Tariff tantrums
Ian Cowie examines the impact of Trump's tariffs on investment trusts
Few politicians have had as dramatic an effect on the global economy as Donald Trump, since he was re-elected as the 47th president of America. Unfortunately for investors, as I write this on so-called ‘Liberation Day’, it is by no means clear what impact Trump’s tariffs and other policies will have on a wide range of commercial activities.
This makes investment trusts’ ability to diminish risk by diversification especially valuable because they can spread our money over dozens of different companies, countries and currencies.
Hopes of less regulation and lower taxes in the world’s biggest economy helped many share prices to rise immediately after the presidential election last November. But that Trump bump has turned into a Trump slump as fears rise and prices fall in several sectors.
“Hopes of less regulation and lower taxes in the world’s biggest economy helped many share prices to rise immediately after the presidential election last November. But that Trump bump has turned into a Trump slump as fears rise and prices fall in several sectors.”
Macroeconomic worries include uncertainty about how tariffs – or taxes on imports – will affect international trade. Geopolitical strategic surprises include America telling Europe we must spend more on our own defence, amid the Continent’s worst war since 1945.
Unexpected consequences include the S&P 500, a broad measure of the American stock market, losing 8% of its value since the start of this year, while the technology-focused Nasdaq index in New York has fallen by 14%. Meanwhile, the FTSE 100 benchmark of Britain’s biggest shares and France's CAC 40 have both risen by 1% over the same period, and Germany’s DAX soaring 6% skyward.
“Unexpected consequences include the S&P 500, a broad measure of the American stock market, losing 8% of its value since the start of this year, while the technology-focused Nasdaq index in New York has fallen by 14%.”
None of the above would have been obvious outcomes from all the talk by Trump and his followers about “making America great again”. All of the above strengthen the case for investing internationally, to reduce our exposure to the risks of any single country.
For example, Polar Capital Technology (stock market ticker: PCT) and Worldwide Healthcare (WWH) are two investment trusts I have owned for more than a decade. Both have most of their underlying assets invested in America but also give me global exposure to long-term wealth creation trends that are likely to persist, whatever politicians do.
To be specific, short-term share price volatility among America’s so-called ‘Magnificent Seven’ technology shares has not prevented me writing this on a MacBook Air, having bought all my digital equipment from Apple (AAPL) for 35 years, nor using Microsoft (MSFT) software. AAPL and MSFT are both top ten assets in PCT, helping to deliver total returns over the last decade, five years and one year of 409%, 94% and minus 3% respectively.
“…people are unlikely to stop becoming ill or wanting to lose weight, whoever is president of the United States…”
Similarly, people are unlikely to stop becoming ill or wanting to lose weight, whoever is president of the United States (POTUS). So Worldwide Healthcare’s top ten assets – which include the most valuable pharmaceutical company on this planet, Eli Lilly (LLY) and the weight-loss wonder-drug-maker, Novo-Nordisk (NOVO) – are likely to remain in demand, whatever happens in Washington. While the past is not necessarily a guide to the future, this long-term shareholder draws some comfort from WWH delivering total returns of 73% over the last decade, 10% over five years and - less happily - shrinking by 9% over the last year.
Both one-year performance statistics demonstrate the short-term risk of stock market investment but news events can also surprise on the upside. Trump’s call for Europe to spend more on our own defence might boost demand for underlying holdings in Seraphim Space Investment Trust (SSIT), where three-quarters of the portfolio is defence-related and two-thirds is invested in Europe, including the United Kingdom. This investment trust was launched in July, 2021, and the share price has risen by 11% over the last year.
Similarly, the March factsheet for European Assets Trust (EAT) shows that its biggest underlying holding is the German arms manufacturer, Rheinmetall, whose share price has more than doubled since the start of this year. Meanwhile, EAT yields dividend income of 7%, having delivered total returns of 40%, 49% and minus 0.6% over the standard three periods.
Back in the USA, while history suggests that tariffs and Trump tantrums are likely to be bad for international trade, smaller and medium-sized companies focused on their domestic economy could benefit from ‘America first’ protectionism. None of the underlying holdings in JPMorgan US Smaller Companies (JUSC) could be described as a household name but this investment trust delivered total returns of 127%, 87% and 1.3% over the usual three periods.
“…while history suggests that tariffs and Trump tantrums are likely to be bad for international trade, smaller and medium-sized companies focused on their domestic economy could benefit from ‘America first’ protectionism.”
While the short-term outlook remains uncertain, longer-term investors can continue to benefit from investment trusts’ ability to diminish risk by diversification. More positively, investment trusts also make it convenient and cost-effective to gain exposure to economic growth and income, whatever arises and whatever Trump does next.
Ian Cowie is a shareholder in Apple (AAPL), Eli Lilly (LLY), European Assets Trust (EAT), Fidelity European (FEV), Microsoft (MSFT), Novo-Nordisk (NOVO), Polar Capital Technology (PCT) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.
