Is happy hour over? Tariffs, inflation, and the storm for markets

It may have passed investors by – there’s been a lot going on – but April 7th was National Beer Day in the US. This might have been a cause for celebration (who doesn’t like beer?) were beer not about to get a whole lot more expensive as a result of the new tariffs. It’s a reminder that there will be consequences for US consumers from the new regime as well as the rest of the world. 

Take Budweiser. It may seem like the quintessential American beer, but Budweiser is actually produced by Belgian company InBev. As part of the EU, Belgium is subject to tariffs of 20%. In February, the company warned that tariffs on aluminium could also raise the cost of its beer in the longer-term. 

The issue of Budweiser illustrates many of the complexities of the tariff situation. Will InBev raise its prices for US consumers? Or will it take the hit to its profits? If it raises its prices, what will that do to demand for beer? And what will be the knock-on effects on the US economy? Could it lift inflation, for example, and force a rise in interest rates? 

What happens next?

David Coombs, manager of the Rathbone Strategic Growth Portfolio, points out that ‘Liberation Day’ may not have provided any real clarity: “What happens next? Governments around the world scramble for a response. Australia and UK call for calm heads, EU and Canada more combative. This is clearly a negotiating tactic. Markets are taking fright as you would expect, with recession talk leading the word cloud. Sovereign bond yields lower, US Dollar lower and equities gaping down in the sectors most impacted.”

On balance, he believes, common sense will prevail and some concessions will be made to the US which will allow Trump to claim victory for the ‘rust belt’. However, he adds, the next few weeks will be challenging.

There is a question of how investors should be responding. It is difficult to formulate a plan of action while the outcomes are still so uncertain. InBev’s forecasts for beer sales, for example, are inevitably going to be tricky while pricing and demand are uncertain, and the same applies to many companies that trade globally. For some companies, this uncertainty is already in the price of their shares, but recovery seems unlikely until the potential impact is better understood.

How should investors react?

There are a few strategic options. Companies that are more domestic in focus may be better insulated from tariff dramas. Those companies are more likely to be found among small and mid cap companies. These have been very out of favour, so also have a valuation cushion to withstand market turbulence.

George Cooke, manager on the Montanaro European Income fund, says: “European smaller companies have been deeply out of favour for the last few years. As a result, these companies now sit on the largest P/E discount to the market on record – wider even than during the financial crisis of 2008 or the Eurozone crisis that followed. Now Europe is entering a period of significant fiscal expansion and investment as it seeks to reduce dependency on the US and elsewhere. Investors are responding; this year has seen the fastest rotation out of the American stock market in favour of Europe in 25 years.”

The UK is another option. While UK small and mid-cap companies have continued to be out of favour, sentiment appears to be shifting at the margins and they may yet catch up with large caps, which have performed well since the start of the year. The IFSL Marlborough Multi Cap Income fund is one option. Its top holdings include asset manager Polar Capital, storage group Big Yellow and specialist finance provider Paragon Banking Group*, whose fortunes are more domestic than global.

It may also be worth including more ‘insurance’ type holdings that can help balance equity exposure and mitigate volatility. This might include SVS RM Defensive Capital, which aims for uncorrelated returns and capital protection. Jupiter Gold and Silver might be another option. As well as being geared to the soaring gold price, manager Ned Naylor-Leyland believes the supply and demand dynamics for silver look appealing. 

Trump will spend a lot of time over the next few months negotiating and renegotiating the levels of tariffs. That is likely to cause turmoil for investors and beer drinkers alike for the near-term. Investors can take steps to insulate themselves, beer drinkers may want to consider alternative brands.

*Source: fund factsheet, 3 March 2025