I’m fully aware that writing an article about the impact of the new US administration’s policies may be a futile effort. It’s quite possible that everything I say here will be out-of-date by the time I’ve finished writing, let alone by the time of publication.
By the same token, the US is such a large part of global financial markets that it probably needs to be written. So, here goes.
First, my crystal ball is extremely cloudy at the best of times. As with Donald Trump’s first presidency, trying to second-guess things is impossible. Even if you do predict what he’s going to do over the next four years accurately, you might not get the market’s reaction right.
There are positives and negatives to Trump’s policies. The deregulation and tax cuts that his administration favours are undoubtedly good for America. Deregulation cuts red tape and reduces costs, as do tax cuts, adding more to corporate earnings and, by consequence, profits. Tax cuts for ordinary Americans, meanwhile, would put more cash into their pockets that could be spent in the economy.
On the other hand, this may all have been priced into markets in the immediate aftermath of the election, which saw a c.10% jump in the tech-heavy Nasdaq Composite and a doubling in the Tesla share price (at the time).
The worry is that these policies could also ignite inflation once more. Certainly, lower taxes for ordinary Americans would probably lead to more cash being spent in the economy, while any cost increases from tariffs would probably be passed on by companies to consumers – something we found out businesses were so adept at doing during the cost-of-living crisis. His tariffs could also trigger a trade war that damages the global economy.
In other words, what Trump gives in tax cuts with one hand might be taken away by higher inflation with another hand.
Add in continued worries about whether soaring capex on artificial intelligence (AI) will produce sufficient profits, and fears that cheaper foreign competitors could close the gap with the US mega-caps, and it’s unsurprising that US markets have had an overdue pause for breath.
Nvidia is down around from its peak at the time of writing, while Tesla has slumped since its most recent high. That has led to an underperformance of US markets since the start of the year, albeit that’s a very short timeframe.
Still, this looks to us like a welcome pause for breath, with valuations at the mega-cap end of the US market looking stretched (the Wilshire 5000’s market cap to GDP, a metric also known as the Buffett indicator, is 202%, well above its long-term average of 75%).
Overall, we suspect that four years of a Trump presidency will be a net positive for the US, but it’s worth positioning at least some of your portfolio for a broadening out-of-market leadership.
The most obvious candidate here is small-caps. If deregulation and tax cuts are to provide the impetus for further market gains, one can imagine that the biggest beneficiaries of this will be domestically focused smaller companies, as opposed to large-caps that have a more globally diversified customer base.
Selectivity is key here, though: about a third of the US smaller companies universe is unprofitable. Both Brown Advisory US Smaller Companies and JPMorgan US Smaller Companies focus on high-quality, profitable companies benefiting from secular trends or competitive advantages.
Elsewhere, the new head of the Federal Trade Commission is expected to take a lighter-touch approach to M&A activity than his predecessor, which should be a positive for dealmaking and, by consequence, for biotech and private equity, two sectors that are skewed to US markets.
Large pharmaceuticals are on the hunt to replace expiring patents, suggesting there are some deals to be made in the mid- to smaller-sized portion of the biotech market, an area that Ailsa Craig and Marek Poszepczynski, the managers of International Biotechnology, have been shifting their portfolio towards.
Dealmaking would be a boon for private equity, too, as would any spike in IPOs that led from a broadening of market returns. Realisation activity has been subdued in recent years, providing a tough backdrop for the sector.
NB Private Equity stands out here thanks to its co-investment strategy, which means it invests in single deals as a minority investor alongside a lead private equity manager, rather than investing in private equity funds.
This gives the trust’s managers complete control over their investments: they can decide when to make investments and how to size them within the portfolio. As they effectively has little need to raise cash when realisation activity is subdued, the managers can sit tight and wait for the environment to improve.
Both International Biotechnology and NB Private Equity have around 79% of their portfolios invested in the US, with the latter’s 20% weighting to consumer and e-commerce companies, shielding it somewhat from tariff-related uncertainties.
At a time when Apple, Nvidia, Microsoft, Amazon, Tesla, Meta, Microsoft, Broadcom and TSMC have the same weighting in the MSCI All Country World Index as all the stocks in Japan, the UK, Canada, China Switzerland, France, India, Germany and Australia put together, diversifying away from mega-cap America but keeping your exposure to the Trump trade intact seems sensible.
David Brenchley is an investment specialist at Kepler Partners. The views expressed above should not be taken as investment advice.