You are sure to have heard about the actions of Donald Trump, the US President. The change of tone and direction from the world’s most powerful country and the largest economy has been dramatic. Global political leaders are scrambling to keep up and investment markets are moving rapidly as a result.
It may be surprising, but behind the blizzard of announcements, there is an underlying logic and a plan. This update is intended to explain that, put the announcements in context and explain how, as your investment managers, we are positioning your money.
As a result, this month’s monthly commentary is included in this document but has been shortened to try to not overload you with information.
The big picture is that Trump has two key objectives.
To reduce taxes for individuals and companies; and
To improve the long-term health of the US economy – particularly as regards government debt.
These objectives conflict with each other because tax cuts increase government debt – the deficit – and also put pressure on government debt markets. To square this circle and fill the deficit hole Tump also has a plan to reduce expenditure and to increase government revenue.
The plan
Cut spending:
– Domestic Government expenditure (the DOGE programme)
– Reduce Ukraine war expenditure
Raise revenue with tariffs on imports
Fund tax cuts for individuals and businesses
Accelerate growth in the USA
Encourage the return of manufacturing businesses firstly to the USA or, if not possible, to allied countries (i.e. not China)
Most of what Trump has announced is, therefore, part of a grand strategy to reshape global trade and improve the long-term position of the US. Knowing that the announcements are part of a plan, we are confident that Trump is not bluffing, and we should expect some changes to be permanent.
The problem with the plan is there are serious drawbacks, short and long-term, and these are important for our investments. We think the risk has increased for some investments and the opportunity has increased for others.
The drawbacks of Trump’s plan
The first is that any reduction in Government spending will be felt immediately in consumer spending. The large deficits that the US government has been running have been a major source of demand in the US economy and a reason for its strength. Cuts in spending raise the risk of recession considerably. For now, we can’t know how large the cuts will be, but the intention is certainly there.
Similarly, the imposition of tariffs will raise US government revenue which will help to balance the government books and reduce debt. It could also finance the expected corporation tax cuts from 21% to 15% which would help profitability. However, the issue with tariffs is that they act as a tax on spending as they make imported goods more expensive. This will be another pressure on the US economy and increase the risk of recession.
The reduction in support for Ukraine is more complicated. Much of that spending was being directed through US defence companies. Reducing it will lead to lower demand in the US economy over the medium term. The more serious impact is the effect on the global alliance of democracies. US military support can no longer be assumed, and this could lead to significant changes.
One area that has been ignored so far is the risk that investments are redirected globally away from the US towards the original country. So, the UK, for example, could require more domestic investors. This may be repeated in many countries. The US has been the dominant recipient of global savings, and the US stock market is valued according to those fund flows. Any disruption to such flows could be significant.
Our conclusion
Overall, whilst we can see the US plan and understand the intentions, our view is that the risk of recession is now greater and that expensive US shares are now more vulnerable to falls in price.
Therefore, a well-diversified portfolio, holding assets that offer protection against the risk of recession, and avoiding assets that are clearly expensive (and therefore riskier), is the most appropriate structure for investors, considering the environment we currently find ourselves in.
