Over The Pond – What are Trumps in this hand?
Written by Julian Wheeler – Partner and US Equity Specialist
In the game of Bridge, if you have one long suit with one or two high cards elsewhere, you usually try to play in ‘No Trumps’ where all the cards speak for themselves, and no one suit dominates. As a stock investor, it is usually preferable when there are only gentle and reasonably predictable forces to consider that are beyond a company’s control. But here we are, only one month on from his inauguration and it looks increasingly likely that this year’s investment hand will indeed be played “with Trump”, which will dominate lesser factors and thus the winds of ‘Macro’ are going to blow strongly and buffet our investment decisions.
In a cocktail consisting of threats and the actual imposition of trade tariffs, offers to purchase or rename parts of the world map and most significantly, plans for a fireside chat in the Saudi desert with a hitherto persona non grata, Vladimir Putin, the incoming US President has shaken up a world of uncertainty in a very short time. Switching card games to Poker, it is already abundantly clear that Trump is going to raise and re-raise, leaving opponents to decide which of his ‘hands’ are bluffs to call or where he is genuinely strong, and they would be advised to fold. It is all being done in the name of ‘USA first, everyone else last’. He has even suspended the enforcement of Anti-Bribery Laws, suggesting that they are detrimental for American companies. It is still the law however, so a caution to any salesman thinking of stuffing brown envelopes! This all adds up to the fact that this President is likely to have more of an impact than usual on the fate of various sectors and companies.
It might surprise you to learn that back in 1987 when Donald Trump’s hair was dark brown, he gave a speech that sounds exactly like one you would expect today. Although it was Japan singled out as the chief offender back then, he bemoaned that the USA “protect ships we don’t own, carrying oil we don’t need, destined for allies who won’t help”. He would rather “end our huge deficits, reduce our taxes and let America’s economy grow unencumbered by the cost of defending those who can easily afford to pay us for the defence of their freedom.”
It has also been the foreign policy of the USA for many years to regard China as the enemy not Russia, which should be both Europe’s problem and their cost to bear. Hence why Europe will now be “encouraged” to look after itself by paying handsomely for US military products or develop its own. Therefore, the real goal for America in these negotiations is to keep Putin and Russia as far apart from Xi and Beijing as possible. As Trump prepares to sit down with Putin, the reports I read suggest there’s not much in this for Zelensky and Kyiv. So what does Trump want from Putin in return for giving Russia what she wants?
If Denmark won’t give him Greenland and control over its rich deposits, then handing Putin sovereignty over East Ukraine will be the way to achieve that instead. In return the US will demand (almost?) exclusive rights to its rich, rare mineral deposits, which is the one commodity America lacks and where China currently holds Aces over the USAs Tens. Perhaps second, that Russian oil will only flow to China under certain conditions. There’s probably a third, but I haven’t worked that one out yet!
The worry with this strategy is that if Trump won’t defend Ukraine in the face of an aggressor, then might China feel more relaxed about an ‘offensive’ against Taiwan? The world has long forgotten the fable about the error of putting eggs in one basket, by allowing 80% of the world’s most important component (semiconductors) to be manufactured on a small island off the coast of China. Any disruption to this supply has now become the single greatest risk to the global economy – bar none. This is the true Black Swan event.
Assuming I have deciphered correctly so far, what type of stocks are ‘Trumps’ in this game? It sounds like the Defence sector, as Europe will be forced to spend much more – but I think that could be wrong if the USA spends less and if the Musk led ‘efficiency’ puts an end to ‘Cost +’ contracts that have given margin protection up to now. The real winners could be what I call the USA ‘Diplomacy’ stocks where a combination of ‘you will buy American or else be punished by tariffs’ along with deterrents towards foreign taxation of US corporate earnings will be good for two sectors in particular. The global facing industrials who employ a large US workforce such as: Boeing, John Deere, Intel, US Steel and others. And of course, all the big ‘Tech Donors’ who were lined up on stage at the inauguration. A whole B-Z of Bezos to Zuckerberg.
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