Shifting yields on fixed income, de-dollarisation and a resurgent European military-industrial base are among the key trends that senior directors and managers at Franklin Templeton expect to be amplified in the wake of the US tariff regime announced on 1 August.
The fracturing of existing global trade, manufacturing and investment flows will lead to investors considering regions and sectors that demonstrate domestic resilience, pricing power, and strategic value-add in coming years, according the views expressed by a panel constituting Michael Browne, investment strategist, Franklin Templeton Institute, Craig Cameron, portfolio manager, Templeton Global Equity Group, Sukumar Rajah, senior managing director & director of Portfolio Management, Franklin Templeton Emerging Markets Equity Singapore, Christy Tan, managing director, Investment Strategist, Franklin Templeton Institute, and David Zahn, head of European Fixed Income, co-chair of the Sustainability & Stewardship Council, Franklin Templeton Fixed Income.
Looking at the global trade and supply chain realignment, the outlook highlights:
- Shift in production away from China is structural and slow: only 25% shift expected within 2–3 years; full realignment likely to take 5–6 years.
- Export subsidies may expand beyond China to countries like Vietnam and India, as they absorb global manufacturing roles.
- The era of cheap labor as a competitive edge is ending. Future competitiveness will rely on tech, quality, and domestic market strength.
On the impact of the tariffs and who will end up paying for them:
- US tariff revenue estimates: $300bn to $650bn/year.
- Cost distribution model: 1/3 absorbed by corporates (where margins allow), 2/3 passed to US consumers, governments may intervene via subsidies in emerging markets.
- Europe’s response: Less likely to subsidise; instead focuses on internal demand and alternative export markets.
Regarding the current monetary policy cycle and the impact of tariffs on global trade and economic growth:
- US: Rates on hold while inflation transmission is assessed. Tariff revenue may improve deficit outlook.
- Europe: Rate cuts likely ending; fiscal pressures rising.
- UK: Recessionary environment persists, rate cuts expected despite sticky inflation and fiscal constraints.
- Global yield curves steepening, offering attractive long-term fixed-income opportunities.
A closer focus on regions could follow:
- Luxury goods resilient due to pricing power; rise of “tourism arbitrage” expected (eg cross-border luxury purchases).
- Auto & low-margin sectors hit hardest by tariffs; volume declines expected as consumer prices rise.
- Investment and production shifts into the US are real, but headline investment figures (eg, $1.4trn of promised investment into the US by Japan, Korea, EU) are likely exaggerated.
Geopolitical considerations will weigh more heavily than previously:
- Europe–US trade commitments appear to include geopolitical dimensions (eg, Ukraine, Russia deterrence).
- Europe’s strategic response includes rebuilding its military-industrial base and diversifying trade with Africa.
- Emerging markets bifurcation: Countries with strong domestic consumption and tech productivity (India, China) will outperform labour-reliant peers.
Market responses to the tariffs mean investors may find other opportunities:
- Resilience of quality, domestic-oriented firms underpins long-term value stability.
- Dollarization trend offers potential for: Emerging market asset rotation, strength in local currencies and sovereign bonds, Enhanced risk-adjusted returns in Asia.
Regarding Europe as a region in particular, Craig Cameron noted that the size of its consumer market and other factors such as leverage in the US energy market given the commitments made in its negotiations with the US could work in its favour.
“The numbers we’ve looked at previously would suggest that at the 10% tariff level, that one thirds, two thirds split [on who pays the cost] holds, but incremental tariffs above that level would be absorbed by the US consumer. For Europe, we are probably looking at 10-12% of that 15% theme ultimately passing through to to the US consumer, Cameron said.
“I think there will be a reluctance among European countries to provide the export subsidies directly. I think that money would be better allocated towards bolstering domestic demand and creating alternative sources of demand for those products. We have to remember, Europe is the largest consumer market in the world. If there are companies that are exporting into the US looking for additional places to sell, Europe is the most likely alternative option, not just for European producers, but also those around the world. Broadly, the implications for European corporates is definitely negative. And that is focused on consumer discretionary type sectors, particularly where companies are competing with the domestic US manufacturers, which are different [to those] exporting a unique product. We can talk about the luxury goods sector, for example, where they tend to have much more pricing power. But if you’re in a low margin, highly competitive industry that does have US domestic manufacturing, I do think you’re going to lose market share. The question is just where do you sell to instead and at what price? So, I think we see some reallocation from the US to Europe. And I think the European corporates will bear probably 34% of that 15% tariff ultimately.”
Commenting on the part of the deal announced between the EU and US on energy purchases, he said: “I think mathematically, the energy purchases practices are very difficult to achieve. It would essentially mean that Europe buys almost all oil and LNG that is being exported from the United States. I think these are notional figures. It is a sort of indication of willingness to continue large purchases and of course, make some effort into closing, at least on the good side, the trade deficit that Europe has with the US.”
“I think other parts of the deal create a little bit of leverage. If the US were to try to change the terms of the deal, then Europe can be in a position to say ‘we’ll pull some of these commitments’. We’re not entirely sure exactly how much defense spending was discussed, but I think there is a broader point that certainly some of the EU officials that were in those negotiations actually spoke of broader geopolitical points being debated and being part of the of the overall deal. For example, we’re still not clear whether conditional on this deal was ongoing support for Ukraine.”
“The incremental moves that the US has has taken to put further pressure on Russia may well have been part of the deal with Europe. Ultimately, if we’re in a position where Russia comes back to the table because it finally realizes that it’s lost that sort of a license to continue, then Europe could be in a much better place. We could see a real ceasefire and improvement in the situation in Ukraine. So, I think there are broader implications at play than, just simply trade. But from the European perspective, I think it remains and will remain a large investor in the United States, and the way that this sort of negotiation happened just ensures that both sides have some leverage over the other going forward.”
“That’s important given the volatility and the changes that we’ve seen. Even this week, in terms of whether it’s the rate that’s been applied to Canada or the strength of the corporate tariffs, there’s definitely willingness on the US side to continually shift the goalposts. I think from a European perspective, you want to make sure that you have as concrete a number as possible, try and get on and deal with that, and ultimately have some leverage over the US if the terms are then changed on you at a future date.”
