A significant shift in global economic and geopolitical relations is underway, driven by policy changes initiated by the Trump administration. These changes, including tariffs on key trading partners and alterations to security policies, are challenging established norms and creating uncertainty in financial markets. Deutsche Bank’s George Saravelos highlights the imposition of tariffs on Canada, Mexico, and potentially the EU, marking the most substantial shift in global trade relations since the collapse of the Bretton Woods accord in 1971, bringing the average tariff across the U.S. economy to 10%, the highest since the 1970s.
Investors appear to be underestimating the potential consequences. While equity markets have reacted modestly, there is a sense that the full extent of the economic damage from tariffs and fiscal tightening is not yet priced in. Apollo Global Management estimates a 0.5% hit to U.S. GDP growth, coupled with increased inflation. Some analysts, like Vantage Point Asset Management’s Nick Ferres, suggest that fiscal tightening could trigger a recession. The market’s sanguine view is not shared across the board, as exemplified by Chamath Palihapitiya’s view, who suggests that Trump is prepared to endure a period of economic pain because his biggest supporters own relatively fewer assets, making them less vulnerable to market downturns.
Macquarie strategist Viktor Shvets argues that the traditional investment playbook is inadequate in the face of such policy regime shifts. The increased uncertainty makes so-called “Trump trades” less viable. Instead, investors should focus on long-term themes, such as security and defense, or companies that can replace labor through automation. The key takeaway is that investors need to acknowledge the real risks posed by Trump’s policy objectives, rather than assuming they are merely negotiating tactics. Investors should open their minds to the idea that the risks to the downside are real.
