There is cautious optimism that the worst of the market volatility is behind us. However, recent meetings in Asia have once again underlined the significant impact that Trump’s tariffs are having on global trade. Chinese exports have virtually ground to a halt, resulting in goods piling up at ports. This is already leading to shortages of essential components for production elsewhere in the world.
“A supply chain of globally sourced components is ultimately only as strong as its weakest link,” writes Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, in his latest market update.
At the same time, investor sentiment has surged to extremely pessimistic levels. “The deleveraging that has taken place over the past month should mean that markets are now fundamentally better off than they were a few weeks ago, when we were still pointing to investor complacency,” Dowding said.
In that light, he expects President Trump to back off in the coming days rather than continue his hard line. “It seems more likely that his approach will be pragmatic, not dogmatic,” he says. Still, it remains difficult to develop a decidedly positive view on US equities, even as risk premiums in other markets begin to normalize.
Global investors are increasingly turning away from the US, Dowding says, as the narrative of US growth exceptionalism crumbles. “The TINA principle (‘there is no alternative’), which for years justified foreign investors buying US equities at high valuations, appears to have fundamentally changed.”
If capital inflows to the US continue to decline structurally in the future, he says it is “logical to think” that the era of a strong dollar is behind us. “It is even conceivable that undervalued currencies, such as the Japanese yen, could rally significantly in the coming weeks and months.”
Dowding points out that former President Biden left his successor an economy that grew by 2.5 to 3 percent. It would be a “monumental and historic act of self-harm” if the Trump administration causes a recession that is entirely due to its own policies.
“Trump and his team cannot afford to lose market confidence in the US policy framework,” Dowding says. “Financial markets run on trust, and once lost, it is not easy to restore. Especially with a Federal Reserve that currently seems ill-equipped to come to the rescue.”
