In stark contrast to the first Trump presidency, when the administration showed itself to be overly sensitive to the stock market, the US equity market has fallen by almost 10% since Donald Trump took office.² ³

Expectations have been confounded in other ways. Before Donald Trump began his second term as president of the US, the expectation was that he and his administration would focus their early policy moves on China, a strategic issue that unites many of the cabinet.⁴ ⁵ Notably, Marco Rubio is a China-sceptic.⁶

That the focus of the administration has been on destroying relationships with allies in Canada and Europe has been a surprise, as has the reaction of the German government in reforming the debt brake and the broader urgency of the EU on defence.⁷ European markets have also surprised in terms of the re-rating of equities⁸ and the de-rating of bonds.⁹

The noise created by the Trump administration vis-à-vis Europe seems to have obscured developments in China. It is driving progress in AI model building,¹⁰ there has been a rapprochement of sorts between the Communist Party and entrepreneurs like Jack Ma¹¹ and the government continues to enact periodic stimulus packages.¹²

Beyond tariffs 

Whilst he has changed world geopolitics, Donald Trump’s economic strategy remains something of a mystery, one that goes far beyond tariffs.

Our sense is that tariffs are merely a mechanism to set the agenda, and to a large extent one that has already lost its power.

For instance, while Trump has not yet ‘fully’ engaged China (we may hear more in early April), there doesn’t seem much scope left to restrict trade with China without severely damaging American companies. 

Earlier rounds of tariffs on China have led to lower trade between the US and China — in 2022, China exported 14.8% of goods to the US compared with 18% in 2017.¹³ This growing trade divide between the US and its allies might open up opportunities for China to grow trade with the rest of the world.

Limiting the fiscal deficit 

At a time when all the world’s major economies are heavily indebted, a likely rationale behind the collection of economic manoeuvres from the US is that the White House and Treasury are trying to limit the fiscal deficit, reduce borrowing costs and stop government debt from growing. The Congressional Budget Office forecasts this to grow at an alarming rate in the next five to ten years.¹⁴

In that context, engineering a cooling of the economy is not a bad idea in our view, but the risks are that the extreme uncertainty associated with the actions of the DOGE project causes companies to defer investment. 

Equally, trying to get foreigners to pay for international public goods like security may not be a bad idea, but it has come at the cost of severing relationships across Europe. However, the sharp rise in European bond yields¹⁵ does help confirm our suspicion that a great ‘Debt’ game is being played out.

Impact on private equity

What does this mean for private equity? If in the long run rates fall, we believe this may prove helpful. In the short term, however, the high levels of uncertainty could make life difficult for executives in public and private firms.

Efforts to reform the government may also be interesting. Much of the focus is on the hardship that cuts to USAID have produced, but if there is a wholesale effort to ‘rewire’ the government and bring greater innovation into sectors like shipbuilding, transport and defence, for example, this may throw up an entirely new set of opportunities.

Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.