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The second act of Hamilton, the award-winning musical depicting the life of one of America’s founding fathers, features a song entitled “The Room Where It Happens”. The scene focuses on the economic arrangements of the new United States, as agreed by Jefferson, Madison and Hamilton himself in 1790.
Fast forward 235 years and it was Donald Trump, Peter Navarro and who else in the room where it happened? Lots of people claim to have been present when the great tariff decisions, announced on April 2, were made, but their inability to explain the rationale behind them suggests they were elsewhere — or that the policies are inexplicable.
Perhaps of more interest are suggestions that there were some who were definitely not there, but knew ahead of time of the April 9 decision to pause most of the “reciprocal” tariffs, and acted on that knowledge. It is certainly a short-term challenge if insiders are indeed trading around announcements, but it does not affect long-term stock value much.
Long-term investors can take further comfort from the fact that, whoever benefited from the tariff pause, it was brought on by the US bond market. This is a huge problem for Trump 2.0 and his tariff ambitions.
The US federal debt is a staggering $36tn — more than 120 per cent of GDP. The tax cuts Trump promised in the election could add $4.5tn to this — taking the debt to 137 per cent.
There are claims that the tariffs would raise significant revenue, but it is more likely that there will be fewer imports to tax. Immediately after April 2 bond yields fell — usually a sign that investors think a recession is coming. Well, consuming less is certainly one way to cut the trade deficit.
Since then they have risen. This does not mean recession fears have eased. Rather, it means the bond market is eyeing up how many bonds need to be issued and is concerned that this will be an unusual recession — with tariffs fuelling inflation when normally recession would cool it. In short, they want more reward for sticking with US treasuries.
I started investing in the early 1980s, and neither my colleagues nor I have witnessed anything like the days before Trump’s partial climbdown on April 9. We have seen crises, crashes and inflation shocks. At times we have disagreed with US economic policy. Never have we gone so far as to call it “deranged”.
Maybe Trump will backtrack further. However, even if sensible compromises are found, the events of the past couple of weeks have surely permanently damaged the confidence companies will have trading with the US and the access American companies will have in the rest of the world.
So how should investors act? I and others have been warning for some time about the risks of having too much of your wealth in a global index tracker. A dozen years ago US equities made up just under half of the global index; recently that figure has risen to nearer 70 per cent. This seems out of kilter with the US share of world GDP.
US companies have often looked more profitable than their peers in other countries, but some of the higher margins may have come from their large domestic market and easy access to overseas markets. Perhaps those days have ended. Reducing exposure to the US and tilting more towards European and Asian equities seems sensible.
Some investors might still be tempted to buy fallen US tech stocks on the dip. I have no desire to bite into Apple. It seems extraordinary to me that this huge company had no substantial plan B for moving production outside China. Nervous investors might look at Nvidia and ask why it has not encouraged its Taiwanese chip manufacturer, TSMC, to build a plant in the US much sooner. TSMC is about to start production in Arizona, but this will only make five million chips and is delayed. The faster chips Nvidia needs may come from the next-generation fabrication plants, estimated to cost more than $50bn and maybe opening in 2029 — but Trump is trying to reduce his contribution.
Any rally in technology stocks could be challenged by the EU response to tariffs. The “bazooka” may include EU sanctions on US companies. Maybe the EU will also suggest these companies pay some tax.
Too many risks? It makes sense to me not to abandon, but to tilt away from the US and superpower multinational tech companies. These will arguably be affected most by a more protectionist world. Instead, you might search out “regional champions” less impacted by tariffs.
One example we have held for some time is Wolters Kluwer. This is a Dutch information services company that, among its services, offers digital access to lawyers of European case law.
Before all the tariff turmoil, we bought Adyen, a European rival to Visa, and Mitsubishi Electric, which makes defence systems in Japan. We would expect both to benefit from the changed landscape.
You might expect a rational tariff supporter (arguably an oxymoron) to go easy on pharmaceutical companies. Moving drug manufacturing to the US will take five years at least, so slapping tariffs on drugs is just going to add to the Medicaid bill. I am holding off on pharmaceuticals for now.
Finally, I return to the “cockroach” stocks I discussed last month. These are resilient companies that can survive any disaster or stupidity thrown at them. Telecom stocks, reinsurance holdings and UK property shares have held up well.
Confidence and trust were damaged on April 2. Protectionism started during Trump 1.0 and was not unwound under Biden — it just took a leap forward under Trump 2.0. However, good companies last a lot longer than governments, and the strong often get stronger during crises like this.
The next few months may see grim downgrades and the start of a recession, but the cockroaches and regional champions will get through it. As noted in Hamilton, the key to “laughin’ in the face of casualties and sorrow” is “thinkin’ past tomorrow”.
Simon Edelsten is a fund manager at Goshawk Asset Management
https://www.ft.com/content/cd2aa892-acde-4c56-8da4-3f95fa156b3c
