Trump 2.0 is already changing global behaviour

Rajat Bhattacharya, Senior Investment Strategist, Chief Investment Office

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30 April 2025  I  5 mins read

Is the “Sell America” trade, so popular in markets, missing the bigger picture? Trump 2.0 potentially augurs a regime shift for geopolitics and the global economy. Nevertheless, the outcome is likely to be a more balanced global economy, with Europe and Asia shouldering more responsibilities for driving growth and maintaining peace, but where the US economy remains “first among equals”. Investors need to adjust their portfolios to reflect this nuanced shift, and not over-react.

Since President Trump took charge of the world’s largest economy on 21 January, the benchmark US 10-year government bond yield is down over 25bps, oil has declined over 15% and, crucially, the US dollar has depreciated almost 7% against its major trade partners. That’s arguably a remarkable achievement in the first 100 days of office, given a core plank of Trump 2.0 is lowering bond yields, boosting energy supplies and making the dollar more competitive.

Although the benchmark S&P500 stock index is down more than 10% over the same period, Trump has waved it away as “short-term pain” necessary to achieve his long-term objective. Trump 2.0’s avowed goal is to rebalance the global economic and financial order by reducing the world’s addiction to the US’s unsustainably debt-fuelled consumption, force Europe and China to boost internal investment and consumption, respectively, and attract more durable investment into US manufacturing sector to revive the fortunes of the American middle class.

Shift in global behaviour

While the execution of these goals can be questioned (is the unconventional execution also part of the plan of a self-confessed disruptor?), there are already signs of significant shifts in foreign government and corporate behaviour. German policymakers bypassed established parliamentary norms to rapidly cobble together a two-thirds majority in the outgoing parliament and approve a generational shift in fiscal policy to boost defence and infrastructure spending. China has embarked on fiscal stimulus to boost domestic consumption and is likely to do more.

Major trade partners, with the main exception of China, are queuing up to negotiate trade deals with the US administration. OPEC has reversed years of oil production curbs to boost supplies. Meanwhile, global companies, from Hyundai and POSCO to Roche and Toyota, have pledged tens of billions of dollars of investment into manufacturing plants in the US.

Primacy of the US consumer

The underlying driver of these shifts in behaviour is simple: the US is by far the world’s largest consumer market. US household spending totalled USD 19tn in 2023, double that of the European Union and almost three times that of China. While this insatiable US consumption has been fuelled by years of excessive fiscal stimulus – which is likely to be curtailed if Trump 2.0 works as planned – the primacy of the US consumer is unlikely to disappear anytime soon.

It is the American consumer power that allows global companies to sell the same goods in the US at profit margins multiple times those in Asia, or even Europe. The Trump team is strategically leveraging this unmatched consumer power to get better deals (terms of trade) for the US. This explains why global manufacturers are lining up to build plants in the US to get closer to this consumer base and for governments to cut deals with the US.

Meanwhile, US tariffs are projected to annually raise on average USD 500bn of revenue for the government over the next 10 years, helping reduce the budget deficit, according to University of Pennsylvania’s Wharton School Budget Model – notwithstanding the 6% and 5% long-term hit to US GDP and wages, respectively.

Private sector-led growth

However, one could argue that a short-term cooling of the economy fuelled by unsustainable government spending is necessary. As Treasury Secretary Scott Bessent explained: “The American economy has been artificially propped up by government spending and public sector job growth. We are focussed on transitioning back to a private sector-powered economy – one where businesses drive job creation, investment and innovation.”

The administration plans to extend individual tax cuts initially enacted in Trump 1.0 and which expires this year, cut corporate taxes, deregulate the banking sector and incentivise investment in small businesses through tax deductions and easing of unnecessary reporting burden. The aim is to boost the economy’s productivity, which should sustainably lift growth and wages.

The economic implication of this strategy is as nuanced as the strategy itself. If Trump 2.0 proceeds as planned, there could be an increased risk of a short-term economic downturn in the latter half of the year, caused by disruptions to trade and short-term hit to consumer and business confidence. However, it would be prudent for investors to look through this downturn because the US policy focus will shift in the coming months towards negotiating trade deals, and then towards long-term growth-supportive measures such as tax cuts and deregulation.

There are signs of this shift happening. Bessent reportedly told a private audience that the current 145% US tariff on imports from China are unsustainable. This was followed by Trump stating the tariff on China will be reduced “substantially” and a tariff deal could happen “pretty quickly”. Trump has already paused reciprocal tariffs against other trade partners for 90 days.

Investment implications

For investors, over-reacting to short-term policy moves could prove costly for long-term wealth generation. This was recently experienced by those who exited the market as US equity markets corrected and the bond market volatility surged after the tariffs were imposed on 2 April. By staying out of the market, these investors missed the biggest single-day surge in US stocks since 2008 when the reciprocal tariffs were paused a week later.

There is a case to be made for resizing one’s asset allocation by reducing the share of equities, especially US stocks, in the portfolio as growth slows, earnings potentially broaden out to Europe and Asia, and the US dollar weakens to reflect the global rebalancing. US and European government bonds should do well in an economic downturn. There are also bargains opening in Emerging Market assets as businesses reorientate supply chains to align with the new world order. However, missing the woods for the trees by focussing on short-term noise and selling US assets lock, stock, and barrel, could undermine long-term returns.

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