“In the past Wall Street has tried to anticipate such changes (political or economic) and has made many serious errors in so doing. Our experience leads us to place chief emphasis on the past record of the enterprise, rather than on what it is likely to accomplish in the future. In the last analysis, stock values depend on the earning power of their assets and the skill and integrity of their management.” – Benjamin Graham in Security Analysis published in 1934.
Tariffs were considered one of the main wild cards for the global economy entering 2025, and recent proclamations have resulted in significant market turbulence. On April 2, U.S. President Trump introduced sweeping changes to U.S. trade policy aimed at reducing the nation’s trade deficits and promoting domestic manufacturing. Key components included a universal 10% baseline tariff and higher “reciprocal” tariffs for countries with which the U.S. had substantial trade deficits or that were deemed to engage in unfair trade practices.
How has Brandes responded to the tariffs?
We invest in businesses, not markets. We continue to fundamentally analyze companies and focus on establishing long-term intrinsic value. Our investment teams have been discussing the implications of tariffs for months now, deliberating the impact on the earnings power of individual companies and adjusting intrinsic value estimates where material.
Amid the greater economic uncertainty triggered by the tariff announcement, we have placed a higher emphasis on balance sheet strength, especially for businesses with material tariff exposure. Pricing power and competitive positioning are among the additional debated topics: Which companies are more likely to be able to pass on costs to end customers? Which ones are going to be forced to absorb them?
From a competitive positioning standpoint, we’ve been analyzing the first order relative impact of the announced tariffs on April 2. For example, we have a couple of export-oriented Brazilian companies in our Emerging Markets strategy that are subject to new tariffs, but their competitors domiciled in other locales are facing even higher tariffs, so our holdings should have a relative gain on competitive positioning.
However, the second order effects of the announced tariffs – the impact on overall economic activity along with consumer and business confidence – are more difficult to analyze and quantify at this point. To account for the heightened risk from these factors, we continue to place a greater emphasis on balance sheet strength and margin of safety when taking portfolio actions.
While it is too early to make significant allocation changes, the investment committees have been adjusting portfolio allocations to account for the heightened risk, even prior to the recent volatility spike. We have a number of Asian and Mexican companies on our monitoring lists but will likely require a higher-than-normal margin of safety to purchase those for which tariff implications are a major risk factor. As Graham noted in Security Analysis, “The investor cannot eliminate all his risks by his own effort, but he can at least know what they are and can often reduce them to an acceptable size.”
We are closely monitoring the situation while scouring the investment landscape for new opportunities. As long-term value investors, we believe times of uncertainty can bring opportunities for market mispricing. A couple of other Graham’s quotes from The Intelligent Investor come to mind as we carefully look for potentially undervalued investments: “The intelligent investor is a realist who sells to optimists and buys from pessimists….The investor’s chief advantage lies in his ability to identify the occasional major discrepancy between price and value.”
Brandes Investment Partners