POST Liberation Day, nations are in a 90-day window to negotiate the reciprocal tariffs imposed by the United States on them.

Even the most talked-about tariffs between China and the United States have now been reduced under a truce, with the United States holding out for a 30% rate on China, and China, in return, reducing tariffs on US goods to just 10%.

China and the United States have also addressed some of the non-trade barriers, which will help the two largest economies move forward more cohesively.

The new 90-day window to finalise the tariffs and issues related to trade is an opportunity for the United States and China to negotiate a trade deal that can be a win-win not only for the two but also for the rest of the world.

Malaysia, which was earlier subjected to a blanket 24% tariff on all goods exported to the United States before being reduced to 10%, has sent trade representatives to present a clear case for a reduction, although the final quantum remains murky for now.

Winning Formula

When it comes to international trade, the imposition of tariffs is a lose-lose game.

While Malaysia’s reciprocal tariff rate is lower than its Asean neighbours, exports to the US may be affected if demand falters.

Malaysian US-bound exports will be subjected to greater competition, especially for similar goods that are exported by other countries with lower reciprocal tariffs.

Assuming that a 10% reciprocal tariff is finally imposed on Malaysian exporters, it is left to be seen to what extent these exporters will absorb the cost of the tariffs, as they would have to sacrifice their profit margins to keep business volume intact.

Logically, the cost of tariffs will be fully absorbed by US importers. However, to maintain business continuity in international trade, it is possible that the tariff cost may be shared between the exporter and the importer.

While it is still a long shot to assume with certainty the impact of US reciprocal tariffs after the 90-day window, the knock-on effect may result in business closures, job losses, and loss of Malaysia’s competitiveness in exports to the United States.

However, with the United States able to reach an understanding with China, there seems to be an added push from both parties to move from a lose-lose situation to a win-win solution.

This is indeed positive for markets.

Pivoting from Calamity

For investors, the current global trade dilemma provides a window of opportunity not only to continuously support businesses that are unperturbed by the tariff dilemma but also businesses that are domestic-oriented.

Many of our goverment-linked companies fall into this category.

However, for some other investee companies – listed or otherwise – which are either localised or regional-based, the deflated valuation due to market uncertainty provides investors with deep pockets to pick up long-term winners.

The market too has shown resilience from the onset of the Liberation Day as investors picked up good bargains from the initial sell-off, as most markets are now trading at levels before Trump’s reciprocal tariffs were announced.

With the temperature on tariffs lowered, markets are now back to focusing on economic fundamentals as the likelihood of the United States going into recession has now been averted.

Nevertheless, the US economy will see some form of slowdown, although inflation prints may not rise as feared before, based on the expected final tariff rate for most nations at 10%. The US Federal Reserve could resume cutting interest rates at least twice this year, based on lower inflation prints and not due to a recession scenario.

This is positive for markets and investors as the year 2025, despite the recent setback, may turn out to be a winning year for investors, backed by solid economic growth in a benign inflation environment, backed by lower interest rates.

No More AAA

Late last Friday, Moody’s Ratings downgraded the US credit rating, joining other rating agencies in stripping the United States of its triple-A rating to Aa1. While markets were unperturbed by Moody’s action on Monday, markets paid more attention to the downgrade as both the benchmark 10-year US treasuries and the long bond hit key levels, crossing the 4.5% and 5.0% mark.

This is crucial on many counts, as the United States is also battling against time to meet its self-imposed timeline to set the final reciprocal tariff against the rest of the world.

While the rate of financing or the cost of borrowing is set to increase, any shortfall in tariff revenue, as well as tax cut plans, could cause the US yield curve to steepen as the longer end is expected to rise much faster while the shorter end may be more inclined to move with rate cut hopes.

Resilient Market

The global equity markets, which saw a deep sell-off in early April, have since recovered fully, although the past week has been another volatile week following the downgrade of the US credit rating.

While markets will still be driven by large market-capitalised stocks and key index-linked names, the alpha play is where investors will outperform, especially after the sell-off on tariff fears.

If all pans out well, including the normalisation in the bond market, even next year’s mid-term elections in the United States may favour Republicans as the United States may even achieve its objective of reducing the trade deficit, encouraging greater non-US manufacturers to relocate to the United States, thus creating jobs.

Investors will then refocus on fundamental picks and stocks that show tremendous growth opportunities, especially among consumer names, construction, and the banking sector.

Property stocks too are likely to be in favour as Malaysia is well-positioned to capitalise not only on domestic demand for affordable homes but also demand from overseas in the higher-end spectrum, located in major cities.

In summary, while the imposition of reciprocal tariffs by the United States on all countries was seen as negative at first, markets have since then recouped their losses as investors begin to price in expectations that the final tariff rate will not be as severe as initially imposed by the United States.

Markets are now focusing their attention back on fundamentals as investors look beyond tariffs.

The article was first published by The Star.

Photo by Ivan Karpov on Unsplash.