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The British are known for their love of underdogs, but they also enjoy seeing the powerful stumble. And who is mightier than the US president?
The investment consensus in London has been clear: President Donald Trump is seen as a bluffer, and his tariff threats are deemed empty; hence, portfolios should have minimal exposure to US equities.
This week’s US court rulings, the first declaring most of Trump’s tariffs unlawful followed by a temporary halt on appeal, have only fueled the schadenfreude. Perhaps the president overlooked the significance of tax and tariff issues, as highlighted in the musical Hamilton, central to the new constitution post-independence.
Regardless of whether these developments were expected, the crucial question is how investors should react. Should they continue diversifying away from the US and increasing investments in European stocks?
While such sentiments may be popular at social gatherings, it’s essential not to let personal views dictate investment decisions without valid reasoning.
Congress potentially playing a larger role in tariff policies could shift the dynamics, but not the overall direction. The trade disputes between the US and EU predate those with China, indicating the possibility of escalating tariffs regardless of the political landscape.
As discussions around tariffs intensify, the focus on European stocks grows. Factors such as budget conditions, perceived valuations, and the reliability of US investments contribute to this shift. However, transitioning from US to European markets poses a challenge in identifying companies with substantial growth potential.
European defense stocks have seen a surge in performance, partly attributed to calls for increased defense spending by European nations. This shift in security policy has brought the bloc together, albeit focusing on traditional defense equipment rather than modern technologies.
Financial stocks dominate the European equity index, with banks benefiting from the current interest rate environment. However, the gains from higher lending rates may be offset by potential increases in bad debts, especially in the event of unfavorable tariff outcomes.
With the reallocation of funds following a reduction in US equity exposure, investors are seeking alternative opportunities. While European companies with strong China ties have shown resilience, caution is advised when dealing with weaker entities that may have compromised stability to survive.
Looking ahead, market uncertainties extend beyond tariffs, with potential market disruptions arising from fiscal policies and debt concerns. The long-term growth prospects of the US and Europe remain debated, emphasizing the need for a balanced and informed investment approach.
While discussions about Trump’s policies may dominate social gatherings, prudent investors prioritize company fundamentals over geopolitical rhetoric, ensuring a diversified and resilient portfolio.
Simon Edelsten, Fund Manager at Goshawk Asset Management