The Ides of March certainly lived up to their ominous reputation this year, with all major indices
finishing the month in the red.
Markets thrive on optimism but fear uncertainty. In March, Donald Trump delivered uncertainty in spades. Rather than being a global peacemaker, he’s stirred geopolitical tensions with sweeping tariff announcements aimed at nearly every developed economy. Whether ally or rival, none have been spared. While there’s merit to addressing the US trade imbalance, his approach has appeared clumsy and confrontational.
That said, tariffs are increasingly a key economic weapon, and as the world’s largest consumer
economy, the US holds plenty of cards.
The big fear that is reflected in the current market sell down is that the tariffs, along with reciprocal measures introduced on 2 April, will likely drive-up prices in the US and reignite inflationary pressures. Globally, they risk pushing economies into recession by shrinking export markets.
Trump’s broader strategy aims to rebuild the US as a manufacturing powerhouse, aided by slashing energy costs, through making US industry more competitive globally. For Australia, much depends on China’s response to US tariffs; whether it absorbs the costs, cuts production, or dumps excess goods into markets like ours and the EU, potentially undercutting local manufacturers.
Whatever happens, this won’t be resolved quickly, and it’s unlikely the markets will make Trump
back down.
Commodities during March
The Materials index outperformed in relative terms in March, despite still losing 1.6%, largely thanks to a spike in copper imports to the US. Manufacturers rushed to build inventories ahead of the 25% tariff that kicked in this month.
Copper may see a short-term dip as stockpiles are drawn down, but with electrification trends
underway, its long-term outlook is solid. Gold surged to an all-time high of US$3,145/oz
(A$5,035/oz), driven by demand from China, central banks and ETFs. Gold is in an honest to
goodness bull-run. All bull runs end at some point, but for now this bull market in gold is showing no signs of abating.
Iron ore briefly dropped to US$100/tonne in March but recovered slightly. Chinese demand is soft, and with new supply coming online from BHP, RIO, FMG, and Rio Tinto’s West African operations, prices could ease further later in 2025.
More positively, it appears that nickel, zinc, uranium and coal have found their bases, so downside in these commodity prices from current levels should hopefully be limited.
Interest Rates and the Election Landscape – The Outlook for Business is Not Great.
As expected, the RBA kept interest rates unchanged at 4.10% at its 1 April meeting. Governor
Michele Bullock remains cautious and wants clear signs inflation is under control before any further rate cuts.
With the 3rd May Federal Election looming, both parties are pumping out spending promises,
which could stoke inflation again and delay any monetary easing. A likely minority government
backed by Greens, Teals, and independents may encourage more short-term populist policies,
making long-term economic planning more difficult.
Short-term politicking and thought bubble policies, such as decarbonising Australia and the
resulting step up in higher energy costs, have significant long-term consequences for Australian business remaining competitive globally. As the size of Government continues to expand as a proportion of our economy, business is increasingly in competition with Government in areas such as labour. Increasing and unrelenting regulation restrict business activity and increase costs.
The result is business investment is at 30-year lows and Australia’s industrial base continues to shrink. For example, manufacturing is now just 5.4% of GDP.
By way of comparison, in the United Kingdom, manufacturing accounts for 17.5% of GDP, the
European Union 14.9%, the United States 10.2% and in China it is 30.1% of GDP. Even New Zealand beats us, with manufacturing running at 8% of GDP …
The risk of de-industrialisation, overreliance on resource exports, and policy paralysis brings us
closer to the “banana republic” scenario Paul Keating warned about in 1986.
As a final comment, our growing federal debt, projected to increase through FY 2029, threatens the sustainability of public services Australians have come to rely on.
Thus far into the election campaign, we struggle to see either side of politics putting an agenda
forward that will advance Australia’s long-term interests.
Trump Tariffs: The Good, The Bad, and The Ugly
On 2 April, the US announced blanket tariffs on all imports, starting at 10%, with several countries facing higher rates. China faces a total tariff of 54%, while Australia received the base rate of 10%, the lowest of any nation impacted.
In the lead up to the US election, Trump made it very clear that he saw tariffs as the key tool to encourage industry back to the United States and to rectify what he saw as the unfair trade balance between the United States and its major trading partners.
In addition, Trump repeatedly stated that he also saw the revenue that could be raised by tariffs as a much better option than using income taxes to reduce the US gross debt, which, as at the end of March 2025, stood at a staggering $US36.2 trillion, equal to 123% of the US GDP.
It is estimated that if the stated tariffs hold, then against the $US3.3 trillion of annual imports into the United States, around $US700 billion in new income will be raised.
With the US election still fresh in our memory and the many subsequent comments made by
Trump, the imposition of these tariffs should not have come as a surprise to anybody. Nevertheless, it would appear they did, because since the April 2nd announcement, all major
bourses have been dramatically sold down.
Clearly equity markets thought Trump was bluffing or that the level of tariffs he would impose
would be much lower than what he had intimated. It’s now up to markets to digest what these
tariffs mean. Here’s what we’re watching:
• Some higher tariffs may be negotiable. Trump loves a deal.
• US tariffs could prompt countries to drop their own trade barriers to retain US access, a positive for global trade.
• Australia’s 10% tariff is manageable and on par with our own GST on US imports.
• US importers bear the cost of tariffs. These may be passed on to consumers, absorbed by
exporters via price cuts, or prompt supply chain shifts; all of which are potentially
inflationary.
• In times of uncertainity, the US dollar usually becomes a safe haven currency. Should the
USD strengthen, this would soften the impact for exporters but hurt US exporters’
competitiveness.
• Stockpiling of imports ahead of the tariff deadline may delay the economic effects.
• China’s response could include dumping surplus goods into third markets, pressuring global
manufacturers and triggering new tariffs elsewhere.
• Slower Chinese output would reduce demand for industrial metals and potentially hurt our
resource sector, though a weaker AUD may offset some of this.
• The EU may hold up better, with defence spending boosting demand.
• The US still has high labour costs, making a full manufacturing resurgence unlikely without further tax or energy cost reform. Trump may be planning just that, with additional tax
cuts and energy policy changes to support his vision.
Depending on which camp you belong to, the largest consuming nation on the planet is either
creating trade barriers and a damaging trade war where everyone looses, or alternately, simply
levelling the playing field as part of putting its national finances in order.
Economist are bearish on the outcome but then again they have predicted 7 of the last 3 recessions so we should take their learned analysis with some caution. We are optimistic that once the dust settles and some inevitable negotiation occurs, we will see an economic outcome nowhere near as dire as some think is coming.
Markets have reacted negatively over the uncertainty and we consider this as creating a buying
opportunity.
The Share Market – Looking Ahead
This month’s letter leans a bit gloomy, but these are important long-term trends to consider. Policy shifts like these have major implications for portfolio returns.
Short-term volatility is inevitable as the world adjusts to this new norm. Markets dislike uncertainty. We consider the recent selloff has created some excellent long-term opportunities, but we are not suggesting markets are through the worst of it. Bluntly, we do not know.
Consequently, while looking to take advantage of the current sell down, we recommend retaining an allocation towards defensive assets as a form of insurance.
As always, we welcome your feedback. Please do not hesitate to reach out to our office if you would like to discuss your investment portfolio.
