Sharemarkets fell, the US dollar cratered and US treasury note yields (the interest rate on government debt) rose sharply. It was this rapid rise in rates – the 10 Year Treasury Note yield went from below 4% to as high as 4.5% in one of the largest weekly moves in recent memory – that seemed to force Trump’s hand.
By month’s end he had paused the implementation of the tariff plan leading to a sharp rebound in share prices and a fall in US interest rates.
Despite the 90-day pause, and market speculation that the eventual tariff levels will be much lower than those initially announced, it’s hard not to feel that this signals a change in the world order. This will have implications for managing money.
Jasper says “we have grown up in a world that has been US-centric. The US dollar has been the clear global reserve currency, and we bought the US multi-national companies, the dollar and bonds. Since World War II, it’s been the smart and powerful way to invest. Most investors matured in a world built on US exceptionalism.
“There were clear lines of sight for us to follow. US companies were globally dominant, the US dollar was strong and provided a safety valve for trading economies to improve competitiveness. Inflation was well contained and generally falling.”
Jasper says that this US investment narrative has been fraying at the edges for some time. “
If you backed the US, you did well, but that is less clear now. Trump’s tariff announcements were a symptom (of that fraying) rather than the cause of it, and ‘Liberation Day’ was another nail in its coffin.
“In its place, we are entering a multipolar world. Rather than the US being a clear world superpower attracting global capital, other regions and countries are gaining relative power and catching up with the US in both economic and geopolitical significance.”
He cites the European bloc, China and India as having increased influence. The lines are being drawn.
“The US has dismantled its international aid agency and appears to be retreating from Europe and Nato. Tariffs are the next iteration.
“The European bloc is taking on more responsibility and authority with defence spending, and the future of Ukraine.”
Jasper says the multipolar world is likely to be characterised by a wind-back in openness and a pivot towards protectionism. It may mean a realignment of trade patterns and potentially require significant new capital investment, not just in manufacturing but also in defence.
He says, despite the sharemarkets bouncing back since “Liberation Day”, the US dollar has weakened as investors retreated from US assets and repatriated capital back to their home markets.
“The DXY Index, which measures US dollar performance against a basket of currencies, fell by 5.3% from April 2 to its intra-month low point. This is a dramatic fall for the world’s reserve currency.
“If the multipolar world takes hold, there will be more repatriation of capital out of the US and we need to make sure our portfolios have exposure to other countries and businesses.”
While market participants seem to have shrugged off their initial fears of the US tariff regime, risk remains, says Jasper. “The echoes of this can be seen in the elevated gold price and the US dollar, which despite a small bounce near month’s end, remained 9.2% off its highs as measured by the DXY index.
“This is the exact opposite from what economic theorists would expect on the imposition of a tariff; theory points to a stronger not weaker currency on the country imposing the tariff.
“Something strange is going on.”
Jasper says “a change in economic leadership is underway and companies have to be more thoughtful about the way they operate. The US idea was having manufacturing offshore because it was cheaper to produce and then developing logistics (supply chain) and growing markets to sell more products.
“Since ‘Liberation Day’ companies are more concerned about their risks and thinking of bringing more manufacturing onshore. There is a move to a multipolar world in managing manufacturing. Managing money and risk is far more important now than it was 10 years ago.”
The new economic and investment landscape means megatrends have to be built into portfolios, says Jasper.
“The idea of mega trends is that there are structural trends or themes driving asset pricing over extended periods of time. In the more stable US-centric world that had existed, these themes tended to be less important to achieving investment success.
“We are of the view that explicitly considering them as we build portfolios today will be central to delivering tomorrow’s investment outcomes.”
He says the megatrends include:
● Geopolitical fragmentation: The change to a multipolar world will result in a change in supply chains.
● Artificial intelligence (this has a geopolitical theme): The arrival of the Chinese AI assistant app DeepSeek was a big wake-up call for the industry and will change business operating models.
● Low carbon economy: The transition to lower carbon-intensity economy will require significant investment.
● Demographic divergence: The demographics in the developing world are still growing while birth rates in the Western World are low, affecting potential economic growth.
● Future of finance: More money will be spent on defence, and manufacturing and the sources needed to fund this will change. This may provide further impetus to the growth of private assets like private credit.
Jasper says while there are strong reasons to believe “we are entering a new investment paradigm, exactly how this plays out, is in many ways, unknowable.
“The US does one thing and we don’t know how China will respond until we hear from them.”
Portfolios must be dynamic and able to respond to changing conditions, he says.
“Set and forget is not a winning strategy in a rapidly-changing world. Being able to adapt your investment portfolio as new insights come to hand will be critical.
“That doesn’t mean you trade every five minutes as you reassess the risk in different parts of the world. But it’s important to look through the noise and isolate the signals.”
During last month’s market volatility when the NZ dollar fell to US55c, ASB reduced its level of exposure to international currencies.
“That’s paid off,” says Jasper. “We increased the size of our hedge at 55c to partially offset any rise back against the American dollar. We also paid a small cost for the put option to do this. It’s a shorter-term position and it’s like an insurance policy – you get a pay-out if the market moves beyond a certain level. And we have an allocation of gold to act as a defensive asset.”
Jasper says when building its investment portfolio, ASB factors in a medium-term outlook of three to five years, considering the mispricings in the markets and which parts of the world are benefiting from the mega trends. This results in the portfolio being varied from its typical long-term exposures.
“You can’t assume the future will be like the past. There will be different ways to look at investing, and the value of diversification has just gone up. When everything is changing, working out the end-game is complex.
“Being dynamic and moving money around will ensure portfolios are well-diversified and well-positioned,” says Jasper.
● ASB is an advertising sponsor in the Herald’s Capital Markets and Investment report.
