Recent increases in US import tariffs and retaliatory actions taken by affected countries in response have had important commercial and economic effects and created significant economic uncertainties that have had knock-on effects on companies and asset valuations.These have been accompanied by policy reversals and conflicting signals which have complicated economic forecasting and corporate planning.
The effects of tariffs have been widespread but are of particular concern to certain countries and industries. For example, early tariff actions focused on North American trade between the US, Canada, and Mexico. Subsequent very large new tariffs on trade between the US and China, in particular, have had direct effects on physical trade flows and even shipping levels. Particular industries have seen outsized effects, especially where extensive supply chains had developed, most notably in technology, but also in sectors such as footwear. However, even countries and companies with less direct linkages are affected with an increased risk of a recession or stagnation, as well as inflation.
Currently, trade deals are being negotiated, and in certain cases measures are on hold as the situation evolves dynamically. This has limited the economic effects to-date and raised questions about the ultimate outcomes.
In looking to understand the potential effects of tariffs on a company and its valuation, the complexity is increased because of uncertainty about how long these arrangements will remain in place. For example, some indications were that the objective of the policy is to shift manufacturing back to the US. This would require the expectation that tariffs would remain in place for the long term so that companies increased investment in US manufacturing.
However, other signals suggest that the current arrangements are an opening negotiating position, implying these will change in the relatively short term, in which case, companies may decide to not change their investment plans (but may change short-term import decisions). This increases the complexity for companies managing in this environment and valuers performing valuations.
This article addresses some of the key uncertainties that companies are currently weighing, which could directly or indirectly affect valuations.
