E.U. if the pipeline gas returns.”

While a negative for energy producers, lower oil and gas prices could provide a much-needed boost to other sectors, notwithstanding any upward price pressures resulting from additional changes in U.S. policy. As European utilities analyst Alexander Laing explains, “Downward pressure on gas prices feeds directly into power prices.”

Ponna Aiyanna, a transportation fixed income analyst, points out another potential upside: “Most airlines in the U.S., particularly legacy carriers, are unhedged on fuel.” This means lower fuel prices could be supportive for those businesses.

Nonetheless, the imposition of new tariffs is expected to be a drag on those sectors directly in the crosshairs. Bobby Missar, a fixed income analyst, focuses on North American homebuilders: “Higher lumber, steel and aluminum costs will likely contribute to further gross margin compression.”

“A trade war or tariffs would have a negative impact on commodity demand,” adds Claire Fleming, an equity analyst covering the materials sector.

Deepak Kumar and Alan Zhou, two Asia Pacific-focused analysts who report on autos, both highlight that sector as another worth watching.

“Asian autos will be affected,” says Zhou, “but are generally better positioned than European counterparts, as they have significant capacity in the U.S.”

Whispers from the world that’s coming

Our analysts’ responses focus on the next few months. Yet there is a broader sense that we may be at a turning point, and not just a cyclical one.

The rhythm of history over the last century and a half suggests we are probably overdue something new to replace the economic orthodoxy of the last 45 years. The analysts’ views could be an early glimpse of a world that few of us have lived in yet.

Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.

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