JACKSON HEWETT: Amid Donald Trump tarrifs and uncertainty, here’s where money is heading in global markets

The hottest trade of the last two years — US equities — is unwinding and likely to take more of a hit thanks to Donald Trump’s inconsistencies.

Over the weekend, even the permanently bullish president failed to hose down concerns about the US entering a recession, driven by his on-again, off-again tariffs and the prospect of eliminating tens of thousands of government-sector jobs.

Asked by his preferred channel, Fox News, whether he was worried about a recession, Mr Trump replied that he would “hate to predict something like that.” Instead, he said the country was in a “period of transition,” echoing his State of the Union speech, in which he warned there would be “a little disturbance”.

Investors were hoping for a pro-business, low-regulation agenda and instead are being served up “transitions” and “disturbances,” neither of which are helpful for consistent earnings amid general stability.

Since Trump came to power, the US S&P 500 has given up almost all its gains, while the tech-heavy Nasdaq has gone into correction mode.

And the mood is getting worse.

Consumers, who had been euphoric about the stock market going up this year, are now starting to worry about inflation. Company expectations for price increases have jumped to 5.7 per cent for services firms and 7.3 per cent for manufacturing firms, while a survey of US chief financial officers shows confidence has dropped from more than 60 per cent to around 40 per cent.

All this nervousness means that neither consumers, companies, nor the investors who back them are confident about what comes next.

That means you should be thinking about your portfolio too.

For the risk averse, gold

Ordinarily, the safest place to head when equity markets start to turn is bonds, namely government ones.

But in a world where deficits are on the way up across the globe, the bond market doesn’t look as safe as it once did.

Instead, investors have been piling into gold.

It’s a trade that has been on a run for a while now, hitting a record high of $US2,956 ($4681) per ounce last month, up 10 per cent already this year. That follows a 27 per cent increase in the price of gold last year, the largest gain in 14 years.

Multiple forces are pushing gold up. Increasingly, investors are worried about the looming size of the US deficit and fear it will eventually damage the integrity of the US dollar. Any challenge to the greenback as the default currency would be highly destabilising, and gold is seen as the safest haven in that instance. If Donald Trump’s tax cuts go ahead and the planned cut to public spending doesn’t eventuate, the attractiveness of gold will grow further.

Some of the biggest buyers of gold have been Chinese. Consumers there are looking at a country where deflation, not inflation, is a key concern. At a time when the value of goods is declining, gold is seen as a good store of value.

China’s central bank has also been a voracious buyer of gold, adding to its reserves for four straight months.

China has a massive trade surplus with the United States, and in the past, the country would buy US government bonds, or Treasuries, to ensure its currency didn’t appreciate to a level where its goods became too expensive for the US consumer. But with anti-China rhetoric at an all-time high, the Chinese government is wary of putting its money into a US government-owned financial product. They have seen what happened to Russia when sanctions were imposed. So instead, they are buying gold to offset that trade surplus cash.

Official US Treasury data confirms the China sell-down. At the end of 2023, China owned $US816 billion worth of US government bonds. By the end of 2024, that had dwindled to $US759 billion, the lowest since 2009. (Side note: China buying US Treasuries keeps US interest rates low, so losing China as a customer will hurt the US economy.)

Given that foreign policy uncertainty is likely to continue under the Trump administration, Capital.com senior financial analyst Kyle Rodda believes gold will continue to be more appealing as a safe-haven asset than US Treasuries, and the yellow metal’s golden run should continue.

Mr Rodda said that for the risk-averse, there weren’t “many places to hide” in Australian equities either. The market had become too expensive, he said, chasing US stocks up, and some of the more traditional stocks to buy in times of a slowdown, such as banks, didn’t present good value. Miners are facing structural headwinds due to the slow Chinese economy, while supermarkets, which usually perform well in a wobbly market, are facing “normalising sales growth, margin pressures, and the modest but meaningful risk of regulatory disruption.”

About the only place that could be a relatively safe haven in Australian equities was utilities, Mr Rodda said.

For the risk-tolerant, Europe and Asia

With little on offer in the US or Australia, investors have been heading to the European mainland in search of returns.

In the past three months, European equities are up 13 per cent, buoyed by a cut in interest rates and the promise of more ahead.

With Donald Trump’s challenge to NATO, Europeans have realised their defence capabilities need bolstering, and the aerospace and defence index jumped 6.5 per cent following the Ukraine peace summit. The defence and aerospace index, which includes names like Airbus, Rolls-Royce, Thales, and BAE Systems, is up 27 per cent so far this year and 45 per cent in 12 months.

Germany’s DAX is another strong performer, up 15 per cent for the year, and is expected to move higher after the country’s new ruling coalition decided to tear up a long-standing rule that prevented excessive borrowing. Germany has a legislated debt brake that caps the federal structural budget deficit at no more than 0.35 per cent of the country’s annual GDP. With a looming defence crisis, that cap is likely to be repealed, opening up more avenues for government spending. The country also intends to launch a 500 billion euro special fund for infrastructure.

Alongside Europe, the other growth market has, ironically, been China, including Hong Kong.

Last year, the Chinese government announced a stimulus program to help consumption, and stocks have been the beneficiaries. Chinese equities are up 21 per cent in the three months to February, leading to a gain of 45 per cent in a year.

China is facing plenty of headwinds, with an ageing population and a property debt overhang, but it has also surprised many with the sophistication of its tech products, particularly AI company DeepSeek. President Xi Jinping seems to have shifted his stance from reining in some of the country’s tech entrepreneurs to supporting the sector’s growth.

It’s a brave new world for investors, and there is plenty of risk about. As Bruce Brammall wrote in The Nightly last week, for those who don’t feel confident trading, the best thing to do is to hold and let the markets do their thing. As the old saying goes, time in the market is more important than timing the market.

For those who manage their portfolio, 2025 looks to be an edge-of-the-seat thrill ride.

This article provides general information only and should not be taken as financial advice.