Towards a New World Order?

Investment Note #26 - 11th April 2025

Towards a New World Order?

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In early 2008, a steak frites in the legendary Balthazar restaurant on Spring Street in New York cost $30 at a time when €1 bought almost $1.60. A steak frites now costs $70, and until the recent weakness, a €1 didn’t buy much more than $1. So, in Euro terms, the cost increased 3.5x versus the slightly more than twofold increase for US customers.

This highlights one of the clearest trends after the Global Financial Crisis: everything US, including the currency, boomed, even more so after COVID-19. What will become of US exceptionalism as the US pivots away from the global World order it was instrumental in creating?

Post GFC – US the Big Winner

On 1 March 2006, US assets owned by foreigners minus foreign assets held by Americans were c. $1.7tn; by September 2024, this had increased to c. $24tn (Source: US Federal Reserve). European investors held about $4tn in US stocks at the start of 2020; by the end of 2024, this was $9tn - around 17% of the overall value of the US market and not far off the market capitalisation of all the equities in Europe (source: FT).

Recent capital flows were supported by the pandemic stimulus programs in the US, which vastly outstripped the rest of the World and provided an unprecedented injection of liquidity, attracting huge capital flows from other countries into the US Dollar and US stocks, especially tech stocks. Furthermore, as some of the pandemic stimulus fizzed out in 2022, along came the Infrastructure, Chips and Inflation Reduction Acts. This was supplemented by the AI investment theme, an almost exclusively US-centric investment focus that provided additional support to underscore the US exceptionalism narrative

The momentum became a self-fulfilling prophecy. The flows pushed up the value of US assets and the US dollar, which increased the returns for foreign investors and fostered confidence that the US was unstoppable, thus drawing in more funds. The narrative gathered further momentum on the back of the Trump election victory.

One Big US Loser

Increased global trade correlated with US wealth significantly outperforming income. This primarily reflects the benefits of more efficient global supply chains through the impact of lower-cost labour in emerging markets, accruing to shareholders. Furthermore, US consumers benefited from access to lower-cost goods.

However, the cost was borne by lower-skilled factory workers, who experienced lower employment opportunities and wage growth. The MIT economist David Autor has calculated that by 2011, China joining the WTO in 2001 resulted in the loss of one million US manufacturing jobs and 2.4 million jobs overall (source: BBC). These job losses were geographically concentrated in Trump’s core supporter base, the Rust Belt and the South. To the extent that one exists, Trump's tariff strategy is to address the perceived injustice that has impacted blue-collar workers in his electoral stronghold.

Trade Flows and Capital Flows

Since the tariff announcement, market participants have been somewhat fixated on how the tariff details will impact specific countries, industries and global supply chains. However, the impact will likely be much broader and more consequential. The one key risk that may not be fully appreciated is the potential for tariffs to lead to a reduction in capital flows.

There is a close relationship between trade and capital flows. The Trump Administration appears to be focused on weaponising areas of strength such as defence, energy and trade. If trade becomes weaponised, it may lead to countries adopting a more protectionist approach that promotes active capital repatriation.

As detailed above, the biggest beneficiary of the free movement of capital has been the US, which has sucked in capital from Europe and the ROW. If globalisation is being unwound, even partially, this will also apply to the deglobalisation of financial markets.

Market commentators such as Russell Napier have warned about the risk of national capitalism, a system requiring domestic investors to ‘buy local’ with a portion of their investment capital. Indeed, the UK government has been most vocal about setting a minimum investment for UK assets for UK pension funds. While this has received significant pushback, in periods of greater global market uncertainty, proposals that were seen as unpalatable become more acceptable, as we have seen with the adjustment to Germany's ‘debt brake’.

At our Outlook event in January, we highlighted Macron’s comments in a landmark speech delivered at the Sorbonne University last year; in the speech, Macron referenced the fact that Europeans send €300bn each year to the US to fund the American government and American corporations. Last week, he came out and explicitly called on European companies to pause their US investment plans: “What would be the message of having big European players that invest billions in the American economy at the same time they are hitting us?”.

Loss of Trust - A Less US Centric World

Movements in US Treasuries are influenced by a broad range of factors, including market positioning. However, such movements, in what is considered to be the ultimate ‘safe haven’ asset, may reflect the reputational damage that the US has suffered. The simultaneous decline of US bonds, US equity markets and the US dollar is a real risk.

In announcing the 90-day pause, Trump is acknowledging the severe risks to the US economy that his signature policy position have introduced. The market reaction to the pause was stunningly positive but, despite this, it remains highly uncertain if the US can regain the trust it has lost on the global stage.

The tariffs, taken in isolation, have massively damaged the credibility of the US, but when combined with the stance on Ukraine, Greenland, NATO and Europe (especially Vance’s comments at the Munich Security Conference), it may be unrecoverable.

The World is increasingly seeing the risk of relying on the US in a broad range of areas, including defence, technology, reserve currency, etc. The tariffs and the mathematical casualness with which they were arrived at are just as unsettling to global markets.

Summary

Genuine portfolio diversification has been out of favour in recent years, with some non-US investors being heavily over-allocated to US assets at the expense of a more globally diversified portfolio. A more inward-looking World will have an outsized negative impact for the biggest winner of a more connected globalised world i.e. the US.

Europe and China are potentially facing a future where access to US demand is significantly reduced, creating a requirement to address lacklustre domestic demand. Germany’s recent historic pivot on defence and infrastructure may herald the beginning of a new, more self-reliant approach. But this represents a global challenge, which for the first time requires a World ex US response.

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Should you wish to discuss any aspects of the current market movements, please contact your relationship manager.

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Annual Market Outlook Event video link: Full Outlook Presentation.