March twenty-fourth, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
II. Insights
Our Viewpoints and ideas on market.
Follow-up on the European trade: reducing positions + using small caps structurally for European exposure
We captured the full move in this European trade on Cross-Asset Planet, and last week’s Notes update on Notes250321: European fiscal-spending risk is tilted toward overreaction actually was actually warning that this part had run too far too quickly in the short term. We sold part of our position and shifted into India (those who read the notes closely should have noticed that once again we caught the macro low in the India trade) (see Notes250313 India trade can be viewed here). The India trade is still in an initial pilot position for now. First, let’s discuss the structural positioning in Europe and what to do next.
Since we signaled a long position in Europe, the market consensus has broadly followed our lead and shifted to Long Europe vs. US equities. This capital is essentially dumb money lifting our positions; we should not stay alongside dumb money for too long.
As quarter-end flows tilt sharply toward U.S. equities (with expected inflows of +1000 hundred million dollars), non-U.S. equities face outflow pressure of about 820 hundred million dollars, In the short term, Long SPX / Short SX5E is the main thesis for a reversal of the pain trade. Expectations of tariff de-escalation are also supporting the relative strength of U.S. equities in the short term, especially benefiting growth sectors.
Over the medium term, we still favor increasing European equity allocations, because eurozone GDP growth over the medium to long term is indeed likely to benefit from fiscal expansion, defense spending, and expectations of a ceasefire in Ukraine. This could bring eurozone economic growth in line with, or even above, that of the United States. We still favor cyclical sectors, including industrials, banks, and the heavily shorted auto sector.
However, this trade has clearly moved too fast at this stage. When we called for going long German equities in the second half of last year, we expected the trade to take around 2 years, but it has now reached our expected range in just over half a year. Although relative EPS trends support continued outperformance by European equities, the recent risk structure in US equities makes reversal trades extremely risky. Going long European equities is better suited as a medium-term position than as a chase at current levels.
In the short term, we will try to capture a rebound in US equities to pair with a reduction in European equities. Over the medium term, China trades will certainly outperform Europe trades. In Europe, as investors reduce index exposure, they can rotate some of it into European small caps, which may continue to catch up for some time and are worth watching. The core position is not being sold; only the trading position is being adjusted.
2025.03.24
What will happen on the eagerly anticipated 4/2?
Markets are in countdown mode. 4/2 has been named “Liberation Day” by Trump himself. It is more than a symbolic political statement; it genuinely has the potential to become a turning point in a new round of trade policy.According to the America First Trade Policy Memorandum, federal agencies must complete their assessment of the US trade deficit and report it to the White House by 4/1. The actual policy timetable is largely anchored to this window. Judging by the administrative procedures and Trump’s high-profile buildup, this looks less like a slogan and more like a substantive policy announcement.
The policy focus has shifted from the initially discussed reciprocal tariffs to the more detailed “three-tiered tariff structure.” In essence, this moves from simply taxing goods by category to a comprehensive assessment system based on structural trade barriers.
The new plan would classify countries into different tariff levels according to the extent of their trade barriers against the United States, The factors considered for proposed tariffs would extend beyond import duties to include a wide range of issues, such as digital services taxes, subsidy mechanisms, intellectual property protection, and non-tariff barriers. The intent is clearer: to use a “layered and tiered” approach as a bargaining chip and build more durable negotiating leverage.
Markets are broadly underestimating the medium-term impact of this policy shift on asset pricing, especially amid a concurrent deterioration in the macro backdrop and a marked slowdown in growth momentum. The tariff shock itself may not trigger a recession, but it will change corporate expectations and investment appetite, thereby weighing on capex and margin expansion and indirectly reinforcing the policy-dependence narrative—that is, Non-economic drivers will account for a greater weight in the Federal Reserve’s policy path.
The contours of the negotiating strategy are beginning to emerge: Bessent disclosed that several countries have proactively reached out to seek tariff relief. The EU has announced that it will delay its retaliatory tariffs from 4/1 to 4/13, while Japan, the UK, and Mexico have also begun consultations.The US side may use a “one-country-one-bracket” mechanism to set different tariff tiers and tailor the pace of negotiations accordingly. In other words, this is an incentive-compatible framework: it can apply pressure, negotiate, and still leave room for exemptions.
Tariffs on China are highly likely to expand further, but as rates continue to rise, the government may introduce certain exemption mechanisms to ease pressure on specific industries. Meanwhile, long-term tariff policy on products involving national security, such as steel and aluminum, is highly likely to remain locked in and will not be relaxed easily.
Although the “three-tier plan” is currently the main topic of market discussion, it cannot be ruled out that the US trade office is preparing a multi-tier alternative. The process may be to first group countries into tiers (three or more), then have the Office of the US Trade Representative assign them to the corresponding tariff levels based on each country’s goods trade deficit and overall degree of trade restrictions, and conduct bilateral negotiations accordingly.
It could still be presented formally as “overall reciprocity,” but the key lies in the ranking mechanism: during negotiations, the trade representative’s office can rank trading partners from the largest to the smallest deficit, assess their trade barriers one by one, and ultimately set a target tariff rate sufficient to “correct the imbalance.”
Which industries are most likely to be affected on 4/1 or 2?
From an industry perspective Agricultural products are unlikely to become the main battleground, despite the large tariff gap, because the United States has strong domestic production capacity and imports account for a low share. Automobiles are very likely to be a primary target.especially the automotive industry from the EU. Complete vehicles and parts account for around 12% of total US imports, while the trade-weighted tariff gap in this sector is 2 percentage points (that is, the rates charged by the United States on imports are lower than those charged by other countries).
Although pharmaceutical products have been mentioned, low tariffs are consistent worldwide, so the tariff imbalance is relatively small and the United States is unlikely to act rashly in this area. By contrast, beverages could become an unexpected target. Although they account for only 1%, the weighted tariff gap reaches 2.5%, making them an easy scapegoat for “high-priced imported goods” in the narrative.
Policy risk is skewed toward the right tail, and the market has insufficiently recognized the idea of “tariffs as a long-term tool of strategic competition.” This trade-policy turning point is highly likely to be more than another round of “Trump-style tariff hikes.”
2025.03.24
III. Market Pulse
Our latest Comments on the economic and market environment
Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not make decisions based on or rely on this information.