Few believed that 100 days into the Trump presidency, the US would emerge as the epicentre of upheaval for global trade. The impact financially is that US indices have underperformed their foreign peers year-to-date, while ten year US government bonds have sold off (yields have gone from 3.9% to 4.4%, and have been slightly higher in recent weeks).
Trump’s inconsistent tariff policy has caused a dramatic drop in the value of the most valuable companies in the world. Eight of the top ten of these are domiciled in the US, and seventeen of the top twenty.
The idea that it would be better if Apple, the largest company in the world, brought its manufacturing base back to the US implies that the US government knows how to run the company better than management! The tariffs would make the iPhone over 40% more expensive according to Reuters. Sales would plummet. Similar problems exist to a greater or lesser degree with tens of thousands of other US companies – including Costco, Nvidia and Broadcom, among many others.
The largest and fastest growing companies got that way through decades of close attention to detail – of supply chains, customer bases, product market fit, disruptive technologies – the list is long. The tariff propositions, which at the very least desperately needs to be consistent, would see this work of decades upended, with the aim of remaking it in months, and without interruption. If this sounds like a warmed-over soviet five-year plan, well that’s because that is what it is.
Country of domicile does not equate to distribution of sales
The world’s largest companies got that way not just by diversifying their supply chains but, critically, their revenues outside the US. Country of domicile does not equate to make-up of sales.
For example, Netflix began operations in the US (and is listed on the Nasdaq exchange). However, over 70% of Netflix subscribers are outside the US. Qualcomm too began operations in the US and it too is Nasdaq-listed, but its Snapdragon processors are manufactured in Taiwan and then sold predominantly in Asia. The fastest growing companies grew their revenues way beyond the home/US market. Their growth was supercharged, and so was their sharemarket performance.
This consistent refinement of business processes, allowed to develop freely, though with regulatory guardrails, is the very stuff of American exceptionalism, and the reason that companies in the US have been able to command premium valuations relative to those in Europe or China.
Will US companies lose their valuation premium?
But the Trump own-goal with respect to tariffs has caused investors to become concerned that the US equity market is rescinding that premium relative to Europe, China and others, as the chart below shows.
Source: Loftus Peak, Bloomberg
The outperformance of foreign indices relative to the US has been driven by European banks and defence stocks, not the disruptive companies in which Loftus Peak would invest. China issues have been overshadowed by the US turmoil in the short term. This has supercharged the share prices of many Chinese AI companies. But whether or not this exuberance holds is to be determined.
Trading out of US disruptors and into European or Chinese names has clearly been the correct short-term tactic. But doing this in the absence of the consideration of whether these companies fit the Loftus Peak strategy, or work in a valuation sense, is incongruent with the Loftus Peak strategy. Capital flight won’t alone generate meaningful performance. That is why Loftus Peak pays close attention to valuations and business strategies in these markets before investing, rather than simply “buying Europe.”
All portfolio stocks stand on their own merit regardless of domicile
So it is that there are exceptional companies that have grown up outside the US and where valuations stack up these are already incorporated into the portfolios we manage. The Japanese company Advantest (which has been in the portfolio since August) is not merely the Asian leader in datacentre chip testing, it is the global leader. The Dutch company ASML is not just the European leader in extreme-ultra-violet lithography machines (machines fundamental to semiconductor fabrication), it is virtually a monopoly.
Non-US companies form a meaningful component of not only the portfolios today, but also make up a part of the investment “bench” (those disruptive companies with attractive investment theses that may be fully valued or already thematically represented in the portfolio) as well as our broader watch-list across the disruptive universe. Coverage of non-US companies is core to our research process. Last month Head of Research Raymond Tong and Investment Analyst Tom Keir travelled to Japan to meet with companies. Tom then went on to directly visit companies in Korea and Taiwan and then the US.
Companies cannot simply be ‘lifted and shifted’
Another part of the Trump plan involves re-shoring and is behind a decision by Taiwan Semiconductor Manufacturing Co, or TSMC, to spend US$100b building silicon chip manufacturing in Arizona. Of course, it is an open question whether TSMC’s high end chip manufacturing ecosystem (as well as all the smaller companies around it) can simply be moved to the US. For certain, computer chip design, which began in Silicon Valley in the middle of the last century, cannot rapidly relocate to the US, Europe or anywhere else.
Can Trump make American equities uninvestable?
He’s certainly trying.
Trump’s election was a catalyst for sharemarket gains. Investors believed the regime was pro-business. The Loftus Peak portfolio was not a participant in the Trump meme-stock sugar rush of the first weeks of the presidency. Tesla’s valuation did not make sense before the election. Nevertheless, the share price doubled. Those gains have turned into losses.
Given enough time, Trump could kill off America’s disruptive edge but it would take him some years and come at the cost of a protracted economic downturn and the end of America’s super power status. Fortunately, the rules of business and finance are sticky.
Within days of his reciprocal tariffs and in the face of a weakening bond market, Trump blinked, claiming that his negotiating ploy was a success. This has been a welcome reprieve for markets.
“Despite the potential of a recession, disruption marches on”
The quote above was from a Loftus Peak piece written in 2022 about disruption and recessions. It isn’t to say that the companies in the Loftus Peak portfolios won’t experience any pain in the short term, but their long term prospects remain. The companies’ prospects can even be better.
For example, the overall economic opportunity may shrink, but disruptive companies can still prosper by growing market share. Finding opportunities by acting flexibly is very important for outperformance, and is a trait which Loftus Peak has sought out in investee companies. It’s helped to underpin the strong performance over almost a decade.
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