What US tariff policy shifts and Middle East risks mean for markets

After the US Supreme Court struck down the use of the International Emergency Economic Powers Act (IEEPA) to impose import tariffs, President Donald Trump invoked Section 122 of the 1974 Trade Act to impose a new global levy for 150 days. This was initially set at 10% by executive order and later raised to 15% via a social media announcement. The new 10% import duty takes effect on 24 February 2026.

Some categories of goods will retain their previous exemptions, and most trade from select countries, including Canada and Mexico, is also excluded. Despite near-term tariff uncertainty, we expect the effective tariff rate to fall from 14.5% to 12.5%, pending further developments. We see limited market impact and retain our pro-risk investment strategy.

Despite near-term tariff uncertainty, we expect the effective tariff rate to fall from 14.5% to 12.5%, pending further developments

Countries facing US import tariffs of 15%, such as the European Union, Switzerland and Japan, should see little change in their effective rates and we therefore expect limited near-term market impact. Economies with previously lower rates, such as the UK, could face more volatility in their domestic market, depending on whether both parties maintain the existing 10% trade arrangement.

Some emerging markets with higher baseline tariffs may benefit. Brazil, for example, had faced a 50% duty. China could also see a modest reduction in its effective tariff rate (a 10% baseline plus the 10 % imposed because of a failure to stem fentanyl and other drugs flowing into the US).

Ultimately, country-specific economic gains or losses will depend on how existing bilateral deals evolve and whether governments seek renegotiation. President Trump said he expects existing accords to stay in place, but it remains unclear whether countries will push for revisions. The trade policy backdrop will remain fluid, with shifts likely on country- and potentially sector-level. We monitor the evolution of events closely.

Some emerging markets with higher baseline tariffs may benefit

Sectoral implications

A new 15% global tariff would not imply major changes for specific sectors. Exemptions for energy, pharmaceuticals, critical minerals, and aerospace remain, as do exclusions for select imports from key trading partners such as Taiwan, South Korea, and Japan (including non cutting-edge semiconductors and aircraft parts) and goods covered under Section 232 (steel, copper, automobiles, and advanced semiconductors) and USMCA (US-Mexico-Canada Agreement)-origin goods. All other goods will be subject to the currently announced 15% tariff. Some sectors that benefitted from the initial announcement of a 10% universal tariff, such as luxury, could adjust in the coming days.

Our equity strategy preferences focus on healthcare, utilities, and materials. In regions, we favour Japanese stocks following Prime Minister Sanae Takaichi’s landslide election victory. We retain our overweight in emerging market equities given their resilience and strong fundamentals, with a preference for South Korea, alongside South Africa, China and India. South Korea and South Africa maintain their leading earnings momentum, supported by strong AI‑infrastructure spending and firm precious metal prices. Tariff developments may also lift investor sentiment towards South Africa, which previously faced a 30% levy. India, having faced 50% US tariffs until an agreement reached on 2 February to lower them to 18%, benefits from these recently lowered trade barriers, a cyclical acceleration and improving market sentiment. Meanwhile, China’s slightly improved tariff backdrop could draw additional investor attention, amid attractive equity yields, rapidly developing AI capabilities and an expected 2026 earnings recovery.

China’s slightly improved tariff backdrop could draw additional investor attention

Portfolio diversification remains paramount

We remain overweight equities via our exposures to emerging markets. Despite the recent AI-related anxiety, and tariff uncertainty, economic growth remains stable, and global leading indicators indicate expansion ahead. A trend of neutral or easing monetary policy, and supportive fiscal policies, remains in place across many major economies. Corporate earnings remain sound on an aggregate basis, with expected earnings for 2026 remaining solid or being revised upward. Finally, neutral investor positioning does not indicate undue exuberance or complacency. That said, we do not expect a linear upward path for equities from here. This reinforces the need to maintain well-diversified portfolios.

We also expect further evolutions in the tariff landscape. Over the long term, less favourable country-specific tariffs may be re-applied under different legal frameworks and additional measures may follow for select industries and countries. For that reason, we expect some near-term volatility in stock markets.

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Investors’ attention is also focused on geopolitics, particularly on developments in the Middle East, where the situation remains fluid and tensions high. In this context, we re-emphasise the importance of ensuring that portfolios remain well diversified.

We continue to favour sources of income for multi-asset portfolios, such as emerging market bonds. Despite recent tech-driven equity volatility, emerging market bonds have remained resilient. This likely results from little direct tech exposure within the asset class. We still expect emerging bonds’ performance to be driven by high yields and strong resulting inflows. We maintain our gold overweight and expect commodities to keep their portfolio diversification benefits both in case of positive economic surprises, for example through front-loaded commercial activity in the base case, as well as supply disruptions in the risk case of escalating tensions. For eligible investors, alternative asset classes like hedge funds, which can pursue uncorrelated strategies, can add different sources of return to multi-asset portfolios.

We maintain our gold overweight and expect commodities to keep their portfolio diversification benefits

The Supreme Court decision implies modest US dollar depreciation and moderately higher US Treasury yields. These will be driven by market expectations of fiscal revenue gaps arising from tariff reimbursement claims. However, we expect the legal reimbursement processes to be protracted, minimising any impact on US Treasury yields.

The geopolitical situation in the Middle East is more important for the dollar and Treasury bonds. In a risk scenario of US strikes on Iran, the US dollar would strengthen and US Treasury yields fall in response to US investors’ repatriation of assets and broader haven demand. Any escalation in tensions would trigger an oil price rise, increasing expectations for higher inflation, and so US Treasury Inflation-Protected Securities (TIPS) would likely outperform other government bonds.