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The Macro Brief - Pricing tariff risks
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With fresh US tariffs due to come into effect on 1 August, Alastair Pinder, Head EM and Global Equity Strategist, looks at how markets are pricing in heightened uncertainty.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
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This podcast was recorded for publication on the 24th of July, 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached your media player.
The Macro Brief Overview
00:00:35
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ah don't forget to like and subscribe to The Macro Brief wherever you get your podcasts.
00:00:43
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Hello, and welcome to the Macro Brief, where we look at the issues driving financial markets across the globe.
US Tariffs and Trade Deals
00:00:50
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I'm Aline Van Dyne in New York, and the US is again very much in focus on our podcast with new tariffs set to come in on the 1st of August.
00:01:00
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This week, President Trump has announced trade deals with Japan and Indonesia, and a host of other nations face steep rises in a week's time. With so much uncertainty, how can investors figure out which of these risks are priced into markets?
00:01:16
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And also, how important tariffs are just in general for the performance of equity markets?
Market Risks with Alistair Pinder
00:01:22
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To help us understand this, I'm joining the studio by Alistair Pinder, Head Emerging Markets and Global Equity Strategist.
00:01:29
Speaker
Alistair, it's great to have you back on the podcast. Thank you for having me back. So Alistair, let's start with just ah stepping back for a minute, figuring out what's going on.
00:01:40
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First of August deadline. Is it even a real deadline? What are we waiting for? That is what seems like a very simple question, and it's incredibly complex. um The 1st of August is clearly a deadline, though the Trump administration ah previously has been quite flexible in in shifting that.
00:01:57
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Why is it so complex is because each country has essentially their own tariff rate being threatened on them. So ah the Europe, for example, has been threatened by a 30% tariff, Brazil a 50% tariff, Korea, Malaysia, 25%. And in between all of that, we've also seen some trade deals, as you mentioned, with ah Japan and Indonesia.
00:02:20
Speaker
And so it's worth maybe just taking a quick step back and being like, okay, we have all of these moving different tariffs, right? Well, what is the average? And, you know, also bear in mind that there's a ton of exemptions from this.
00:02:32
Speaker
Certain products don't get hit by tariffs. Some sectors actually have their own individualized tariff. And so we kind of want to net it all out. And netting that all out, we currently think the effective tariff rate is at 14%.
Impact of Tariff Increases
00:02:47
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1st of August tariffs could increase that to 20%. And that is going to be the highest level since really the 1930s. Right. I was going to say, so even though it's going up from 14% to 20%, even that 14% number is a lot higher than it's been historically.
00:03:05
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Yeah. And and so pre-Trump's second term, essentially that effective tariff rate was roughly 3% by some numbers. So again, it's you know, huge increase.
00:03:16
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and And of course, we compare it to the 1930s. ah Global trade in the 1930s was much smaller than it is today. Global trade has ballooned and is such a big and, you know, dynamic part of our economy.
00:03:31
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So the impact of that tariff is much more substantial than what it was, ah you know, 90 years ago. On last week's podcast, of course, we talked in detail about the fact that in the real economy, so in terms of inflation, in terms of growth, it's still hard to see the effect of some of these tariffs.
00:03:49
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And to some extent, it's been a bit surprising that so far the impact has not been as transparent or as apparent. um And of course, we're still waiting to see what happens. This could change in the coming months. yeah But what about the actual markets and what they're pricing in?
Equity Markets Rally
00:04:06
Speaker
Has this higher tariff and this potentially higher tariff already been reflected in in stock prices globally? Or what are we seeing? I mean, I think what surprises a lot of investors is that despite you know such a big jump in tariff rates, ah global equity markets have substantially rallied this year, more than 10%. EM equities specifically, which have been the cornerstone of globalization and you know benefiting from these exports and should be significantly damaged by these tariffs are up actually 13 to 15%. And that has, I think, created this notion that equity markets are not pricing in tariffs.
00:04:50
Speaker
And I think that's maybe a little bit of a simplistic way to view things, because one thing just to bear in mind is that EM economies and EM equities are two very different beasts.
00:05:02
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And one way just to frame that is um by looking at revenue exposure. So an EM economy might be very export heavy. but their equity market might not be, might be for low banks.
00:05:14
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So when you're talking about the equity market, it's basically the stocks that are listed on the domestic stock exchange may not be a carbon copy of of the market. That's exactly right. That's a great way to frame it. Exactly.
Earnings Impact Analysis
00:05:27
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And so when we do our analysis and we look at kind of the tariff impact or and our assessment of what it could impact on earnings, For all of EM, it's an aggregate 5%.
00:05:39
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That's not great, but it's not the worst situation. You know, they generally grow profits at 7% year on year anyway. And so is this analysis also relevant to developed markets? Because, for example, it's not just emerging markets where there have been rallies. The US is a prime example. And this is one of the discussion points like, well, if tariffs are so bad, how come US stocks keep hitting record highs? Completely. And so in in that context, you know our analysis shows that areas like Europe and Japan are much more sensitive. That hit could be to earnings could be anywhere between 15 to 20 percent, so pretty massive.
00:06:16
Speaker
But for the S&P 500, so far, actually, those companies have you know been reporting earnings that have been beating. And I guess it was, again, just reflecting this difference between the economy and the equity market.
00:06:29
Speaker
The biggest stocks in the US are these so-called Magnificent Seven. um You think about what they sell, they sell software. You know, some some like companies obviously sell other goods and hardware, but software doesn't get hit by tariffs.
00:06:42
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You know, if you have a cloud engine um and you're selling cloud um you know software, um that's completely unimpacted. And the other area, which is, you know, semiconductors, I guess is another key topic when it comes to tariffs.
00:06:56
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So far, there has been this threat of a specific semiconductor tariff, 30%, but that still hasn't yet materialized yet. So semiconductors is one of the sectors. I think it's copper is another one.
00:07:08
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One of the sectors that is currently being investigated where there are reviews, pharma. But so far, nothing has materialized. But again, we're in this sort of wait and see.
00:07:20
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Could it happen? um And I guess it is a risk. Yeah, and that's definitely a downside risk. But, you know, President Trump first mentioned this back in February about these potential sector-specific tariffs, and they still haven't really materialized yet. And they might materialize actually towards the end of the year.
00:07:39
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But this kind of, you know, quiet zone has given maybe a false sense of confidence that they're not going to materialize. So it's worth just, I think that's ah the first thing just to highlight is that, you know, that might be one reason why equity markets have done so well.
00:07:53
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So just to recap, to figure out whether or not tariffs are priced in or are relevant to equity markets, you have to see it whether or not they will impact the earnings of the companies in those equity markets. Completely. Okay.
00:08:06
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So then to understand whether like actually markets are pricing in, going back to your point, you know, specifically what we can do is say, look, instead of looking at the performance of the entire market,
00:08:17
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equity market, yeah why don't we focus on just the stocks that are most susceptible to tariffs? They produce goods and they export them to the US. OK. And that accounts for a lot of their revenue.
00:08:29
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So this is obviously the non-US s markets, emerging markets. Emerging markets and a subset of these companies, which we think are most ah exposed. And then what we can do is basically look at the performance of these stocks and look at them and compare it to what we would expect to happen given the current macro backdrop.
00:08:49
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And by comparing their performance with what we would expect to happen might be an indication of, you know, are they pricing in ah tariff risks or not?
00:09:01
Speaker
And the conclusion that we found was that it was a little mixed across the EM regions. And just to ask one follow question, what sort of time frame are you looking at? Is that sort of performance this year as these tariff risks have emerged? Yes, since the US election. OK. Yeah. So since the US s elections, we knew Trump was going to come in and potentially focusing on those tariff risks.
00:09:25
Speaker
But what is very interesting in our analysis is that you do see, you know, around Liberation Day, also around February when he started to mention the the sector specific tariffs, that these stocks and our barometer of tariff risks increase quite substantially.
00:09:39
Speaker
OK. And then when you have these quiet zones, they start to price it out a little bit. But there's definitely some markets in EM, particularly those which are a bit more tech heavy and are related to the semiconductors, which are not probably pricing it in as much. And there's others which are very goods heavy and are very affected by these 1st of August tariffs that are starting to price in more aggressively.
00:10:03
Speaker
And just to be clear, we're obviously talking about what's priced in now. This is not a discussion about what provides good value in the future. yeah But on that basis, in terms of what's priced in now, which markets are pricing in the biggest tariff impact?
00:10:16
Speaker
So we basically highlight ASEAN. And you know to a certain extent, that's not a huge surprise given that A, they export a lot to the US and B, they've been faced with some very high tariff rates, above 30% in some cases.
00:10:30
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So that is one area. And also LATAM has also started to price in more risks. And that's been a kind a responsive reaction to a 50% tariff on Brazil. Right.
00:10:42
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so i they i Because originally in April, the i it seemed they would be subject to a 10% tariff. Yes. and and you know And Mexico at one point was actually removed and wasn't even included in the reciprocal tariffs.
00:10:55
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And now is getting more and more tariffs being sort of thrown their way. um So that shift... has definitely caused that market or those markets to to start pricing in those downside risks a bit more.
00:11:07
Speaker
So ASEAN, any particular economies or you looking at it as the entire region as a whole? Okay. as And then which markets are seemingly immune from tariff pricing pressures?
North Asia's Resilience to Tariffs
00:11:21
Speaker
So this is really um North Asia um and and by that I mean specifically Taiwan and Korea. And again this goes back to the point of, and well most of the stocks in these markets are semiconductor focused.
00:11:36
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So um they're not too impacted by this 1st of August ah tariffs. They're more focused on what could happen with the you know the semiconductor related tasks specifically.
00:11:47
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And the other reason why they might be glossing it over is because, of course, we have this other just underlying trend of AI. And that's come back into focus with you know all of this spending on, I guess, AI data centers, chips, whatever else to to fuel this technology.
00:12:06
Speaker
Which is another reminder that when you're looking at what the markets are pricing in, it's never just one thing. Like something might be getting the headlines, but a company's profitability activity might be driven by a whole other trend. Completely. And, you know, perhaps counterintuitively, and this is where I think it's quite interesting, is that you could even argue that tariffs might accelerate the AI trend.
00:12:31
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So if I am a ah company and I'm exposed to tariffs and I need to think about, well, how am I going to manage these costs? Why don't you start investing in AI and actually start using that as a productive tool to become more efficient and you know reduce costs through that means?
00:12:49
Speaker
And so actually, that could be an interesting angle here is that tariffs, you know, kind of much like in COVID-19, where this very big event causes to drastically change our actions very quickly and in a very, in some ways, efficient and dynamic manner, tariffs could be forcing the same thing for companies today. It's a catalyst for change. Exactly.
Who Absorbs Tariff Costs?
00:13:08
Speaker
Exactly. So Alastair, is there anything else as you did this analysis in terms of what markets are pricing in that stood out? Any other observations in terms of how investors are absorbing this, grappling with this uncertainty?
00:13:22
Speaker
So I think... One of the big questions that investors have been asking is who absorbs this cost? Because there's really three potential um absorbers, so to speak.
00:13:37
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ah One is US consumers, that all of these tariffs basically get passed on to the US consumer. Which is back to this point about inflation. yeah If it was passed on to the consumer, presumably it starts to appear in inflation data. So that's still a subject of debate, the extent to which that happens. Exactly.
00:13:57
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The second one is US corporates, that they don't pass the the costs on and US corporates you know eat some of that margin cost. And the third is that it's not actually eaten by the US at all, but it's eaten by the foreigner, the foreign exporter.
00:14:12
Speaker
that they lower their prices um and then export that. And when you add on the tariff, net net, it kind of evens out. And so the US importer doesn't get impacted by that.
00:14:24
Speaker
um And so one thing that you can do, of course, is look at US import prices. And if it was the foreign exporter that was eating it, what you'd expect is a big decline in US import prices.
00:14:37
Speaker
And we haven't seen that. Actually, we've kind of seen the slight opposite, which is that they've been up very gradually, but they've increased a little bit. So I think the interesting narrative here is that, you know, the the foreign exporter, particularly in in certain sectors, seems to have a lot of pricing power and seems to be able to push the costs on to the US side. And then it's a debate on whether it's going be the corporate or the consumer in the US that eats that.
00:15:01
Speaker
But we also did a lot looking at the the earnings calls and what companies specifically are saying about tariffs. In the US or globally? ah Globally, actually in emerging markets, you know given their export exposure.
00:15:16
Speaker
Though we actually did do this ah in the US as well and in in a separate report. And I guess there's two interesting angles here. The first is that in you know emerging markets, 67% of the companies that you know mentioned tariffs actually said it's going to have no pricing impact whatsoever.
00:15:32
Speaker
So again, highlighting this fact that they have pricing power, they don't really need to adjust or absorb much cost. So really the majority. Yeah. Now in the US, when we asked we looked at the question of like, well, what are companies saying about how it's going to impact their earnings?
00:15:47
Speaker
Probably the most interesting thing was that 20 to 30% said it's gonna have a delayed impact. Right. So, you know, some obviously, like I mentioned, some companies said it actually has no impact because we do software and whatever doesn't impact us.
00:15:59
Speaker
But those that you know are impacted, a lot of them said it's a delayed impact. And some of them have front loaded inventory. They've had some other ways to navigate it But it's this delayed impact, which I think is really important, because as you were mentioning and saying about your conversation last week, you know, about how it's not feeding through into the real time data just yet.
00:16:19
Speaker
the I think the worry that we all have in markets is that there's a sense of complacency and then it shocks us in three or four months time that towards in the end the year, we get this shock factor where inflation picks up, data starts to to slow down a lot and that tariff impact starts to bite when we least expect it. Yes, yes, which I guess that that's what we're all looking out for to see if that actually emerges or not.
00:16:43
Speaker
Alistair, this is so interesting. And let's make sure that we keep talking about it over the coming months. Maybe we'll get some more visibility on on whats what's being impacted. Definitely.
00:16:54
Speaker
Hello, Macrobrief listeners. Fred Newman here from Under the Banyan Tree podcast in Hong Kong. Join me and my special guest, Yuqian Ding, on this week's podcast, where we will be talking all things electric vehicles in mainland China, from gadgets to charging times, costs to global sales.
00:17:09
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We've got the info you need to understand the world's number one electric vehicle market. Listen, like and subscribe, and we'll see you Under the Banyan Tree.
Launch of HSBC Global Macro Investor
00:17:19
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A couple of quick things before we go. This week, we launched a new regular report called the Global Macro Investor.
00:17:27
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Led by Murat Olgun, our interim global head of macro strategy, the report brings together top trends and our best trade ideas across all asset classes and geographies.
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If you'd like more information on that, or if you'd like to get in contact about anything else, please email askresearch at hsbc.com. And a reminder that if you're an HSBC Global Investment Research client, then don't forget to download our mobile app.
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00:18:10
Speaker
So that's it for today. From all of us here on the team, thanks very much for joining us. We'll be back again next week with another edition of the Macro Brief.
00:18:43
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.