Tariffs and geopolitics have taken the centre stage in the past few weeks after Donald Trump took the helm in the US.
Trump is pushing ahead with his protectionist “America First” agenda by imposing tariffs on key trading partners, which is threatening to stoke inflation, hurt US economic growth and has caused havoc in the markets. The new administration’s policy towards the Ukraine conflict and the long-standing alliance with Europe too have created uncertainty.
The lack of stability in the economic outlook is a significant headache for businesses trying to plan their investments. In the initial days of Trump’s second term, markets believed that the administration would use tariffs as a negotiating tool rather than a blunt weapon. That was reflected in the rally of the US stock market and appreciation of the dollar.
However, what we’ve seen so far is a raging tariff war, marked by temporary reprieves, sudden U-turns and sharp escalations, with higher import duties targeting rivals and allies alike. The new administration’s policy path has certainly come as a surprise to markets, which had bet on a Trump ``put.’’
It appears that Trump is willing to subjugate growth to achieve his larger agenda, including curtailing immigration, a move that could reduce the labour supply and boost wages. Those who expected that the stock market slump will prompt the government to rethink their policies have been disappointed so far. The president seems willing to inflict pain on the American consumers in the medium term for purported longer-term gains.
The market reaction has been unsettling for investors and herald the end of the US exceptionalism that’s marked the global economy over the past decade.
The end of US exceptionalism?
US assets have never been so expensive
The broad-based S&P 500 index has declined sharply, with the `magnificent seven’ tech stocks1 beating a hasty retreat from their multi-year highs. The US dollar has weakened, credit spreads have widened from historical tights, and US Treasury yields have declined. Gauges of stock and bond volatility have risen, as investors try to fathom the reaction of central banks to elevated uncertainty on growth and inflation fronts.
What’s further fanned concerns about growth is the government’s aggressive push to cut spending by reducing the workforce, particularly through the Department of Government Efficiency (DOGE), spearheaded by billionaire Elon Musk. This comes even as the unemployment rate in the broader economy is rising.
It’s no secret that strong fiscal spending by the previous administration was one of the reasons for the economy’s resilience despite high interest rates. Treasury Secretary Scott Bessent has made it clear that the US economy has to reduce its reliance on public spending and move towards more private enterprise. He said the economy is addicted to government spending and called the adjustment a ``detox period.’’
"Whatever it takes’’ 2.0
While the US is moving towards fiscal austerity, a different regime is taking shape in Europe. Germany’s incoming Chancellor Friedrich Merz has vowed to boost fiscal spending to spur growth and strengthen the country’s military amid fears the post-World War II alliance with the US could come unstuck. Merz’s gesture is reminiscent of former ECB President Mario Draghi’s famous vow to do ``whatever it takes’’ to defend the euro more than a decade ago. German bond yields have jumped following the move to relax Germany’s strict borrowing rules, a sharp contrast to US yields.
As Europe and other countries ramp up borrowing, we will begin to see competition for capital in the global marketplace. This development will prompt investors to build in term premium in US Treasuries, which along with slower growth could steepen the US yield curve.
Over the past many years, strong capital inflows into the US underpinned the dollar, allowed the government to borrow cheaply, flattened the yield curve and increased P/E ratios in the equity markets. We expect the reverse to happen now. The theme right now is rotation out of US risk markets into the rest of the world where growth prospects look better.
While it’s difficult to predict whether the volatile policy narrative will change anytime soon, it’s important to build a portfolio that can ride out the never-ending stream of headlines. For instance, nobody could have predicted that Germany would loosen its fiscal purse strings. Therefore, investing in a diversified portfolio and ensuring adequate liquidity will be key in this environment. We believe gaining exposure to the cheap pockets of the market with adequate balance in the overall portfolio is a good strategy.
In this context, we favour staying long duration in US Treasuries, particularly the belly of the curve, and short core European bonds. We also like the euro and Japanese yen while being short the US dollar as the greenback looks expensive even after the recent weakening. The unloved EM rates market, which have been in the doldrums due to relentless inflows into US markets, are attractive again as real yields haven’t been this good in 20 years.
Footnotes
1Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla
Strategy specific risks
- Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
- Interest Rate Risk - The strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates.e.g. the value of a bond tends to decrease when interest rates rise
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Contingent convertible bonds - The strategy may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- Credit Risk - The issuer of a bond or a similar investment within the Strategy may not pay income or repay capital to the Strategy when due.
- Derivative risk - the Strategy may use derivatives to generate returns and/or to reduce costs and the overall risk of the Strategy. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Strategy's assets.
Bond Connect Risk - The rules of the Bond Connect scheme may not always permit the Strategy to sell its assets, and may cause the Strategy to suffer losses on an investment.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.