Those who stepped in after the announcement of US import tariffs (April 2) gained almost 30 percent. What comes next, and where should investors put their money?
Every now and then, it is useful to reread what has been written: let’s revisit the economic commentary on the consequences of the tariff war. At the start of this year, analysts predicted slower growth, lower corporate earnings, and more volatility. Yet stock markets remain in good shape: the MSCI World in dollars rose 14 percent since the start of the year (as of August 29).
On April 2, US president Trump announced drastic import tariffs. This triggered a worldwide sell-off. I reread the Financial Times from April 26. Out of uncertainty, the IMF presented a range of growth forecasts, the World Bank spoke of fear among its members and cut its growth outlook by 0.5 percent, research firm Capital Economics reduced eurozone growth to 0 percent (second and third quarter), and Torsten Slok of Apollo even spoke of a “trade reset recession” with a 90 percent likelihood.
Where does the market optimism come from?
Despite this, markets moved higher. A few explanations: first, the tariff threat turned out less severe than initially feared. Next, the Magnificent 7 reported earnings per share up 26 percent in Q2 year-over-year, which was 12 percent above expectations. They continue to push the S&P500 higher. S&P500 earnings overall rose 13 percent over the same period. Profit margins hit historic highs.
Analyses show that CEOs rarely used the word “recession.” Companies stocked up at old prices or squeezed suppliers, shifted supply chains, and cut costs aggressively. Part of the burden was passed on to consumers, though we now see first signs of strain at companies like Walmart and Home Depot.
Investing in the US stock market (S&P500)?
Those invested in the S&P500 tracker should realize that the ten largest companies represent 40 percent of market capitalization. This tracker outperforms most active funds, but switching to an actively managed fund or the EW S&P 500 (equal-weighted) is increasingly advisable. Why?
Long-term interest rates on 10- and 30-year bonds weigh more and more on growth: growth stocks are sensitive to higher rates, mortgage loans are more expensive, and private equity must resort to financial acrobatics to sell its assets.
We now see “CV-squared” deals, where continuation vehicles are placed into new continuation vehicles. A continuation vehicle is already a repackaging of a PE fund.
Higher rates, combined with a falling forward earnings yield of the S&P500, make fixed income more attractive than equities. Risk-taking is no longer sufficiently rewarded.
Sam Altman (OpenAI) has spoken of a potential AI bubble. Billions are being invested, not only in the models but also in energy infrastructure—even mini nuclear reactors are being purchased. Looking at MSCI Factset, these companies show high price-to-earnings ratios combined with low expected earnings growth next year.
Their PEG ratios range between 2 and 5—excluding Tesla. These are expensive valuations, leaving little room for error. Take it for what it’s worth, but top university MIT wrote that 95 percent of organizations will get zero return from their investments in generative AI. Likely exaggerated, but it should ring alarm bells.
Finally: what about companies putting bitcoin on their balance sheet (instead of cash deposits) and instantly seeing their market cap surge? Financial journalist Jenkins (FT) calls it a “fool’s paradise” and even uses the word “Ponzi.”
Are there more attractive regions?
For several months now, I have been overweight in Asia. The region will benefit from the trade war between the US and China. Western companies are seeking non-Chinese, low-cost, low-tariff manufacturing bases, which will attract investment to those countries.
Of course, in the short term, it is not all rosy. Who will pocket the profits? Which components must still be imported? Will the local population benefit (through falling unemployment and rising wages)? Still, the pluses outweigh the minuses.
Since the tariff announcement in early April, Vietnam’s stock market has soared (FTSE Vietnam +78 percent as of August 29). This is not only the result of the trade war but also of its appeal as an investment destination. Thailand and Malaysia in the past also reaped benefits from industrial cooperation with automakers and Western semiconductor and data center firms.
Recently we saw the creation of the JS-SEZ (Johor-Singapore Special Economic Zone). Johor is one of Malaysia’s thirteen states and hosts the world’s second-largest AI hub, with production and logistics centers and one of the busiest ports in the world, Tanjung Pelepas. It is a cross-border economic partnership leveraging joint strengths to boost investment, jobs, and integration.
I remain cautious on India’s stock market. Strengths include participation in the “China Plus One” story. China will again allow the export of rare metals, fertilizers, and construction machinery. The trade war is currently sand in the wheels. Still, with continued reforms and a stronger focus on entrepreneurship, a phased entry into Indian equities is a solid strategy.
Finally, Indonesia. The country is struggling today, but it still has steady growth, a large and young population (270 million, half under 35), and is rich in natural resources (nickel, copper, gas). Weak points: too much focus on raw materials slows industrial development, conglomerates still dominate, and bureaucracy remains a hurdle.
Investing in Asian countries such as Malaysia, Singapore, Vietnam, Indonesia, and India will pay off over time. The underweight position in the United States can thus be partly offset in this region.
Jan Vergote is an independent financial consultant and analyst.