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Roger Lee at Cavendish talks Liberation Day’ and the UK’s potential to profit

Roger Lee, Head of Equity Strategy at Cavendish, a leading UK investment bank for growth companies takes a look at the potential outcomes post Trump’s tariff announcements. There’s obviously a worst case scenario, but there are also opportunities to be had.

“BE COOL! Everything is going to work out well. The USA will be bigger and better than before!….. THIS IS A GREAT TIME TO BUY!!!” — President Donald Trump, 9 April 2025

After Trump’s ‘Liberation Day’ and despite the President declaring a 90-day pause in implementing the punishing tariffs, markets are still on edge waiting to see what comes next. Are we entering a prolonged period of protectionism, retaliation, and recession? But what if the US secures new free trade agreements with the 70 or so countries that have offered to negotiate? Could the global economy in fact be at the start of what US Treasury Secretary Scott Bessent has described as a “new Golden Age of Global Trade”?

The two extreme outcomes of Trump’s tariff threats

The market is torn between two starkly different interpretations of Trump’s sweeping tariff announcements.

One scenario sees tariffs as a long-term source of taxation and protectionism. In which case, we are looking at a repeat of the 1930 Smoot-Hawley Tariff Act, which triggered a collapse in global trade and deepened the Great Depression. The world will respond to Trump’s tariffs with widespread retaliation resulting in a collapse of export volumes and most likely a global recession.

The alternative is more optimistic, and less discussed, but actually looking a more probable outcome – Trump’s tariffs are just a threat to be used as leverage in a broader trade negotiation strategy. The prize ultimately is the chance of a reset in the terms of global trade with the removal of trade barriers and a significantly improved global trading environment.

The worst case – a US recession?

This recent policy volatility and the uncertainties around the tariff outlook have certainly increased the chances of a US recession. However, despite the recent falls in US equities, the market has yet to price in the worst-case scenario of a global recession driven by a decline in global trade volumes.

Historically, a ‘standard’ US recession, such as in 1990, 2000 or 2020, has produced an EPS downgrade from peak to trough earnings of c. 26%, and the market tends to bottom out at around 18.5x forward earnings. With peak S&P EPS estimates earlier in the year around $280, a proper recession implies the S&P closer to 4,000 – well below where we are now.

These dramatic changes in policy can unleash forces that cause shorter-term risks if the stresses extend to other parts of the financial system. The surge in longer term US Treasury yields between ‘Liberation Day’ and Trumps pause in tariffs bears a striking resemblance to the Truss LDI gilts crisis. Like then, policy can be reversed, and the response is decisive, market overreactions can be corrected. This has been demonstrated again by Trump recently signalling a potential U-turn on his trade war with China, suggesting the high tariffs on Chinese goods will “come down substantially, but it won’t be zero”.

These periods of extreme volatility often present attractive market opportunities for long-term investors.

Or the golden opportunity – a global trade reset?

The 90-day tariff pause is a strong sign that the US administration is using tariffs as a starting point for negotiation rather than a final position.

It looks like the only combatant in any potential global trade war is China, which was presumably the main target of the tariffs in the first place. Therefore, the risk of a sustained trade war with China persists, but the risk of a global trade war has receded. Although recent commentary from the Administration would suggest that even the tariffs imposed on China are a negotiating tool albeit a blunt one.

If tariffs can ultimately bring down broader trade barriers, especially if supranational blocs like the EU or ASEAN respond with pro-trade reforms of their own, this could trigger a very positive global trade reset.

Implications for equity markets

If the risks of a global trade slump recede and Trump’s tariffs, paradoxically, start the removal of trade barriers, there could be serious implications for European and UK equities.

All equity markets should rally, and history would suggest that to be the case when moments of extreme stress pass. The S&P fell 10.7% over the three trading days following ‘Liberation Day’, the 11th biggest 3-day decline since 1950. On all the other ten occasions stocks were higher over the next 1, 3 and 5 years.

However, the ‘Policy Volatility’ so evident post ‘Liberation Day’ is unlikely to go away and so it is difficult to see US equities returning to their peak multiples, even if an economic slowdown is avoided. The risk premium of owning US equity has certainly gone up, and is unlikely to reverse in the near future, despite the long-term attraction of US equities.

As the market tensions over tariffs recede, we can see the benefits of ‘diversification’ return, which will lead to asset inflows into European and UK equities. The likely divergence in interest rate policy between Europe/UK and the US is also expected to accelerate this diversification into non-US assets.

Opportunity for UK exceptionalism

Amid this turmoil, the UK may have stumbled into an unlikely moment of opportunity.

If the UK Government can accelerate progress on a trade deal with the US and resist the temptation for retaliatory action, it could position the UK as a global bridge between the huge EU and US markets. A Brexiteer dream perhaps, but at least the potential for a change in perception of the UK into more of a global trading hub.

Despite the real structural challenges facing the UK economy, this external trade disruption provides a unique opportunity to redefine the UK’s role in the world. Just as London has become a global financial centre, the UK could become a centre for global trade. If the government seizes this opportunity, the UK might be one of the few beneficiaries of Trump’s radical trade experiment.

The greatest irony of all, Trump’s ‘America First’ policies may be the start of a new era of ‘UK exceptionalism’.

About Roger Lee

Roger is currently Head of Equity Strategy and has been in the equity market for almost 30 years having started his broking career with Cazenove & Co and subsequently HSBC James Capel, JP Morgan and Deutsche Bank. He has covered UK, European and US equities and serviced clients in UK, Europe, the Middle East and Asia when living in Hong Kong. Most recently he was Head of UK Equity Strategy at Investec. Roger is also a Fellow of the Institute of Chartered Accountants.

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