President Donald Trump’s second term is now off to a busy start, with a flurry of executive orders released. Some of these orders are aimed at re-shaping the world trading system and others that will have micro-level implications for sectors and industries. 

In general, the new administration seems to be a boon for businesses in the USA and the mood amongst CEOs is broadly very positive.¹ As such, the early days of the administration are germane to the deployment of private equity capital.

The debate around tariffs and trade is vital in this respect because it has three aims — to garner more revenue for the government, to make American firms more competitive relative to overseas rivals and to drive America’s trading partners to reshape world trade, potentially in a deal in the fashion of the Plaza Accord.²

One aim is to weaken the dollar relative to trading partners. This is relevant for private assets in the sense of investors deploying capital outside the US. To date, the opposite has been the case, as rates markets have priced in higher growth and inflation in the US as well as weaker growth elsewhere, notably in Europe and China. Today, the dollar appears overvalued;³ by some estimates, it is the most expensive it has been in decades, and in that regard, we may see more private capital from the US invested abroad once there is clarity on the outlook.

Trump’s second presidency has the potential to serve as a catalyst for private assets, but for governments and businesses overseas, he represents the greatest source of uncertainty. Domestically, a significant constraint will be the extent to which his policies generate inflation and drive interest rates higher. Our sense is also that the environment is now much more attractive for business rationalisations and restructurings.

The implications of tariffs

On tariffs, the expectation is that the White House, having published its ‘America First’ agenda, will impose a 10% tariff on goods from the EU (there will be a retaliatory tariff)⁴, a 10% on China⁵ (Trump was threatening China with a 60% tariff on the campaign trail) and they have already flagged a likely 25% tariff on goods from Canada and Mexico.⁶ Together, these measures would take the world economy back to a 1930s level of tariffs.⁷

For private companies and investors, we expect a pronounced sectoral effect, which will likely be good for financials, energy, defence and new technologies, whilst disruptive for healthcare and potentially margin-negative for some consumer businesses (rising prices and labour costs). 

In overseas markets like Europe, non-export-oriented firms may benefit from a rise in global business activity. We expect that the European winners from the ‘Trump effect’ will be in strategic sectors that Europe is earmarking for a ‘catch-up’ such as defence, AI and cyber. The EU will soon announce its response to the Draghi report⁸ and the expectation is a shift in policy on capital markets union and technology investment. To a degree, Trump might claim credit for the new urgency that the EU might show here.

There have also been a range of regulatory and institutional changes. The cutting of federal funding for green technology projects (up to $300 billion)⁹, the exit from the Paris Accord¹⁰ and the green light for new oil drilling¹¹ will tilt the investment balance from green to more traditional energy.

Elsewhere, the announcement of an initial $100 billion investment plan for AI (between Softbank, Oracle and OpenAI) is a real positive for the sector.¹²  We also note that the release of the UK’s AI Opportunities Action Plan¹³ — which is very detailed and aims to build out data centres and the energy infrastructure to support AI projects, as well as driving the use of AI in government — is a strong positive for AI as a segment in Europe.

Our view is that a short period of tariff ‘dispute’ is optimal from the point of view of private firms. This will then permit clarity on the outlook, visibility in terms of rates and the focus to turn to the effects of easier regulations on businesses in the US and potentially Europe. However, a protracted trade dispute with China that results in supply chain disruption would be a much more negative result.

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.