Welcome to Firstlinks Edition 605 with weekend update

The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.

The following from one of our sponsors, Schroders, offers a succinct and insightful take on Trump's tariffs and their likely impact. First, there's commentary from senior economist, George Brown, followed by CIO, Johanna Kyrklund:

President Trump’s highly anticipated tariffs were more punitive than expected. Rather than match what other countries levy on US exports on a like-for-like basis, the White House has also taken aim at non-tariff barriers.

The proposals would see effective US tariffs rise to 25.3%, which we calculate would push up prices in the US by 2% and cut growth by almost 1%. These estimates take no account of any potential retaliation from other countries.

The US tariff rate will rise to a 120-year high

Proposed tariffs and their potential impacts

^{Source: Schroders Economics Group, April 2025}

Tariff overview: how they were calculated, and who gets hit

The tariffs were devised using an unconventional approach based on the US trade deficit with trading partners. Trump claims this is the “true” tariff levied on US exports by each country.

The tariffs are based on trade deficits, rather than rates

^{Source: Schroders Economics Group April 2025}

For countries whose tariff is calculated to be above 10%, the US will impose a reciprocal tariff equal to half of this. As an example, Beijing is estimated by the administration to levy a 67% tariff on US exports and so will face an additional 34% tariff on top of the 20% imposed since Trump’s inauguration. For all other countries, except Canada and Mexico, the administration will impose a 10% baseline tariff.

Countries will face higher tariffs than they impose on the US

^{Source: Schroders Economics Group April 2025}

Tariffs’ potential impact on the US and elsewhere

The administration’s actions to-date are estimated to lift the effective US tariff rate by a further 17.6 percentage points to 25.3%. Before accounting for any retaliation, we judge this would roughly push up US prices by 2% and hit growth to the tune of 0.9%.

By comparison, a simple like-for-like retaliation would have added just another 1.3 percentage points to the effective tariff rate and had a marginal economic impact.

Trump’s tariffs will be a sharp stagflationary shock for the US economy

^{Source: Schroders Economics Group April 2025}

Outside of the US, the economic impact of the reciprocal tariffs varies considerably. Canada and Mexico will be breathing a sigh of relief, given that over 2.5% of their GDP is embedded in final US demand for manufactured goods.

On the other end of the scale, Asian economies have generally been hit hard. Both China and Vietnam are likely to experience losses more than 0.5% of GDP. Whereas the EU and Japan are probably somewhere in the middle, as they face a hit of around 0.3% to 0.4% of GDP.

Asian economies will be hit hardest by the reciprocal tariffs

^{Source: Schroders Economics Group April 2025}

The prospect of retaliatory tariffs

Outcomes depend on how countries choose to respond. While the White House has indicated that the reciprocal tariffs could be negotiated down, several countries have instead indicated that they will retaliate with countermeasures. As such, the risk instead appears to be skewed towards higher-still tariffs.

As an illustrative example, if the administration were to impose the full reciprocal tariffs, this would further lift the US effective tariff rate to 35.6%.

Reciprocal tariffs would be another 10% higher if fully applied

^{Source: Schroders Economics Group April 2025}

Fallout for interest rates

The stagflationary impact of the tariffs (growth down, prices up) puts the Federal Reserve between a rock and a hard place. In the near-term, we think the path of least resistance will be inertia, given the elevated uncertainty about what the economic impact of them will be.

Further down the line, the rising risk of a recession does mean that the committee could deliver more than the four cuts currently in the ‘dot plot’ by the end of 2026.

For other central banks, the mix of countermeasures and fiscal support by their governments will also complicate their job. But broadly we would expect the Bank of England and the European Central Bank to take out insurance against downside risks by cutting rates further, whereas the Bank of Japan is likely to be unable to raise interest rates any further this year.

The investor’s view: Johanna Kyrklund, Group CIO

"Certainly, Trump’s opening salvo points to higher tariffs than we were expecting, and our economic growth forecasts are being adjusted downwards.

This leads us to reduce our equity exposure, and we see value in government bonds as a hedge against the risk of recession for the first time in this cycle. We continue to like gold as it benefits from both weaker growth and the more structural risk posed by rising debt levels.

Going forward the reaction of the rest of the world will be critical. The countries on the list will have to make their decision either to retaliate and escalate the war – or to contemplate reducing their trade imbalance with the US. How long this will take will also matter for the market.

But let’s also try and tease out some positives. Trump’s framework, laid out on a physical chart, is clear. One might dispute the approach – of using each country’s trade deficit with the US – but by applying the principle of imposing 50% of the calculated rate they have laid out a clear starting point for negotiation. This might feel like a game of snakes and ladders, but at least we are beginning to understand the rules. That gives markets a basis for pricing these risks."

Generational change is coming to this federal election on May 3. Kos Samaras, pollster & director of the Redbridge Group, made the case in a recent interview with Fran Kelly on the ABC Radio National Hour program.

He says that in 2010, Millennials made up 15-18% of the electoral role. In 2025, Millennials and Gen Z combined will account for 42% of voters. That compares to Baby Boomers at 32%.

The change over the past 15 years has fragmented the political vote. In 2010, 80 seats were decided by preferences. At the last election in 2022, the number increased to more than 130 (Tony Dillon does into more detail on how preferences will determine the winner of this election in his piece this week).

Also, in 2010, eight seats were deemed ‘non-classical contests’, where only the major parties were involved. In 2022, that increased to 27 seats, and Samaras says the number is likely to rise to 40 seats at this election.

Samaras went on the outline how Millennials and Gen Zers believe the country has major structural issues and the two major political parties “are just throwing band aids at them.”

Samaras acknowledges that the decline in votes towards the major parties has been happening for some time – at the end of World War Two, votes for the two major parties were in the 90% range, which has since fallen to around 67%.

However, he suggests the voter trend away from Labor and the Coalition is accelerating thanks to the rise of Millennials and Gen Zers.

Why are the young angry?

A new report by independent think tank Per Capita may help explain why younger generations are turning their backs on the major parties.

The report bluntly critiques a “lost decade during which real wages barely grew” for young Australians.

It says that the purchasing power of workers barely budged from 2012 to 2022, increasing by just 2.6% in total over that decade. On average, nominal wages grew 2.3% per annum (p.a.), but adjusted for inflation, real wages increased just 0.2% p.a. That contrasts with the 20 years prior to that when real wages grew annually by 1.4%.

Per Capita says that if wages in the decade between 2012 and 2022 had maintained the growth rate of the previous two decades, the average full-time worker would be earning an extra $11,900 p.a. today. It suggests that the income lost by an average worker between 2012 and 2022 amounts to $54,000 in current dollar terms. And for a young couple, the combined loss is roughly the equivalent to a 20% deposit on a $500,000 first home.

The Coalition to blame?

Per Capita lays the blame for low wages on the introduction of WorkChoices legislation. It says the changes to industrial laws increased a power imbalance between workers and their employers. And the lack of bargaining power for works led to real wage stagnation in the following decade.

This seems simplistic though and ignores other key drivers of wage growth such as productivity.

Less income equals less homeownership

Per Capita argues that the suppression of wages after 2012, when Millennials and Gen Z Australians were in the first decade or so of their working lives, “not only robbed the average younger person of their first home deposit, but reduced their borrowing power”.

And, “while wages kept pace with home prices it was possible to save a deposit on a first home within three to five years, and this required prospective buyers to save diligently towards that goal. Then, at the outset of the mortgage journey, young homebuyers would be required to devote the maximum amount they could afford from their disposable income towards repayments, as assessed by the lending institution…

“The journey to home ownership and financial security across the life course clearly relied on a certain social compact: that wage growth would consistently outstrip inflation and keep pace with increases in home prices during a person’s working life…

“The collapse in wage growth over the decade from 2012 to 2022 has hit young Australians particularly hard…”

The end result is less homeownership among the younger generations:

“In 1971, Census data showed that 64% of people aged between 30 and 34 owned or were buying their home; by the 2021 Census, this had fallen to just 50%. Similarly, while 50% of those aged 25 to 29 were homeowners in 1971, fifty years later just 36% of people in their late twenties were buying a home”.

The political calculus on housing is changing

Per Capita is right to highlight wage growth as an issue for younger people. Yet it ignores the larger problem of ever-rising house prices. Even if wages had grown faster over the past decade, it’s highly unlikely that they wouldn’t have kept pace with booming housing prices.

That means fixing housing remains the biggest issue.

On that front, the political will to address the problems is weak. That’s because around two-thirds of households own homes.

So while Kos Samaras is right to highlight the growing clout of non-homeowning Millennials and Gen Zers, they aren’t in a position to be kingmakers at this election.

Though as Bob Dylan said, “The times they are a changin.”

****

In my article this week, I look at the latest shareholder letter from one of the smartest people in finance, Blackrock CEO Larry Fink. The letter outlines Fink's new quest to become the biggest player in private assets and to upend the traditional 60/40 portfolio.

James Gruber

Also in this week's edition...

Clime's John Abernethy is back, this time with a report card on Australia's economy as we head to the polls. He explores how economic growth of 7% per annum over the past seven years has largely come from fiscal and monetary largesse, and that growth is now slowing. He believes budget forecasts suggesting better times ahead are built on assumptions that lack credibility and neither major party have solutions to kickstart our economy. John offers some potential ways forward. 

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime, as Meg Heffron explains.

Recently, James Gruber sat down to interview Wilson Asset Management's Matthew Haupt. In the interview, Haupt reveals his latest views on the local stock market, how he's bullish on REITs though not on the big 4 banks, and why his firm is launching a new income-oriented listed investment company.

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. Don Ezra breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

While many assets are currently on shaky ground, gold is continuing to reach new highs. VanEck's Arian Neiron says gold miners have lagged the price rises in physical gold, but that may be about to change.

Two extra reads from Morningstar this weekend. Preston Caldwell writes on why America’s tariffs could usher in a self-inflicted economic catastrophe. Meanwhile, Joseph Taylor asks Winky Tan if the worst is over for Australian office building REITs.

Lastly, in this week's whitepaper, Munro details how climate-related investment remains one of the most significant investment themes of the 21st century.  

****

The Australian share market has fallen to an eight-month low, with more than $97 billion wiped from its top 500 stocks in two days. The S&P/ASX200 sank 2.44% to 7,667.8 on Friday, while the broader All Ordinaries tanked 2.55% to 7,847.6.

Ten of 11 local sectors closed lower, with energy stocks plummetting 8% as crude demand expectations sent oil futures plummeting.

IT stocks also took a battering, down 6.4%, while the traditionally defensive utilities buckled under falling energy prices to give up 4.4%.

Consumer staples were the only winner, up 2.4% as investors flocked to grocery giants Coles and Woolworths for save haven. Both were up more than 3.4%.

Financials - which make up almost a third of the Australian bourse's value and are considered a bellwether for the broader market - were down 2.8% on Friday and more than 12% lower than mid-February's peak.

Materials stocks were also suffering as China's growth worries swelled, losing 1.3%.

From Shane Oliver, AMP:

For the week US shares fell 9.1%, Eurozone shares fell 8.1%, Japanese shares fell 9% and Chinese shares fell 1.4%. The falls in global shares and worries about the threat to the Australian economy from the tariffs saw the local share market fall another 3.9%, with the falls led by resources, IT, utilities and retail shares. Bond yields fell sharply with safe haven demand swamping concerns about the tariffs adding to US inflation and as expectations for central bank rate cuts rose on the back of growth fears. Growth worries also weighed heavily on metal, iron ore and oil prices with the latter also being hit by a surprisingly stronger increase in OPEC oil supply plans. Gold fell slightly but after it rose to a record high on the back of safe haven demand. The $US fell slightly, but the $A was hit hard with a fall to near $US0.60 after China’s retaliation against the US was announced. Bitcoin was little changed.

The Trump Dump. So far the fall in shares from their highs earlier this year – down 17% in the US, 16% globally and 10% in Australia – is still mild in the context of past share market downturns (see the next chart which goes back to 1900), but it’s likely to have further to go probably now taking us into bear market territory (or -20%) as we start to see weaker economic and profit data flowing from Trump’s trade war.

Source: Bloomberg, AMP

As can be seen in the next chart while gold is being true to its reputation as a safe haven, surging to new highs in the past week, the $US despite a bounce on Friday is not and appears to be under pressure from a combination of expectations that the tariffs pose a greater threat to US growth than non-US growth, possibly an emerging loss of faith in the US given Trump’s erratic policy making and investors re-weighting away from US assets in response. Put simply “US Exceptionalism” is being questioned. This in turn may accelerate de-dollarization and may add to pressure on non-US central banks, to cut their interest rates as their currencies are not falling and playing the shock absorber role that would normally be expected to flow from higher US tariffs. This doesn’t appear to be applying to the $A though which fell sharply to a five year low on Friday as China retaliated and so it still appears to be behaving as a “risk off currency”, providing a shock absorber for the Australian economy.

Trump’s 2^nd April Liberation – or rather Retro - Day tariff hit was worse than expected. Every so often the US seems to hanker for a return to the 1950s. This happened in the 1970s with American Graffiti and Happy Days and so it is again! But its a lot more serious this time. The trouble is that the so called Golden Age of the US in the 1950s when everyone drove a Chevy or Cadi and played with hula hoops are long gone and return to that manufacturing nirvana is impossible: it will take years for companies to return production to the US; it will mean big price rises for Americans on imports or on higher cost domestically made products; most Americans don’t aspire to work in factories anyway; and even if manufacturing does return it will mainly be jobs for robots. Anyway, here are the key points:

• Trump is putting a base 10% tariff on imports from all countries including those with which the US has a trade surplus like Australia, the UK and Brazil, but applying a higher “reciprocal tariff” to many countries that the US has a trade deficit with including China, Europe, Japan and South Korea.
• The reciprocal tariffs are supposed to compensate for the Trump Administration’s calculation of what barriers US exports to those countries face. See the second column in the next table. But it’s based on a whacky formula that compares the US trade deficit with a country with its exports to the US – the bigger the gap the higher the reciprocal tariff. Eg for the European Union it is the US’s $236bn trade deficit with EU divided by the EU’s $606bn in exports to the US which gives 39%...which is then halved because Trump is such a nice guy! This supposedly reflects tariff and non-tariff barriers but makes no allowance for the fact that even if a country has a trade balance in total it will have deficits with some countries and surpluses with others and the reality that the US spends more than it earns or produces as a nation which is the key driver of its chronic trade deficit. As such the reciprocal tariff formula and resultant tariffs are completely non-sensical.
• There are exemptions for: imports from Canada and Mexico which already face 25% tariffs, although the exemption for USMCA compliant goods remains; autos, steel and aluminium which already face a 25% tariff; and for sectors like pharmaceuticals and copper which will likely see their own tariffs. The de minimis exemption for low cost online imports from China was removed. Bad news for US Temu shoppers.

US Reciprocal Tariffs on key countries

Source: US Government

• While the tariff on Chinese imports was set at 34%, it’s really 54% (or maybe 68%!) based on comments by Treasury Secretary Bessent that its on top of the 20% fentanyl tariff.
• Countries will find it hard to negotiate the reciprocal tariffs back down because the Administration has focussed on non-tariff barriers, like regulations and consumption taxes which many countries like Europe and Australia won’t change.
• While Trump has complained about our bio security laws restricting US beef exports to Australia and other things, even if we removed everything the US is complaining about we would still be subject to the 10% tariff as it is the new minimum. And why was Norfolk Island in there? It’s part of Australia and doesn’t even export to the US! 
• Given the size of the US tariffs, retaliation is to be expected, and China quickly announced this with a 34% tariff on all imports from the US. This is taking us further into a trade war.
• The tariffs are starting to look less about negotiation and more about raising tax revenue to pay for tax cuts and returning production back to the US. This is bad news for share markets and the latter two objectives are in conflict anyway because if all production is returned to the US tariff revenue will be zero.

Overall, the tariffs are worse than expected. Our rough calculation is that the 2^nd April announcement will take the US average tariff to above levels seen in the 1930s after the Smoot/Hawley tariffs.

Curated by James Gruber and Joseph Taylor

A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by next Thursday.

Latest updates

PDF version of Firstlinks Newsletter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Listed Investment Company (LIC) Indicative NTA Report from Bell Potter

Plus updates and announcements on the Sponsor Noticeboard on our website