Client Update - 6th June 2025

Whatever you may think of him and his politics, there seems little doubt that Trump has polarised Europe to finally come together and focus on domestic growth and its own level of protectionism. It is not only a geopolitical shift that is underway, but also a change in investment positioning.

Institutional investors are shifting away from US markets as Donald Trump’s trade wars and the country’s escalating debt levels fuel fears about the dominance of American assets in global portfolios. The US president’s erratic trade policy has shaken global markets in recent months, sparking a sharp sell-off in the US dollar and leaving Wall Street stocks lagging behind European rivals this year. Trump’s landmark tax bill, which is forecast to add $2.4tn to Washington’s debt over the next decade, has also increased pressure on US debt (Treasuries). Investors have started to question the sustainability of this ever-growing level of US debt, especially if inflation remains stubbornly high and the cost for servicing this debt continues to increase.

Passive global equity portfolios allocation to US equities have increased from 40% of your portfolio to 70% over the last twenty years as the US economy has outstripped all rivals. However, now the US has come under pressure, other areas of the market, such as the UK and Europe, start to look ever more attractive. Having 70% in a market that is looking quite expensive and quite vulnerable is maybe too much to be concentrated in one regional market? Time will tell, but as far as we are concerned, our investment team have been overweight in Europe versus the US since the end of last year and this has been a very good decision.

As sterling has remained strong versus the US dollar, this has also reduced UK investors return from US equities as the US dollar is close to a three-year low — down 9% this year — even though Trump has retreated on many of the tariffs he initially announced. Investors have long believed that the global dominance of the US economy and the depth of its capital markets mean it will remain the premier destination for global investment. For years, US growth outpaced the rest of the developed world. But growth expectations have softened, and other countries are letting out their own fiscal sails.

The €1tn German spending spree on defence and infrastructure is expected to boost growth, and European investors have been a beneficiary of investors’ wariness over US exposure. Inflation is falling below the 2% target in Europe, and this may fall further if low-cost Chinese imports no longer head to the US due to Trumps tariffs and instead head into Europe. Interest rates are also being cut more meaningfully in Europe, partly as a result of this falling inflation, meaning borrowing costs are falling and therefore capital expenditure should rise.

We have discussed in the office this week the challenge to Trumps tariffs in the US courts and we are considering it may be best for Trump to implement his tariffs, as he appears to start high (very high) and then gradually reduce them as he is such a great businessman. It might be worse for the world if he loses his tariffs and embarks on a new devilishly cunning scheme to “Make America Great Again,” that we did not see coming. At least we all knew tariffs would arrive at some point.

Writing in the Financial Times, journalist Robert Armstrong has labelled the current scenario the Taco trade (Trump Always Chickens Out). When this was mentioned at a press conference, Trump certainly did not take it very well. At some point, important people might decide that the US is no longer trustworthy, and this may start to keep Trump a little more under control. With UK and European equities already on the way up, this should bring in a more comfortable and profitable period for investors. As promised, this seems like a nice place to leave you today. Do have a good weekend.