Last month we noted that something very positive was occurring in the investment world, and this has persisted over the last month. Sadly it has been overlooked by many investors, who are increasingly lost in the fog of Trump idiocy. Let’s focus on those clear positives, and also look at how ordinary US folk are responding to Trump, as well as the billionaires he thought were on his side.
In our last Market Commentary (4th February) we noted a rotation in world stock markets, with the cheaper one’s turning up even as the US took fright when the Chinese challenged the US-centric euphoria over Artificial Intelligence.
We hope that these positive new trends beyond the US would persist, but ended with “though we cannot eliminate the potential for stupidity from Donald Trump, so remain on our guard”. Perhaps surprisingly, despite new depths of stupidity, lies and hypocrisy from Trump and his team, the performance gap between the US financial markets and much of the rest of the world is widening over the last month, with growing enthusiasm for Europe and China, to which we will return in a moment.
But first it is good to understand the impact that Trump is having on the US economy and US financial markets, and it is most certainly not what he intended.
Ironically, the massed ranks of less well-off Americans, those which voted most enthusiastically for Trump, have been rapidly losing confidence.
For example, an array of recent economic releases are revealing sudden and alarming weakness. One of the most jaw-dropping was a Wells Fargo survey which found that 76% of Americans plan to reduce their spending in 2025 – that is very un-American!
There is much more. There has been an upsurge in Americans applying for UK and Irish citizenship. Applications for the UK were up 40% in the last quarter of 2024, and up 46% across 2024 for Ireland.
US hedge funds aren’t sitting on their hands while all of this is unfolding right in front of them. According to Goldman Sachs there has been a surge in bets on there being chaotic falls in a Trump-depressed US stock market, a huge turnaround in sentiment since November, when all seemed rosey, US Exceptionalism was forever, and, apparently, no one should invest their money anywhere other than the US. No sniggering at the back of the class!
Even the huge Vanguard fund management group, enthusiastic purveyors of S&P index trackers to unprepared investors around the world, has hinted at problems ahead, but are their ETF buyers listening? This from MarketWatch:
“Vanguard’s model implies absolute catastrophe for those who invest in large U.S. growth stocks — the kind currently dominating the market. The firm sees them losing somewhere between 20% and 40% of their value in real or constant dollars over the next 10 years.”
Our analysis, and that of quite a few others, puts the number somewhat bigger than a 40% loss, but let’s not split hairs. The US stock market is, on some measures, more over-valued than in 1929 and 2000, and we don’t need to tell you what happened next (we’ve done that many times before!). It suffices to say it gets ugly.
Senior executives in US businesses have been voting with their feet, selling up their own shares even as latecomers to the US stock market party still insist on piling in. These insiders are selling more of their own company shares than at any other time since 1988. They are at the sharp end, they know what is happening right now, and have a decent sense of what is just ahead.
Warren Buffett, the worlds most successful investor, has been selling US stocks in record volume, with his cash pile now at a massive $334 billion. He has been re-investing significant amounts into Japan, in particular the five largest trading houses which are at the heart of Japanese industry, and in which he already held very large stakes.
Japan is one of the obvious centres of value for global investors. It is not just cheap, but government reforms of the financial sector are now persistently unlocking value, and that will persist for years. Buffett says he intends to hold his stakes for “many decades”.
The other opportunities can be illustrated by performances in the year to date. China (FTSE China 50) is up 21%, the German index 17%, and even the FTSE 100 has grown 6%. Gold is up 8%, gold miners up 18%. All of these are cheap stock markets, where that value is now (at last?) being reflected by investor buying.
In contrast, since the turn of the year the hugely overvalued S&P 500 and NASDAQ are down 4% and 7% respectively. These mask somewhat sharper falls, such as 33% in Tesla, where the ultimate falls look like they will be double that, at least.
Over valued India is also down 7%, and might need a bit more time to unwind to lower levels before its long term potential can be re-asserted in the stock market. For completeness, Japan’s Nikkei 225 is down 5%, mostly as a result of the strengthening yen hurting the earnings of their big exporters. Already cheap, this is an opportunity to buy more Japan (on which see Buffett above).
There is more on China in the recently published 45th edition of the TopFunds Guide (get a copy here if you haven’t already). The opportunities in Germany and the UK deserve a bit more detail.
The EU economy, particularly Germany and France, has been sluggish at best for some time, and was desperate for reforms to restore confidence and growth. Then along came Trump. Part of his brief is not to Make Europe Great Again, and arguably he would prefer Europe to be weak and servile vis-à-vis the US and Trump’s new best friend, the dictator Putin. Yet he might well have been surprised at how Europe (including the UK) has responded with vigour to the post-Second World War alliances being ripped up in a matter of days.
Putting the politics to one side, this is an extraordinary opportunity for the European economy to regain some poise. Overnight the moribund but huge German car industry, and its array of skilled workers, can be re-purposed. There are plenty of historical examples of wars (or the prospect of war) driving economic and technological advances.
Take the complaint from the French to the British that they cannot get enough high quality steel to make sufficient numbers of reliable weapons…
That was in 1856, and it was a plea from Napoleon III to the British, as they both faced Russia in the Crimean War. The technological response was the Bessemer process for industrial scale production of steel. After that war, this technological advance spurred the rapid expansion of the railways and a huge boom. Similarly various technologies advancing in leaps and bounds during the Second World War e.g. computers and jet engines, and not forgetting the mass production of penicillin.
Now Germany has its chance. Friedrich Merz, the pending German Chancellor, has already begun to tear up the very strict German rule book. Germany, and Europe generally, will (must) now find the money for military and economic re-armament. The scale will “entirely change the economic and geopolitical shape of the world” (Telegraph). Europe is now on a war footing.
It now needs to work fast on the detail, but the direction of travel is clear, and the high level advantages are already considerable – NATO countries without the US have a combined GDP 14 times the size of the Russian economy.
Turning to the UK, consider these:
- When a stock market is at a low ebb, and the underlying economy in recession, it has a tendency to stabilise and bounce before any economic recovery.
- One Bank Of England official recently suggested there is scope for six rate cuts.
- The government needs to act quickly to encourage growth of, and investment into, the UK.
- If both the latter occurred to some degree they would generate the confidence desperately needed by the UK economy and stock market.
- U.K. medium sized and smaller companies are cheap, and include some superb and under-valued businesses.
In the above are the ingredients for U.K. stock market outperformance in the year or so ahead, particularly for smaller companies (though there will be stiff competition from smallers in Japan, Europe, and China).
One of the biggest risks today is investors allowing Trump to cloud the outlook and befuddle your thinking. Obviously you can’t ignore Trump, but we must all keep calm and carry on. We must stay focussed on the emerging uptrends in numerous relatively cheap markets versus the increasingly troubled looking trends in the bloated US.
While there is undoubtedly some schadenfreude on our part, we will also guard against the risk of both complacency and “unknown unknowns” with our stop-loss strategy i.e. we look to systematically contain losses before they escalate to unacceptable levels which, bizarrely, is almost unique in our industry.
If any of the above raises questions for you on your existing investment strategy, whether you might wish to get more gung-ho or hide behind the sofa, do talk to your usual adviser.
