This is not a pipedream, or ideas thrown down in a think tank outline destined for the back shelf of your local academic library. US Treasury Secretary Scott Bessent has identified three key aims and a three-pronged plan to reshape the US economy for the next decade: 3 per cent GDP growth, a 3 per cent deficit and 3 million additional barrels of daily energy production. 

The administration hopes to cut government spending by USD$1 trillion. It expects tariff revenues. And to reduce regulation and taxes to deliver an increase in domestic energy production. Will it work? We’ll see. But as investors, how do we react?

Aditya Khowala, Equities Portfolio Manager 

The starting point of all of this is the precarious US fiscal situation and a deficit which, at greater than 6 per cent of GDP, is unsustainable. Since 2019 the interest burden has more than quadrupled, growing from $250bn to $1.1trn. On current trends this means that interest payments will reach $1.8trn by 2030, absorbing 35 per cent of US government revenues. The only reason the US is not yet in a financial crisis is because it owns the reserve currency. 

Significant cuts to federal spending are being made. Some 15 to 20 million Federal contractors are likely to see revenues decline as the government tries to reduce spending. 

One obvious reaction, therefore, is to limit exposure to companies that support the affected government services. In the health care sector this might be the life sciences and tools companies which are more vulnerable to cuts in public research spending and tariff risks, despite typically being considered defensive plays. 

By contrast, the drive towards federal efficiency may create opportunities for health care providers in areas such as Medicare Advantage. These are defensive, quality businesses that are backed by demographics and can help the US government manage health care costs in the long term. 

The White House forecasts tariffs will deliver between $300 to 600bn annually over the next decade. In the near-term, however, they will create significant volatility in markets, disrupt supply chains and lead to inflationary pressures and uncertainty for businesses that will impact investment and hurt consumer confidence. 

Again, the obvious plays are to limit exposure to industries that are heavily reliant on imports, such as pharmaceuticals, semiconductors, and autos, along with any other products which are specifically imported from China. 

We should also adjust for the deteriorating outlook for US consumers and employment. In financials, reinsurance companies and insurance brokers, which are relatively insulated businesses, look better than banks or credit card companies who might struggle as employment weakens. 

There may still be some hope in the promises of deregulation made by the administration. Regulations have been shown to have a disproportionate effect on small and medium sized firms. Companies focused on the domestic economy will benefit from lower corporate taxes, lower regulation, and access to cheap energy. The reindustrialisation of Middle America is a story investors should be reading closely. 

Mike Riddell, Fixed Income Portfolio Manager

The softening of language on tariffs by US leaders in recent days has made us more comfortable to own US government bonds, where we have taken advantage of the higher yields on offer to switch out of bullish government bond positions that we previously held in Europe. European bonds are no longer as attractively priced.

That also gives us yet more reason to be bearish on the dollar. The US currency’s Real Effective Exchange Rate (i.e. trade weighted exchange rate adjusted for inflation) hit its strongest since 1986 in January, setting the scene for a multi-year reversal as the ‘US exceptionalism’ narrative unwinds. It looks like US government policy may wind up turbocharging this decline. 

While a number of G10 currencies have rallied sharply versus the dollar, we think that the greater value is in emerging markets, where not only are many EM currencies exceptionally cheap, but nominal and real yields are at historic highs on EM local bonds. 

Longer term, if US trade policy succeeds in reducing or even eliminating trade deficits, then there will be less overseas funding of US government bond issuance. This means the US will have great difficulty maintaining its policy of deficit fuelled growth, without causing continued ruptures in the US Treasury market.

Fred Sykes, Equity Income Portfolio Manager

One of the primary inputs I use to make an investment decision is to quantify how much money might be lost in a ‘bad’ scenario. What ‘bad’ looks like is generally similar over time, but can be different on occasion. For example, during the Covid pandemic, motorway concessions, which are usually defensive business models, turned out to be very non-defensive as lockdowns stopped traffic. We had to swiftly change our assessment of the business given the changed environment. 

We’ve been doing the due diligence with Fidelity’s analyst team to understand which stocks may do poorly in a high tariff environment. The first order impacts are likely to be on stocks with significant US revenue exposure, sellers of goods rather than services, and those which need to buy parts or raw materials from outside America. 

Then there are second and third order impacts. For example, if US tariffs persist, we may see more Chinese goods exported to Europe. Europe could impose tariffs of its own, or it may take advantage by importing cheaper goods, which would be beneficial to some consumers but negatively affect some European manufacturers and lead to increased unemployment. This might see inflation fall together with market expectations of interest rate levels, which could impact bank holdings. 

Our bank analysts have been running scenarios to quantify the impact of lower interest rates versus expectations, and higher levels of provisions. In addition, they’ve reviewed the asset quality of the banks in the portfolio, which are significantly better than during the 2008 financial crisis. 

When the environment changes, we always revert to first principles, assess the risk-reward, and ensure that we like the portfolio as it stands today relative to the prices we’re paying for the stocks. That done, there will be time to search for good businesses that may be trading at more attractive prices than they were just a few weeks ago.

James Durance and Andrei Gorodilov, Fixed Income Portfolio Managers

The administration has shown that it does have a pain threshold, that they do care about what happens in financial markets. That puts to bed some of the wilder prognoses of what might happen next but there are still substantial risks. 

Principal among them is rapidly diminishing confidence in the US financial system. The dominance of the US in the world’s financial market is of course so great that a decoupling of the rest of the world from dollar assets is almost inconceivable. And yet trillions of dollars have been repatriated, and the dollar has depreciated violently since Liberation Day.

From an analytical perspective this hard stop represents something akin to the Covid period, when overnight a large part of the world’s workers were sent home and we had to think about how long companies would last with zero revenues. It’s admittedly less bad than Covid, in that it’s not quite a global hard stop, but on the other hand it’s also worse - because it’s a clash of leadership, cultures, and economies. 

And yet one thing we have repeatedly learned is it never pays in the long run to get too bearish in a bear market. We do not know where the bottom is; but there always is one, and the bounce back is (normally) just as severe.

What does that all mean for our asset class? Ultimately it means that while we expect more volatility, and potentially more drawdowns in the very short term, we do think there is an endgame here that is less apocalyptic. From the Covid drawdown it took European high yield 10 months to break higher ground, while the more severe drawdown of 2008 took 15 months. But the asset class has always recovered from crises. We expect the same to happen this time around too. 

Dmitry Solomakhin, Equities Portfolio Manager

I have been adding incrementally to ‘tariff losers’: China positions and continental European names. China domestic names are still attractive with some of the biggest looking cheap and buying back shares. Valuations are very low, and quite a few names trade close to net cash. 

Europe is seen as a tariff loser, but many stocks here are still at depressed levels. The market got excited about Germany earlier in the year off the back of the fiscal stimulus and defence spending news, but this was largely sentiment driven. I’ve added some more investment here on weakness. 

Volatility can be my friend, just like it was in prior periods of macro and political uncertainty. But there is a need to remain patient, concentrate on the portfolio on a bottom-up basis, and then hopefully be rewarded as markets return to focusing on company fundamentals.

Talib Sheikh, Multi Asset Portfolio Manager

The world is in many ways becoming more regional: a trend that was underway before the tariffs. The US on its own, a pan-European bloc and possibly a pan-Asian bloc. These tariffs have accelerated that trend.

People expected that a lot of the impact would be cushioned by a rise in the dollar sharing the cost between the US and the tariffed. The opposite has happened, accelerating the price impact. And that's really going to hit low-end US consumers, who have relied on cheap imported goods for years. That is likely to lead to lower consumption and ultimately lower growth.  

When I started off my career, US equities were about 37 per cent of global equities indices. Coming into this crisis, that figure was above 74 per cent. Clearly at the margin, if some of that starts moving the other way, the dollar will weaken. So there’s an opportunity for the euro to become more important and a bigger destination for capital in this rebalanced world. 

The good news is the oil price is down, which helps the inflation dynamic. Ex- US investors are also starting to view US exceptionalism through a different lens. Can I trust the dollar? Can I trust treasuries? The changes are marginal but the sums are massive. That changes perceptions around gold and other safe assets, where we are quite bullish. 

Clearly risk assets have de-rated but I wouldn't say that there's a massive value buy here as earnings uncertainty is high. Our changes in positioning have been driven by technicals: trying to think where are things underpriced, where can we put hedges into the portfolio. Most importantly, it's about trying to protect our clients’ capital. Because when we do come out of this, there will be great investment opportunities.

But there is an old adage to buy insurance before your house burns down and not after, and that’s where we are now. But is the house half burnt down, or fully burned down? Accordingly some of the safe havens are quite expensive now so we don’t want to overpay for protection and chase after the move. 

The yen and the Swiss franc look interesting. And cash now is very different from the Great Financial Crisis. You can get 4.5 per cent on cash currently. Building some dry powder makes a lot of sense for the moment.