The tariff situation seems to be a continuously moving target. In our view, if the announced tariffs are in fact executed, the base case scenario would be higher inflation in the U.S. given tariffs are essentially just another form of corporate taxation, which will likely be passed on to consumers. It would also have a negative impact on global growth, possibly pulling many countries into recession, which would – in the short term at least – negatively impact the earnings of many of the companies in which we are invested.
That said, we continue to believe that the most recent announcements are part of the negotiation process with other countries, which started during the last Trump administration and has ramped up in recent weeks. As such, it is likely that the more draconian tariff measures may well be short lived, or the tariff levels significantly reduced. Further, it is important to look at all policies together and other proposed policy changes, including less regulation, maintaining tax cuts, and improving government efficiency which would generally be pro-growth and anti-inflationary, and could also help reduce government deficits. In addition, U.S. policy uncertainty could provide an opportunity for countries to focus on domestic pro-growth initiatives, something which has been lacking in much of the world for many years.
Specific to Harris | Oakmark portfolios, we would remind investors that our value estimates are based on a company’s expected lifetime cash generation, and therefore, the initial years’ cash flows have a limited impact on that intrinsic value estimate. In addition, when valuing companies we do not attempt to predict GDP growth or inflation, but rather consider company specific factors, where we believe we can have greater insight.
While there are short-term risks to company profitability, companies have also had advanced notice of this policy. In speaking with management teams across our portfolio holdings, we found that many have already taken action, such as accelerating imports and ramping up U.S. production where possible.
If we are wrong and these tariffs were to be sustained for an extended period of time, we think companies will also shift production in ways that would be less costly than the current proposed levies. As always, we will continue to engage with company management and monitor both the risks and opportunities the current environment may provide. We will also adjust our intrinsic value estimates if necessary.
As market volatility has increased in recent weeks, we would remind investors that there have been many major events that have rocked the markets in the short term. But for prudent investors these periods have proven to be excellent buying opportunities.
Implications to our stocks
- European Autos: We believe that the impact of tariffs will be manageable but will likely result in lower margins in the short term. For BMW, roughly 50% of the cars sold in the U.S. are manufactured in the U.S. For Mercedes, 35% of the cars sold in the U.S. are manufactured in the U.S. We believe that in the short term, the cost of the tariffs will be shared across the consumers, dealers and manufacturers and in the medium term both companies have the ability to assess changes to production.
- U.S. Autos: Tariffs, as proposed, will challenge the U.S. auto industry, including GM. Still, it’s early and details may shift significantly. GM’s adaptability, proven in past disruptions, gives us confidence. We’ve cut earnings and repurchase estimates and adjusted our multiple for possible lasting tariffs. Even so, the stock seems appealing with upside potential. We’ll keep updating our estimates as this evolves. Beyond tariff risks, relaxed emissions rules could benefit GM, so it is important consider the full policy picture.
- Luxury Goods: U.S. tariffs on Europe, specifically the threat of 200% tariffs on E.U. alcohol in retaliation for the E.U.’s 50% tariff on U.S. whiskey, is negative for the companies with wine and spirits exposure such as LVMH, Pernod Ricard and Diageo. As for other luxury categories, we believe there will be mitigants from locally produced products in the U.S. In addition, the higher-end customer that buys goods exported from Europe is less price sensitive, and even so, would likely experience a mid-single digit price increase, which would not be catastrophic.
- Agriculture: The threat of tariffs on U.S. agriculture products has hurt agriculture equipment makers John Deere and CNH Industrial. Clearly, if tariffs are implemented and stay for the long term, these companies will decline in intrinsic value.
OPINION PIECE. PLEASE SEE ENDNOTES FOR IMPORTANT DISCLOSURES.
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Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. Past performance is no guarantee of future results.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
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