It’s been almost a month now since Liberation Day, and it’s time to try to think about what this all means.
My suggestion is ignore the short term and the volatility that goes with it. It’s hard to predict. Ignore the politics because people have different views. Let’s concentrate on what we know. What we do know is that the United States, under President Trump, has decided essentially to suspend abiding by the rules that it created following the Second World War, both in terms of trade and free markets and globalisation, and in terms of politics and the world order according to rules. Now, what does that mean?
It means ultimately that anybody investing in the United States from here on will probably put a risk premium on US assets, which never happened before. We will never think again, if we are from outside of the US, of US treasuries as being risk-free assets – there’s a small risk to be added. It doesn’t mean you don’t invest. Of course you do. It just means it’s not risk-free.
What does it mean then for the companies around the world with this tariff? Well, there are two things I think will happen. The first thing that’s going to happen is the companies that export to the United States are going to become more efficient in cutting their costs. That is an obvious one. They’ll become better companies with better profitability, so profitability outside the US goes up.
The second thing is that you will find the blocs of the world outside the US coming together – as we’ve seen in the far east and as we’ve seen in Europe – to try to find alternative markets and to rejuvenate their economies so they will benefit.
Then the final difference is, because of the US hesitancy of underwriting the security of the Western world, you’ll find more investment as we’ve seen in Europe in defence that will lead to innovation. Investment in defence leads to technological innovation, and when that happens, there’s going to be a lot more technological innovation coming out of Europe as we’ve seen happen in China, where it was cut out of some of the technological innovation in in the west.
So all in all, it’s going to change the way that the markets react. Gone are the days where the markets go up or down in tandem. And you can simply buy an index. This is yet again the time for active managers who know which stocks to go to. That’s going to be important. It’s going to be a time of increased volatility and in times of increased volatility sitting in cash, like we used to do back in the 80s, makes perfect sense. Money markets are also attractive.
So, active management is back, money markets are king, and there’s a risk premium on US assets from here on. Whatever future presidents do, that’s just the reality of the markets.
