“There are decades where nothing happens; and there are weeks where decades happen”-Vladimir Lenin
This is a new Trumpian world. Within 8 weeks of being sworn in, Trump has voted alongside Russia at the UN against historical allies, threatened to annex Greenland, to cut defence aid to Ukraine, to exit NATO, pulled the US out of the Paris climate change agreement, defied the US judiciary ….
Trump’s explicitly stated core beliefs.
- Europe and other US allies have enjoyed a US security umbrella. This has resulted in a bad deal for the US where cost benefits are no longer in US favour.
- The US has been embroiled in international disputes without any benefit in return.
- Chinese firms have exploited US tariff treaties with Mexico to flood the US with cheap imports which in turn has hollowed out the US industrial base.
- Climate change is a hoax.
Other realities not explicitly stated.
- The US has borrowed money from China to buy Chinese goods. While doing this, it has enhanced Chinese economic power and hence Chinese military power which is now almost at par with the US.
- Chinese technology skills in many sectors (semiconductors an exception) may be at par or above the US. The Deep Seek AI model developed by a Chinese hedge fund at a fraction of the cost of US peers whilst delivering great results punctured the notion that US Big Tech had an unassailable lead in AI and that large Cap ex is not required to compete. Cars coming out of China are available at a fraction of the cost of US cars with more advanced features.
- The elite in the US have aided the hollowing out of the US industrial base by being capital light and outsourcing manufacturing which was good for stock prices.
- The US debt is now approaching unsustainable levels.
Hence, the new Trump administration believes that:
- The US should not entangle itself in foreign wars. Allies need to pay for US support/protection.
- The US should concentrate focus on China as primary adversary. The way to limit Chinese military power is to limit its economic growth.
- Encourage companies to bring back Manufacturing at home by giving tariff protection which will also aid Deficit and Debt reduction.
- A temporary recession in the US economy will reduce interest rates and help refinance the USD 9 Trillion US debt that is maturing this year.
India in a Trumpian world – long term positive for Manufacturing
When supply chains can be used as weapons, national security concerns will reflect significantly more in strategic decision making by businesses than they did earlier. There will be desire for self -reliance in High Tech sectors (e.g. Semi-Conductors) supported by sourcing from countries who will be likely allies rather than those who will be potential adversaries.
While the US wants to bring manufacturing back home, one cannot rebuild Manufacturing “competitively” and “quickly” in medium technology products fast even if you wanted to.
- In many sectors, industrial capacity in the US has been hollowed out. For many products, the US needs to rely on imports as capacity does not exist. The US had 295K+ small and medium manufacturing shops in 2001 which has reduced by ~25% by 2023 as the next generation is not keen to continue in this field.
- One cannot just set up plants and make them competitive quickly. Manufacturing requires both a hard edge (Economies of scale) and soft edge (Engineering talent, process know how, culture). The quality struggles at Boeing are a good example of how hard it is to reverse a deterioration in culture.
- Why will a company add capacity when a new administration may reverse policy after 4 years and leave a company with an uncompetitive asset?
The US/Europe are seeking a symbiotic relationship with India who is seen more of an ally rather than a potential adversary.
- China now dominates Manufacturing and could outproduce most countries cumulatively in a conventional war.
- The new German Chancellor has publicly warned German companies of overinvesting in China[1].
- There are separate trade agreements being negotiated between the US/Europe/UK and India.
Hence, higher across the board tariffs expected on 2 April may become more nuanced over time with lower tariffs on products where US lacks capacity/willingness to produce and where import substitution is not possible.
However, tariffs on Indian products should remain lower than on Chinese which will enhance relative competitiveness of Indian companies vs the Chinese. The world is recognizing that Manufacturing is a national strategic priority in China and that surplus capacities are being dumped onto the world by companies enjoying state support. Hence, we expect tariff gaps between China and other countries. These will support market share gains in global supply chains.
Investment Implications
Growth head winds with possibility of higher inflation in the developed world means lower growth vs earlier for companies in the medium term.
- Policy uncertainty will cause corporations to temporarily freeze plans as they wait for more certainty before committing on a path. Consumer and business sentiment in the US is already falling quickly.
- Tariffs are inflationary (companies will pass on costs as the US lacks an industrial base for many products which need to be imported). This will act as head wind to demand.
- The US is the engine that drives global growth. Slower growth in the US will result into lower economic growth across the world leading to short term growth challenges for businesses. This means growth head winds for Indian businesses as well.
“Manufacturing out of India for the world” continues to be a mega theme and is reflected in our increasing weights to Manufacturing.
- The Chinese will continue to dump surplus capacity circuitously through other markets. However, “medium” tech manufacturing can be 18-20% ROCE with 15-20% decadal longevity of earnings growth. Customers are willing to pay a small premium for de-risking. Differential tariffs vs China will also help.
- “Ownership mindset” means we need to look beyond potential short term growth challenges.
However, Manufacturing choices need to be more nuanced.
- The desire to bring Manufacturing back to the US means one must stay away from businesses which the US views as critical for national security and/or where India is providing incentives to aid global competitiveness.
- Rather, focus must be on acquiring Assets with uniqueness attributes (which US may not want to bring back home or where competencies cannot be easily learnt) as these offer best respite from tariffs.
High probability we could see Equity outflows from US to other markets including India.
- “American exceptionalism is the belief that the United States is unique compared to other nations” as it followed a rules-based order vs other nations. 65-70% of the global market capitalization is held in US stocks at present.
- Ironically, it is the US that seems more autocratic and unreliable at present vs other nations. Hence, this could be the end of American stock market exceptionalism.
- Early trends suggest money is moving out of US Assets to other countries like China. India too could be a beneficiary.
Precious Metals could continue to do well, despite a strong run in the past year.
- A reserve currency is like the elder in the room – respected and feared. The unpredictability of the US means it is now feared, but not as trusted. The US Dollar – perhaps has “peaked” as a reserve Asset.
- Central Banks have been price agnostic buyers in Gold since the Ukraine invasion in 2022 when the US froze Russian Assets. This trend may continue to find support as there will be considerable interest in an alternative to US Treasuries for Central Bank reserves.
[1] “I say to all representatives of the German economy that the decision to invest in China is a decision involving great risk,” Merz said after a policy speech in which he advocated for Berlin to take a more active role on the global stage. “My heartfelt request to all companies…Limit the risk you take in order to avoid endangering your own company if it triggers an immediate write-off,” he added. Source: FT