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Mercer executive sees trade war fears short-circuiting market’s ‘pivot to growth’

The specter of global trade war haunting markets after President Donald Trump threatened to slap tariffs on imports of steel and aluminum could prove particularly ill-timed at the current moment in the recovery from the global financial crisis, a consulting industry veteran says.

The threat of a trade war could short-circuit the "pivot to growth" that rising business confidence, supported by the recent passage of U.S. tax reform and the prospect of an infrastructure spending program, had been setting the stage for in recent months, said Richard Nuzum, president of Mercer's global wealth business.

After eight years where business leaders focused like a laser on expense management, rising global employment and, more recently, rising wages were helping to resuscitate a "growth mindset," said Mr. Nuzum Monday in an interview on the sidelines of a global investment forum in Singapore for clients.

"And then we get this shock," he said.

One potential side effect: the heightened uncertainties facing business leaders now could prompt them to funnel more of the tax savings to share buybacks and dividend payouts, rather than the investments in plant, equipment and people that would boost the economy and improve long-term returns for investors, he said.

And even if the Trump administration reverses course fairly quickly after the March 1 announcement, as opponents marshal evidence that a trade war would harm the president's political base, the ripple effects on business confidence could be considerable, said Mr. Nuzum.

"We've seen over and over that the Trump administration will announce a policy," then back away when the negative potential outcomes for his core supporters are highlighted, and there's reason to expect that could be the case with tariffs, he said.

Tariffs are effectively "a regressive tax," likely to reduce net employment, and once it becomes clear this hurts his base, "we would expect that he'll back away," said Mr. Nuzum. But the fact that they did it at all, that they "shocked the market," is the kind of thing that could convince the chief financial officer of a company to do a billion-dollar share buyback rather than opening a new plant and hiring 300 new workers, he said.

If the administration doesn't reverse course, and a tit-for-tat volley of tariffs and counter-tariffs ensues, the fallout would be far more substantial, with global capital — far more mobile today than it was when the U.S. Smoot-Hawley tariffs launched the last great trade war in 1930 — on the margin, seeking out markets with less policy uncertainty, said Mr. Nuzum.

The negative fallout from the imposition of tariffs, meanwhile, would be swift — more a matter of months than quarters or years, said Mr. Nuzum. "There are literally millions of business people making hiring decisions (and) investment decisions every day," and if they hold off purchasing that incremental coffee machine, copier or iPad, "it's going to show up immediately in terms of job growth (and) wage growth," he said.

For institutional investors in the U.S. and overseas, Mr. Nuzum said a trade war instigated by the U.S. would likely shift allocations, again on the margin, away from U.S. equities.

With Mercer's expected returns from the S&P 500 for the coming 20 years at 5.6%, roughly half the level it had anticipated 20 years before, investors with allocations dominated by publicly traded securities will face enormous challenges garnering the returns they need, he said.

That market environment often finds Mercer advising prospects to allocate more to infrastructure and real estate if they're concerned about inflation, or private equity and private debt if they're focused on returns, or all four if their priority is diversification, said Mr. Nuzum.