by Carolina Mandl and Laura Matthews

New York (Reuters) – Investors are looking to protect themselves from economic risks now that the customs duties promised by US President Donald Trump have been revealed, in particular by seeking assets capable of resisting a recession and a rise in inflation, or companies less exposed to international trade.

The S&P 500 index has lost 7.7% since the summit reached on February 19, in the wake of Donald Trump’s nomination for a second mandate in the White House, and could suffer even more volatility, according to investors, the American customs duties announced on Wednesday evening having been heavier than many thought of Wall Street.

Donald Trump unveiled new so-called “reciprocal” customs of customs on Wednesday of at least 10% on all imports in the United States, at the risk of provoking an increase in prices and engaging in a world trade war.

The new uncertainty about Washington’s business measures encourages investors to opt for protection and position coverage strategies.

“We do not know at all where we are going to land, where we will be in the three and a half years to come, with regard to customs duties,” said Don Calcagni, director of investments at Mercer Advisors.

“This is why we think it is a market where investors should remain cautious, very well diversified and not try to play the heroes,” he said.

The raw materials, precious metals such as gold, actions decorated (“value”) and defensive values, as well as small businesses and obligations, are all assets likely to protect against the impact of economic fluctuations linked to customs duties.

“The movements that we have observed on the markets so far are the result of a safety leak in the face of the risk imposed by customs duties or a potential recession. We must now see further,” said Gustaf Little, portfolio manager at Allspring.

“There could be a potential for an era of demondialization because of customs duties,” he added.

He said he seeks in particular small capitalizations which can benefit from protectionist policies, because they are less dependent on foreign trade than large capitalizations and has added some positions of this type in recent weeks.

Robert Christian, analyst at Franklin Templeton, explains that as an investor in hedge funds, he prefers global macroeconomic funds, which can negotiate a myriad of assets in different countries, or neutral action funds, which tend to behave well in an uncertain environment.

“Companies have completed their warehouses and are ready … for the next three or four months. But the question is: what will happen next?” He wonders.

A tolerance test

The situation could still worsen, even if the S&P 500 is already in correction territory.

“The exorbitant customs duties applied to countries by country are a negotiation tactic that will maintain markets on the alert in the foreseeable future,” notes Adam Hetts, a global multi-active management manager at Janus Henderson Investors.

The analyst stresses that the Trump administration has shown surprising resilience to market difficulties.

“The big question is now what is his tolerance for real economic suffering as the negotiations are taking place,” he said.

The S&P 500 is currently negotiating at around 20.4 times the benefits estimated for the next 12 months, which is significantly higher than the long -term course/benefit ratio of 15.8, show LSEG data.

The main concern of investors is whether the protectionist trade policies of the United States will erode the confidence of businesses and consumers, bring back inflation and push the first world economy to recession, even “stagflation”, a combination of low growth and high prices.

According to Michael MEDEIROS, strategist at Wellington Management, companies that do not know what type of pressure on costs will expect will find it will be difficult to make decisions in terms of spending and hiring in the short and medium term.

“This is where the corrosive impact of uncertainty can really start to negatively repercussions on the economy,” he warned.

Recession forecasts were already up before the announcement of customs duties on Wednesday evening. This same week, Goldman Sachs noted the probability of a recession in the United States for 20% to 35% in the next 12 months.

For Michael Medeiros, in charge of investment strategy at Wellington, real assets, such as precious metals, could protect portfolios from a possible side effect of customs duties, as well as inflation.

Damian McIntyre, portfolio manager at Federated Hermes, says they are looking for defensive values ​​offering dividend in the event of an economic slowdown.

For his part, Chris Decarolis, senior portfolio manager at Wealth Enhancement, believes that public service companies are also interesting in this context of uncertainty.

“People will continue to pay for waste management companies to collect their garbage, or mobile phone bills,” he said.

The American exceptionalism in question?

Investors are also concerned about the repercussions around the world and how customs duties will modify the demand for American products on other markets.

“These customs rights will surely push consumers in China and other countries to consume more of their own products or other brands,” notes Eric Clark, director of investments at Alpha Brands Portfolio Manager, adding that S&P 500 companies generate more than 40% of their turnover outside the United States.

This could even change the discourse on “American exceptionalism”, which saw money flock to the assets of the world’s leading economic power.

“The question is now whether American exceptionalism is about to change and, if so, towards where this leadership will move,” said Olga Bitel, strategist at William Blair & Co.

Some see however a glimmer of hope.

“I think the market will calm down, start analyzing the details and realizing that the news is at worst mixed,” said Jason Britton, director of investments at Reflection Asset Management, saying that he is attracted to large technological companies that have enormous liquidity.

“If they have to undergo the backlash of this decline, I am a buyer in the event of weakness,” he explains. “It is simply an excessive reaction of the market, and I am delighted to take advantage of it.”

(Carolina Mandl in New York, with the contribution of Suzanne McGee and Tatiana Bautzer, Diana Mandia, edited by Blandine Hénault)

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