Are We Switzerland?

As the dust settles on the opening salvo of the great trade war, one thing has become very apparent: any promise of a Schlieffen plan for instantaneous global trade harmony, the fair-weather strategy of "the war will be over by Christmas" executed by the fast deal-making of generals and shrouded in the bluff of economic Armageddon, could already be over. China appears to be settling in for a long trench war, quietly selling off $759 billion in US debt and preparing themselves to absorb any short-term tariff pain in the knowledge that the margins for cheaply made goods for consumption in the US market are already considerable, given that’s the central USP of the entire East to West economy. They believe they can win the unwinnable war, and so does the US, so perhaps what we will see now is a period of adjusting to life in wartime rather than a quick return to peacetime.

The S&P500 climbed 0.79% and secured back-to-back gains across two sessions off the back of the announcement that smartphones and specific electronic devices will fall under a different set of rules to the generalised tariffs, which the market took as confirmation of a plan beyond the oversimplified early days of conflict, and that deal-making is still at the core of this. There were strong indications from the US Vice President at the time of writing that a deal with the UK could be close. As the FTSE rises for its third straight day, the question we are asking in this week's blog is, to what extent will dollar weakness encourage investment in the pound and associated UK business assets, including our real estate infrastructure? Are we a neutral country that could profit internally between two warring titans? Are we Switzerland in this war-focused analogy?

To answer that, we must examine the short—and long-term consequences of tariffs and ask ourselves whether they are inflationary or deflationary. A global trade and tariff war can be considered short-term inflationary because it disrupts the flow of goods and raises the cost of imports and exports. When countries impose tariffs—taxes on imported goods—businesses that rely on those goods face higher input costs. These increased costs are often passed on to consumers through higher prices, contributing directly to inflation. Furthermore, retaliatory tariffs from other nations can limit export opportunities, leading to global supply chain inefficiencies and raising production costs.

In such a scenario, competition is also reduced as imported goods become more expensive or scarce, giving domestic producers more pricing power. This lack of competition can result in price hikes, compounding inflationary pressures. Additionally, uncertainty in global markets may lead companies to stockpile goods or shift supply chains hastily, both of which can drive up operational expenses. If this tariff war is prolonged, wage pressures may also emerge as workers demand higher pay to keep up with rising living costs, potentially creating a wage-price spiral. Central banks may respond by tightening monetary policy, but the underlying structural disruptions caused by trade restrictions make inflation harder to control. Overall, trade wars typically strain economies and fuel inflation.

Until they don't.

Tariffs, long- to medium-term, can be deflationary under certain conditions, particularly if they significantly dampen economic activity and consumer demand. As countries impose tariffs, international trade slows, leading to decreased business confidence, reduced investment, and job losses in export-driven sectors. If consumers face economic uncertainty and declining income prospects, they may reduce spending, leading to lower demand for goods and services. This weak demand can put downward pressure on prices. Additionally, as global supply chains are disrupted, companies may find themselves with excess inventory or struggle to adapt quickly, leading to inefficiencies and price cuts to clear stock. If tariffs lead to a significant appreciation in a nation’s currency—due to reduced demand for imports or capital flight from affected regions—imported goods could become cheaper, exerting additional deflationary pressure.

This sort of capital flight will be excruciating in the short term but have some internal positives in the US in the long term; it will reduce inflation, and dollar weakness will lessen the burden of the US national debt under certain conditions, though the effects are nuanced. Most of the U.S. national debt is denominated in dollars, so the real value of this debt declines as the dollar weakens, effectively reducing the government’s repayment burden in real terms. If inflation rises moderately alongside dollar weakness, it can further erode the real value of outstanding debt, making it easier to pay down over time with "cheaper" dollars.

So how would our market benefit as this plays out? Simply put, dollar weakness can encourage investment in the pound and UK business assets. The focus will also shift to non-beta trade ideas, and even though pound-backed P2P investing is correlated with market cycles, it's much less correlated with equities that will suffer in the early stages of a dollar weakening as the goods and services these businesses sell become more expensive to global consumers. When the U.S. dollar depreciates relative to the British pound, UK assets become cheaper for investors holding stronger or appreciating currencies. For international investors, a weaker dollar will make pound-denominated assets more attractive, as they may anticipate future currency gains when converting back to their home currency. This potential for foreign exchange appreciation adds an extra return layer beyond the underlying asset performance. Moreover, dollar weakness often signals looser U.S. monetary policy or economic uncertainty, which may prompt investors to diversify into other markets perceived as more stable or undervalued—such as the UK and our corner of it.

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