With 97 executive orders issued to date, US President Donald Trump is well on track to outstrip the 220 issued during his first term. April 2 has been labelled “Liberation Day” by the US president, on which reciprocal tariffs are scheduled to be levied on all US trading partners to the same extent that these countries impose taxes on goods imported from the US to their shores.
This year, the executive orders from the White House have been treated as a game of Simon Says … with the market anticipating the worst but then rebounding at any hint that there may be delays in the implementation time frames. For those who used the Trump 1.0 playbook, the big surprise has been the pullback in US markets, whereby the big winners of the previous year had a lacklustre start to 2025 (See the chart).
An exceptional year for US equities
In real terms, the S&P’s returns for past year would be in the top 15th percentile of calendar returns over the past century. It is easy to forget that in the middle of September last year US short-term rates were 5.25% higher than in the first quarter of 2022.
After two-and-a-half years of high dosage monetary medicine, the US economy was showing early signs of weakening and core inflation dropped back to 3% from 7%. A softer labour market allowed the Fed to pivot on September 18 and end the year slashing rates by an aggregate of 1%.
However, the cost of capital globally is likely to remain high as investors demand adequate compensation from highly indebted developed economies, with the effect of reciprocal tariffs also posing a risk to the future trajectory of global inflation.
So far, even the best efforts by Elon Musk via the US Department of Government Efficiency (Doge), has done little to make a dent to the ballooning US budget deficit.
Mega instead of Maga
European stocks delivered a disappointing 2% return in dollar terms last year, hamstrung by tepid economic growth and crippling energy prices, as gas from Russia dried up due to its ongoing war with Ukraine.
An unexpected spin-off from the Trump administration attempting to broker a peace accord between Russia and Ukraine starting with a Black Sea ceasefire, has been a call by Trump for his Nato allies to boost defence spending to 5% of GDP, to allow the US to curtail its own military commitments to Europe.
A basket of the seven biggest European stocks are up close to 60% year to date in dollar terms, and to add more fuel to this fire the newly elected coalition in Germany, led by the conservatives, is planning to relax the country’s strict limits on public debt to boost defence and infrastructure spending (See chart 2, showing the European defence seven compared with the US magnificent seven stocks).
Rather than Maga (Make America Great Again), maybe the theme of this year should be Mega (Make Europe Great Again), with European markets up about 13% year to date.
Optimism towards China continuing
After a strong turnaround in the final quarter of 2024, Chinese large capitalisation stocks continue to perform strongly, up 18% in dollar terms year to date. That’s the best start to a year yet.
While concerns remain over the level of US tariffs targeting Chinese imports, market participants have been surprised that the Trump administration first turned its attention to its two biggest trading partners, Mexico — which has now overtaken China in terms of exports to the US — and Canada.
The launch of the DeepSeek open-source large language model also put the spotlight on China’s ability to compete in the AI space. The Chinese tech index is up 23% in dollar terms this year, while the magnificent seven stocks are down 12%.
Questions have been raised about the viability of global tech companies to monetise the spend on building similar models, when a relatively obscure Chinese hedge fund has been able to develop a comparable model, now freely available, at a fraction of the cost.
Focus on fundmentals and get rich slowly
In this volatile macro environment our recipe is to diversify across sectors, geographies and currencies, while looking for quality companies with high margins, strong brands and cash generation abilities.
Many of the companies we invest in are household brand names that have stood the test of time. Think Coca-Cola and personal care and beauty products such as Olay, Oral B, Head & Shoulders and L’Oréal.
Rather than investing in companies with high levels of debt, we favour capital-light businesses in the financial sector, such as Visa. While we acknowledge that the AI revolution will have far-reaching effects on a number of industries, we have invested in SAP, which is embedding AI in the enterprise resource planning systems it implements for corporates.
Rather than being transfixed by last year’s winners, Ashburton Investments has partnered with Morgan Stanley Investment Management, the doyens of quality investing with a record spanning three decades.
In today’s topsy-turvy world of investing, sticking to quality names is our recipe to preserve wealth and make our clients rich slowly.
• Rassou is chief investment officer at Ashburton Investments.
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