Jeff Kleintop, Chief Global Investment Strategist at Charles Schwab, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the tariff situation and the potential impact on investors in international equities.
Kleintop has had a bright economic and earnings outlook for the US, but tariffs can pose a risk to that outlook. Tariffs pour sand in the gears of commerce and trade. Markets can hope that Trump’s bark is worse than his bite, as the actual tariffs on China were much lower than the initial threat of 60%.
The probability and impact of tariffs may be different for each country and industry. Steel tariffs are likely, as the US only imports 8% of its steel needs. It can be more challenging to implement tariffs on aluminum, as nearly all US demand is satisfied through imports. The auto industry may be hit especially hard, as the largest importer from Mexico to the US is Ford.
If implemented, tariffs could have a negative effect on US stocks, but we can see a relief rally if and when those tariffs are rolled back. Through February, Mexican and Canadian stocks outperformed the S&P 500 year to date. The US is a service economy, with over 90% of jobs in services, but future job growth will likely be in manufacturing.
Kleintop is constructive on European stocks, as consumer confidence can improve if ceasefires are implemented. Stocks are fairly valued, and Kleintop likes the earnings momentum. European equities are focused on manufacturing, while the German economy is driven by automobile production. To date, Europe has less risk to US tariffs than other countries or regions. It may be relatively easy to invest in international equities, as the MSCI EAFE Index has its largest weights in Japan and the UK, two countries yet to be involved in tariff threats or discussions. The EAFE Index has no exposure to the US, Mexico, Canada, or China, and a large weight on Europe, offering broad international exposure with lower risk to tariffs.
Kleintop notes that the outlooks for India and China are uncertain. The key to the Chinese economy is a potential turnaround in domestic consumption, as Chinese exports to the US have fallen to just 3% of GDP. The property sector weighs heavily on China, as many lost their life savings when builders went bankrupt while keeping the down payments deposited by would-be homebuyers. Chinese consumer spending and confidence can be revived if the government guarantees those deposits. While Chinese stocks are cheap, Kleintop sees little probability of a quick turnaround in that market’s prospects. India has the world’s fastest-growing economy and is on track to become the world’s third-largest in the coming years. There is a potential downside risk to Indian stocks due to the current valuation levels if anything goes wrong in the Indian economy.
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