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The British have a reputation for loving undergrounders. The other side of this is that powerful people enjoy watching wobbling. And no one is stronger than the President of the United States.
The investment consensus in London is consistent with the dinner party consensus. President Donald Trump is a braffer and his tariff threat is false. Therefore, our portfolio must hold most of the US stocks.
This week, the U.S. court ruling was only added to Shaden Fluid, with a deferral of appeal to suspend the decision after finding that most of Trump’s tariffs were illegal. Perhaps the president missed the issues outlined in the rap of the musical Hamilton. After all, it was a central issue in the new constitution, as independence was caused by tax and tariff issues.
Whether this should come as a surprise or not, the only important question is how investors should respond. Should we diversify away from the US and accumulate in European stocks?
It’s kind of emotion that goes well at a dinner party, but don’t let your portfolio be determined in a dinner party view. At least it’s not that there’s no good reason.
First, Congress, which plays a bigger role in tariff policy, could change paths rather than directions. After all, it followed a solid boundary with China, escalating under the first President Trump, but under Biden. Also, the difference in trade between the US and the EU is trade with China.
So, whatever happens, can lead to increased tariffs. And even a modest increase can lead to corporate operations and chaos.
If there is a current 10% tariff on European exports to the US, or if there is a slight increase, the EU can choose to ignore it or reflect that and increase the price of the goods we pay.
I tried to get my head around us and add the amount of things I bought in America. That’s not that much. And the price increase of 10% due to tariffs probably means I replaced my local equivalent. Maybe I am showing myself as a non-bourbon drinker.
Of course, tariffs are only part of the reason investors are switching from the US to European stocks. There is also the budget situation, a low rating, and the belief that the US is a less reliable investment location than ever before. However, investors switching from the US to Europe face one major hurdle. This is a shorter list of companies with interesting growth potential.
Naturally, European defence stocks are leading performance. Everyone doubts that he will send a letter of thanks to JD Vance, but his calling on European countries to boost his defensive spending has put together a block on security policies in ways President Putin did not control.
That said, it can seem that large European defence companies are making kits for past wars rather than drones or cyberattacks. Given how much the stock has risen, you need to choose which stocks will show up with significant new orders.
Almost a quarter of the European equity index is made up of financial stocks. European banks enjoy a higher interest rate environment.
However, the extra income they receive from higher lending rates seems modest compared to the increase in bad debts from the companies they lend. And even the outcome of addicts’ tariffs is likely to result in a significant number of bankruptcy
When we started with a situation where US stocks appeared to be significantly overrepresented in the global index, even a modest cut in US allocation left us with a lot of money looking for a home. It’s always a concern that you have money to drill holes in your fund manager’s pocket.
The good news is that for long-term investors, many of the top European stocks in the 2010s were poor performers in the 2020s. I should know – my funds own them. What they have in common is that they were given premium valuations in their Chinese business five years ago, but the slowdown in China since then both slowed growth and reduced stock valuations.
Large European companies, from Louis Vuitton to L’Oreal and Schneider, have focused on China over the past decade rather than the US, and have owned all three. Currently, the worst signs of China’s poor property are at its worst, and there are indications that the People’s Bank’s policies to restore confidence, announced a year ago, are in effect. Chinese consumers can use some of the products the US doesn’t want to receive, and it appears that China is no longer buying many US bonds.
Looking back at European real estate crunch in 2008-9, it is worth investing in a strong company that is wary of weak companies that are dealing with issues but may have been cut to survive. L’Oreal is a very expensive inventory, but US rival Estee Lauder may find it difficult to handle the outcomes of US and China tariffs.
Finally, it is worth mentioning that tariffs may not be a major market drama in the summer.
That may come from Senate Republicans who are challenging Trump’s tax system and the impact on US debt. We’ve seen the president “suspend” some tariffs when the 10-year bond yield reached 4.5%.
The argument is that tax cuts will ultimately lead to stronger growth. Some will take the view that this gives the US a long-term growth story that Europe lacks. Others will probably have heard this from Kwasi Kwarteng.
If you want to miss out on steam about Trump and his diplomatic style, arranging a dinner party for like-minded guests is probably not a challenge. Then, in the morning, you can go back to investing in the best companies, regardless of your country of origin.
Simon Edelsten is the fund manager for Goshawk Asset Management
