The tariff shock is a systemic shock to the global economy, say experts. The question is, how should pension funds that have to plan for the long term respond to these lurches?
By Rob Rose
It is almost as if the investment market, which underpins your pension, has strolled into a nightmare, and nobody in any fiduciary position seems to know how to wake up.
On April 2nd, US President Donald Trump upended financial markets and global trade by announcing a slew of tariffs on his country’s largest trading partners. South Africa was slammed with a 31% tariff, Lesotho 50%, and the European Union 20%.
Stock markets collapsed, losing 15% in a week; the oil price tumbled to a multi-year low of $60/barrel; and retail investors couldn’t sell their stocks fast enough.
Retirement savings went up in smoke: the largest 25 US pension funds lost $169bn in just four days, according to a report by the New York-based research organisation Equable Institute.
This was “the most significant tariff hike since the Great Depression”, said Arthur Kamp, chief economist at Sanlam Investments. “This is not simply a trade spat; it is a systemic shock to the global order.”
The panic, at least, prompted Trump to blink, imposing a 90-day moratorium on tariffs for everyone but China. But there’s no saying how it will go once those three months are over.
The question is, how should pension funds respond to this? Has this changed their investment strategy, or capital allocation?
“Our advice to our pension fund clients is they must just ride out the storm,” says Orin Tambo, head of investment strategy at 27four Investment Managers. “The situation remains very fluid, but you can’t afford to have a knee-jerk response. As it is, US equities have sold off by 10% to 15%, so there is no point selling now.”
A number of asset managers, including 27four, had unintentionally prepared for this storm by selling down their exposure to US equities in recent months — not because of the possibility of tariffs, but because American stocks had become relatively expensive.
“This is what we did at 27four, but we were just fortunate in our timing. Instead, we increased our exposure to South African equities, to Europe and to China, since they seemed the best positioned of the offshore markets,” says Tambo.
What is most likely to happen now, according to a report by Fungai Mhembere, an investment associate at 27four, is that this tariff war will likely lead to some sort of negotiated truce: a strategic compromise in which countries offer concessions to Trump, and end up with a likely 10% tariff across the board.
The least likely scenario is the one in which tariffs will remain set at the high levels initially imposed by Trump. This is “unsustainable in the long term”, says Mhembere.
“Most of the brokers who have contacted us in the past few days to discuss how to respond to these tariffs have taken this in their stride, and are looking to stay invested — which is the right approach, “ says Jaco-Chris Koorts, a portfolio manager for Sanlam Investments Multi-Manager and Glacier Invest.
While panicking is obviously an understandable reaction in any market collapse, Koorts says selling is the worst approach, “because you’re crystallising the downside and losing out on any recovery, which can happen swiftly”.
As it is, the logical underpinning of Trump’s tariff plan is flawed, he says. And sooner or later, with mid-term elections scheduled in the US next year, the political pressure will likely lead to a realisation in the White House of that reality.
“Tariffs are simply a tax on the consumer. A comparison I like is the one in which I buy a coffee for $3 today, and because I see this as a ’trade deficit’, I then slap a 50% tariff on that coffee house. Which means that same coffee will cost me $4.50 tomorrow. It is nonsensical,” he says.
But Trump does have a deeper objective. Tariffs aren’t just a bargaining tool and a way to cut the trade deficit, they are a critical tool by which Trump hopes to finance his tax cuts — but to do this, he’ll need to raise around $ 5-trillion.
The April 2 tariffs would have generated $1.4-trillion over a decade. Combine that with the sharp cuts into the bureaucracy made by Elon Musk’s Department of Government Efficiency, and Trump was hoping to get close to that $5-trillion target.
But if this was a plan, the tariff shock has introduced a whole new set of variables into the picture, with long-term implications for GDP growth across the globe.
Mhembere says the most likely scenario is one in which the world must battle below-trend GDP growth, higher inflation and persistent policy ambiguity. And, if the trade war continues, stagflation — where high inflation and low growth predominate — is a real risk.
“Our priority is to remain balanced, diversified, and responsive across asset classes,” she said. “We are prepared to adjust positioning as key signals evolve [including] a more disorderly deterioration in global trade, a breakdown in political space in South Africa, or signs of financial market dysfunction.”
Americans ‘won’t be wealthier’
For pension fund trustees trying to pilot a long-term voyage towards financial security for members, it’s like sailing into the dark.
Mostly, funds are now eschewing risk. Overseas, the largest funds have pulled back sharply on their investments in unpredictable private markets, particularly in the US.
“If some private equity funds come by and say ‘we have a great investment in the US’, we will say ‘no thank you, come back in half a year when things are more stable and foreseeable or we will have to take a big discount’,” an executive from one of the largest pension funds in Denmark told the Financial Times.
But Koorts says that at this point, South African pension funds should not discard US assets entirely.
“If I were a trustee, I would not move away from US exposure completely. I’d make sure my portfolio is still well-diversified and style-neutral on whether to support growth stocks or value stocks,” he says. “The US economy is still a juggernaut, so while there is good value in Europe, emerging markets and the UK, it would be dangerous to avoid America entirely.”
Sanlam’s Kamp argues that with any luck, the impact won’t be as dramatic as it initially appeared. “We remain hopeful that diplomacy and legislative checks will eventually temper the impact. But in the interim, expect short-term effects on trade volumes, investment sentiment and real economic activity,” he said.
While Trump is taking a big gamble on tariffs, Allan Gray’s Sandy McGregor points out that this strategy “will not make Americans wealthier as Trump claims”. Rather, the cost of this new tax will be slower growth and less income.
South Africa, McGregor says, could still negotiate its tariffs down, which would be best for everyone, including pension funds.
“If we are subject to the standard 10% tariff, the new tariff regime should not be damaging. Our exports to the US are mainly metals, minerals and agricultural products, which the US requires,” he said. “SA will lose some of its US export markets, but this should be manageable.”
The bottom line for pension funds is that South African corporate earnings, which underpin investments, should remain largely intact — though damaged on the margin by lower global growth and higher prices, even if tariffs settle at the more benign 10% level.
This is, however, subject to the caveat that Trump is unpredictable and could choose to revert to his initial punitive tariffs in three months.
Those who could have foreseen this chaos in early March would have saved themselves much pain. One such person is Christopher Mellor, a 65-year-old financial coach living in the UK, who told the Telegraph he had saved £400,000 by shifting £2.8m of his pension savings into cash the week before Trump was inaugurated in January.
“Why take the risk?” he said. Mellor admitted he felt a little “smug” about how profoundly his decision had paid off.
But for the rest of us, there is no other option at this point other than staying invested and backing the quality investments best-placed to ride out four more years of Trump-induced lurches. This won’t be the last of them.
