Thus far, it looks like Donald Trump is working hard to Make Europe Great Again rather than Making America Great Again, writes Darius McDermott
It may feel like decades, but it is only two months since Donald Trump took up his place as the 47th President of the US. It hasn't been boring, as he has ripped up historic alliances, announced (and cancelled) trade tariffs, and threatened to annex sovereign nations. For financial markets, it has sounded the death knell for US exceptionalism.
The first significant change, as Trump has settled into office, has been the unwinding of the ‘Trump trade' – the wave of exuberance that saw the technology giants, the dollar, Bitcoin and banks gain after Trump's election in anticipation of tax cuts, deregulation and a buoyant economy. In some cases, this unwinding has been extreme – Tesla's share price is down almost 40% for the year to date*. The CNBC Magnificent 7 Index is down 14.3% over the same period.
The latest Bank of America Merrill Lynch survey shows fund managers pulling money out of the US at a record pace and reallocating to Europe and even the UK. European, UK and emerging market indices have all been relatively stable as the US has sold off, suggesting this isn't part of a wider ‘risk-off' trade.
However, even after this sell-off, share prices for the Mag 7 are still only at the level they were in October last year. Many active managers had been shunning them on valuation grounds, but even supporters of the long-term case for AI are paring back.
BNY Multi-Asset Balanced fund manager Simon Nichols says: "We have had a reasonable exposure to technology companies. We are long-term investors and we do think AI is a pretty significant change. Over the longer term, we believe the technology companies will continue to produce good returns. Over the shorter term, we have been bringing back some of our exposure in some of the technology names that have performed very well and if we look at new additions into the portfolio, they have been away from the technology space."
Precarious economy
The overwhelming majority of economists thought that Trump's policies would be good for the US economy. He would pursue tax cuts and deregulation, which would help support growth. In the event, Trump has proved unbothered by the apparent hit to the economy from his erratic tariff regime, while stock-market weakness is hurting consumer confidence.
The overall result is that US economic indicators have started to trend lower. This includes areas such as retail sales, jobs growth and consumer confidence indicators. Some economists have even suggested that Trump may drive the US into recession, quite a feat for an economy previously in rude health. Inflationary pressures also remain.
Guinness Global Investors chief investment officer and manager of the Guinness Asian Equity Income fund Edmund Harriss says economists had focused too much on tax cuts and deregulation, and not enough on tariffs. He adds: "We're waking up to the fact that Trump's policies are contractionary and the change in tone to ‘jam tomorrow' from the Administration (there will be some pain/‘minor disturbances but we're ok with that'/people are envious about ‘how rich we're gonna be') has been noted.
"So a Trump trade based on a macro expansionary theme has fizzled and the focus now must fall into two areas: how will companies' operating performance fare in a world of rising input costs and potentially weakening domestic demand? Plus, a consideration of how valuations (discount rates/bond yields) will change in a more uncertain fiscal policy and growth environment."
Gold price hits new highs
The gold price has tipped over $3,000 an ounce and continues to reflect increasing investor concern over geopolitical tensions. Trump's blundering efforts to bring about peace in Ukraine and the Middle East appear to have inflamed rather than dampened international conflict.
Jupiter Gold and Silver fund manager Ned Naylor-Leyland says: "In Trump's inaugural address in January, he declared the start of a "Golden Age'' in America. It's early days for his administration, yet its policies with regard to trade, geopolitics and the economy have already impacted precious metal prices. The gold price in dollars has touched a series of record highs in the last year, most recently this month."
Can it continue? He says the recent moves upward for the gold price are related to its traditional role as a safe-haven asset, concern about economic growth and Trump's trade policies, expectations that interest rates may fall and demand for the precious metal from central banks. While these issues remain in place, gold can maintain its current trajectory.
Resurgence in Europe
One of the more surprising impacts of the Trump presidency to date has been the resurgence of Europe. The Euro Stoxx 50 Index is up 10.8% since the start of the year, with financials and defence companies particularly strong. Markets appear to be betting that Trump urging Europe to stand on its own two feet will do more to benefit Europe than the US. An enormous fiscal stimulus package from Germany is also expected to buoy growth in the region.
It is also worth noting that this is not just speculation on Europe's future prospects. Liontrust European Dynamic fund manager James Inglis Jones points out that robust earnings for European companies have also helped buoy the region's stock markets. Interest rate cuts and some stronger economic data is also helping to drive enthusiasm for the region.
It is possible that the strategic genius behind Trump's vision is not yet evident, but there can be little doubt that his policies so far may be conspiring to Make Europe Great Again rather than Making America Great Again.
Darius McDermott is managing director at FundCalibre and Chelsea Financial Services
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