Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Nick Watson, multi asset fund manager for Janus Henderson, to talk about Trump's trade tariffs.

Hi, Nick.

Nick Watson: Hi, Emma.

Wall: So, Trump has proposed some tariffs on commodities and it's got the world nervous. What does he propose?

Watson: Sure. So, for the time being, Donald Trump has proposed tariffs of about 25% on steel imports and 10% on aluminum imports into United States. So, that's sort of in the context for trade war, which markets have now become very concerned about. Markets don't like uncertainty and given the current volatility in markets, markets are not going to be enthusiastic about anything that might hinder economic growth going forwards.

Wall: And it shouldn't be too much of a surprise because it is this kind of protectionist stance which he got elected for. But of course, markets have reacted badly, in particular, emerging markets and Asia?

Watson: Correct. I think if you look at the markets which have responded most negatively to this, it's been those more cyclical markets, those markets which are more exposed to global economic activity. So, you mentioned emerging markets; Germany and Japan have both also struggled amidst this. You are completely correct to say he was elected off the back of this type of policy.

And to be honest, we shouldn't really be surprised. A lot of what he has tried to do, whether it's immigration reform, fiscal stimulus or tax reform, he has all managed to get those through. It's also worth observing that he doesn't have to rely on Congress to get this new policy coming through.

The final thing I'll say, there is an election coming up in Pittsburg, I think it's on Tuesday, in which the Republican Party is looking potentially like they might lose, and Pittsburg is a very blue-collar, working class base. So, it may well be the case that Donald Trump is trying to rile up some enthusiasm amongst his usual electoral support to try to get that election win for the Republican Party.

Wall: And in the short term, as you mentioned, we have seen market volatility across Asia and German and Japan. But long-term, if he does get these proposals through, what are the markets that will be impacted? Presumably, the commodities sectors will be impacted?

Watson: Yeah. And I think that's how you can have a read through to U.K. market. As we all know, the FTSE 100, about 70% of revenues come from outside the U.K. And you look at some of the large resources companies, let's say, your Glencores, or your Shells or BPs, they do have a read through to the commodity price rather than necessarily what's happening in the U.K. economy or the U.K. market. So, that could be this sort of transfer mechanism that has an impact on the U.K.

On a more global basis, if this trade war rhetoric did really ramp up, and that's not necessarily what we are anticipating, but that's certainly something we need to be cognisant of, again, those more cyclical markets, Japan, emerging markets themselves, could be more vulnerable.

The final point I'll make on that is Donald Trump has been very assertive that China is a trade sort of influence, if you like, and he is trying to make sure that there's not this imbalance between the two countries. In terms of the actual policy that he has announced, China doesn't really gets affected here.

China does produce relatively cheap steel and relatively cheap aluminum, but that doesn't actually feed through to the U.S. The biggest of countries who would be affected by these tariffs are more of their own allies. So, you'd be talking about Mexico, you'd be talking about Canada. So, those are countries that would be more affected by this rather than maybe the target, which his political base is hoping for.

Wall: And you did mention the phrase trade war there. Do we anticipate, if this goes through, that there will be a sort of retaliation from some of those markets which then it could, of course, make more seismic impact globally?

Watson: Yeah. And that's where the read through comes through to global economic backdrop. At the moment, global economic growth is pretty broad-based. It's pretty resilient, which is quite constructive for markets. But if you were to see the situation deteriorate, I think the EU has come out and said that they might levy tariffs on Levi jeans, for example. China could potentially look at doing something around soybeans. So, you can see how that naturally expands out into a wider economic shock.

The other point I'll make is that these tariffs are actually quite inflationary. So, for the U.S. consumer, that's not necessarily an immediately good news because their aluminum production base needs to take some time to get fired up. Some of it will have a chilling impact on economic growth while boosting inflation which is not necessarily a dynamic that markets are going to respond particularly favorably to.

Wall: Because higher inflation means more Fed rate rises?

Watson: Completely. And it's almost looking back at what was 2017 like. So, 2017 we had positive economic growth, muted inflation and you had supportive central banks in terms of maintaining diverse monetary policy and QE. And through that environment markets did fantastically well.

What have we seen through 2018? Well, the growth is still there, but we've also had inflation come through. So, markets are now starting to realise they need to reprice some of these expensive parts of the market. Government bonds have sold off. You've seen some of the bond proxies have a tough time as well. So, that policy part of the fantastic markets we saw in 2017 is now actually having the opposite effect on markets. Talking about the FTSE All-Share, down 6% or 7% year-to-date. Yes, growth is good, but you don't have that same accommodative support from either government policy or monetary policy.

Wall: Nick, thank you very much.

Watson: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.