From ‘US Exceptionalism’ to ‘the End of an Empire’?

‘Liberation Day’, announced on the April 2, was a game-changer and yet another warning shot fired by the Trump administration. The ensuing 90-day pause brought additional volatility to the markets, resulting in sharp fluctuations that felt like financial whiplash. The global tectonic plates are shifting, and everyone must adjust.

The fact that Trump wants to review tariffs, some of which were agreed upon after WWII, is understandable, but the magnitude and manner in which these ‘reciprocal’ tariffs have been decided upon for all countries is disproportionate. Of course, these tariffs can be negotiated downwards. However, not all nations have the same leverage, and some smaller emerging countries may not have the means to negotiate, and thus may accept Trump’s terms. Larger countries might opt to review some of their tariffs, while others might retaliate. China was quick to retaliate and raise tariffs as well, while Europe is still debating how to respond. As usual, Europe is divided and heavily reliant on international trade.

But where did the idea of tariffs originate? On one hand, Trump has seen the US industrial base disappear over the years, and a large portion of his electorate has consequently been affected. As a result, he wishes to reverse this trend to some extent. On the other hand, we must recognise that the US’s financial situation is precarious. This becomes evident when we consider the country’s indebtedness and large budget deficit. Only by significantly reducing entitlements (such as Social Security and Medicare/Medicaid) could this situation be rectified. The social fabric of the US is not robust enough, and reducing entitlements would have serious consequences for 80% of the population. Thus, in Trump’s view, other nations must pay and resolve the US’s budget deficit, as raising US income taxes was never on his agenda. The truth is that tariffs are a form of consumption tax, the burden of which is most likely shared by foreigners and the US consumer through higher inflation. It is far from certain that many of Trump’s voters will be better off in the future.

The fact that Trump has been aggressive towards both friends and foes alike also speaks volumes. Japan and Israel, longstanding US allies, were also affected. Henry Kissinger once observed, “It may be dangerous to be America’s enemy, but to be America’s friend is fatal.” ‘Liberation Day’ is a statement in which the US indicates that it wishes to change the global rules of trade. Scott Bessent, the US Treasury Secretary, stated at the Manhattan Institute in June 2024, "We’re also at a unique moment geopolitically, and I could see, in the next few years, that we are going to have to have some kind of a grand global economic reordering, something equivalent to a new Bretton Woods."

As a result, we should not take these messages lightly. Many nation-states are highly indebted, facing unfavourable demographic trends, and need to find solutions for the coming decades. The US has decided to completely reverse course and has chosen protectionism as its guiding principle. Navarro, Trump’s tariff czar, has stated that tariffs won’t stop until the deficit is closed. Consequently, this situation may worsen before it improves.

Therefore, we need to consider that economic growth may slow, and we may even face a recession - a scenario that was not on our radar at the start of the year.

Since the end of March, equities have become a more challenging asset class. Part of this is due to timing; the market had already priced in much of the downturn by the end of Q1, making rebalancing less appealing. More broadly, sentiment toward US equities in particular has shifted significantly, and with good reason. What once felt like US exceptionalism has now given way to growing concerns.

This shift reflects a mix of structural and cyclical factors. Companies outside the US, including in Asia and Europe, are catching up with the US mega-caps, helped along by innovations like DeepSeek. At the same time, protectionist rhetoric, particularly from the Trump camp, raises the risk of higher prices for consumer goods, which could strain an already fragile US consumer base.

In this context, it may make sense to look beyond the US. Other regions, including Europe and parts of the emerging world, offer relatively better prospects. That said, before embracing emerging markets more fully, greater clarity is needed on global trade dynamics. This could take weeks or even months, particularly when it comes to China, where the situation remains complex and opaque.

Within fixed income, recent spread widening is consistent with a backdrop of softer growth. Importantly, this seems more about earnings pressure than balance sheet risk. As a result, we are not looking to exit corporate bonds wholesale, but rather remain opportunistic, especially if valuations become more attractive.

While gold remains a safe choice, the same cannot be said about the US dollar. With the Federal Reserve likely to pivot toward rate cuts and potential changes in financial regulation encouraging greater Treasury ownership by banks, the dollar may face renewed pressure. Moreover, a weaker dollar aligns with the Trump administration’s pro-industry stance. In this environment, gold and the Swiss franc stand out as preferred safe-haven assets.

Within equities, there may still be value in companies that are less cyclical and less exposed to global trade flows. These stocks are not prohibitively priced and could offer selective opportunities, particularly if volatility persists.

In short, we are entering a period of global economic realignment. This will likely bring elevated volatility, but also moments of opportunity. With this in mind, a more defensive tilt seems appropriate for now, though risk may be rewarded in the months ahead.