Money goes home!
The opening salvo of President Trump’s ‘Make America Great Again’ policy initially caused financial markets to drop sharply as the true ramifications of the tariff policy became clear.
The opening salvo of President Trump’s ‘Make America Great Again’ policy initially caused financial markets to drop sharply as the true ramifications of the tariff policy became clear. Whether President Trump intended this market reaction or not is unclear, but what is clear is that a hasty retreat throughout April and May was undertaken by the US administration. As a result, markets reacted and moved up as the news became incrementally less disruptive.
President Trump’s tariff policies appear to have been set at levels which would gain leverage in trade deals, but this strategy simply became bogged down in geo-political realities as many countries around the world pushed back with their own interests and did not want to be coerced into unfavourable deals. The President’s dream of a revitalised manufacturing sector was dented, but it is now clear it cannot be achieved through tariffs alone.
President Trump’s seemingly serious conversations about Canada becoming the 51st State as well as ‘acquiring’ Greenland also rocked investor confidence and made governments around the world question the reliability of the US both as a leading geopolitical country.
President Trump’s approach to global politics is unlike the world has seen for many years. But it is quite likely he has only been trying to rattle cages and is saying to the world ‘it’s not you, it’s me’. It may be his way of telegraphing that the US is going to be a less dependable partner in certain areas of global affairs, such as defence, as the US administration turns to focus increasingly on its domestic industrial renaissance and national security priorities. Trump is likely asking other countries around the world, particularly in the West, to step up.
At the same time, President Trump also likely views that there is too much foreign capital in US financial markets (e.g. the S&P 500) and not enough being invested in ‘Main Street’ (e.g building factories). President Trump’s ‘Great Big Beautiful Bill’ is making its way through the US political system and whilst his bill is loaded with tax cuts, investment incentives, deregulation and critical infrastructure upgrades there is also a potential sting in the tail for foreigners investing money in the US financial markets – such as potential taxes on foreign capital.
How to invest in this environment?
At the margins, if the US is being more discerning on the type of foreign capital it accepts, this very modestly increases the barriers to investing in the US. If President Trump is also asking other countries in the West to ‘step up’, this involves more investment in their domestic economies – we have seen this just recently with Germany, with record new debt issuance with a massive boost to military spending.
Raymond James, Richmond has been reading the financial tea leaves and we have assessed that, because of global policies, more foreign capital will flow out of US markets and back into the economies and stock markets of other parts of the world – money goes home! What does this mean for investors? We have believed for some time that the US Dollar is likely to weaken. Why?
- A weakening of the US Dollar is one of the easiest ways to help correcting the trade imbalances that exist around the world and that President Trump is trying to rectify
- It will help American exports become competitive in the global marketplace
- As other countries of the world look to boost their own national economic resilience via capital investments, the will boost their own currencies vs the US Dollar
- And above all…. Trump wants a weaker Dollar!
If the US Dollar weakens, other currencies must rise against it, and this will likely include the British Pound. To a UK investor invested in US stocks, this matters: If the US stock market rises 10%, but the British Pound also rises 10%, there is virtually no return to a UK investor.
Raymond James, Richmond has been planning for the weakening of the US Dollar and we continue to remain underweight the US stock market and overweight many other regions of the world and this move has benefited our client portfolios.
If you would like to explore in more detail how we can help you and your investments please call 020 4502 4731 or email tom.moloney@raymondjames.com
Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.