Strategy and Market Impact Analysis
In recent months, tariffs have reemerged as a significant economic policy tool with potential implications for investors. At Riverwater, we’ve conducted a thorough analysis of the current landscape and its potential impact on our portfolios. Here’s our perspective on navigating these uncertain waters.
Historical Context Matters
Tariffs, while historically a seldom-used policy instrument, have gained renewed prominence in recent years. 
For context, the aggregate U.S. tariff rate has consistently remained below 5% for the past two decades. However, proposed tariffs on China, Mexico, and Canada could potentially push this rate to 10% – levels not seen since World War II. More aggressive universal tariff proposals of 20% could return us to Great Depression-era tariff levels.
History offers valuable lessons here. Previous high-tariff environments, such as the UK’s Corn Laws of 1815 and U.S. policies in the 1930s, failed to deliver economic prosperity. In fact, recent U.S. tariff implementations have reportedly reduced GDP by approximately 0.2% annually, translating to economic losses of around $58 billion per year.
Our Portfolio Assessment
Given the market uncertainty surrounding tariff policies, which has reached record levels, our investment team has proactively assessed our exposure to potentially affected regions.
Our analysis reveals minimal vulnerability:
- Minimal exposure to China, with our highest in our small-cap strategy at 3.4% and our micro-cap strategy at just 0.3%.
- Even smaller exposure to Mexico and Canada, meaning our portfolio is well-insulated from broader North American trade risks.
- Global exposure ranges from 6-18%, but only a sweeping, all-encompassing tariff scenario would pose material risk.
Strategic Outlook on Tariffs
We view a comprehensive trade conflict with Mexico and Canada as highly unlikely, given their significant trade dependency on the U.S. (83% and 77% respectively). As a result, we believe the most probable outcome appears to be additional targeted tariffs on China, though considerable uncertainty remains.
Final Takeaways
At Riverwater, we recognize that policy shifts like tariffs can create both challenges and opportunities. Our focus remains on investing in high-quality, well-positioned businesses that can withstand economic headwinds. By maintaining diversified holdings and monitoring global developments, portfolios can remain resilient, even in uncertain times.
