John Townsend’s investment opinions July 2025

The tariff machinations of the current US president, with their inconsistent directions, bullying and unclear policies, are causing chaos in the international markets and especially in the United States itself. America’s allies, under the threat of a withdrawal of US military support, suffer the most, while the country’s enemies such as China and Russia, seem to ignore the Trumpian threats with impunity. A 15% mainly one-sided tariff level seems to be the norm at present, up from an average of 4.7% in the recent past. Steel and Aluminium carry higher tariff levels, up to 50%, in an attempt to protect the US metal producing industries, even though these US producers are moribund. The inevitable results of these tariffs will be an increase in domestic inflation within the US, even though the government’s coffers will benefit from the tariffs that will be paid by the American consumers and industry.

Investors hate uncertainty, and the new bombastic approach by the US president, evidently with little sage external advice, is causing international investors to hesitate and to begin to lighten their US exposures. The US dollar has been falling in value against a basket of other currencies. This may help the US economy in the short term, easing exports and making imports more expensive in addition to the increased tariff costs, but the United States will need to refinance many billions of Dollars of maturing national debt this year and the enormous extra debt stemming from the ‘Big Beautiful Bill’ that a compliant congress pushed through. It is not clear who will buy this excess debt. President Trump, having antagonised the Chinese government which holds most to the US national debt at present, apparently assumes that China will be as compliant as it has been in the past, but whether it will actually do so without demanding recompense is not clear.

The certainty of higher inflation levels caused by the tariff machinations, is causing the Federal Reserve, the US central bank, to hold interest rates higher than President Trump would like, causing him to demand the replacement of the Chair, Jerome Powell. Inflation is a major threat to the US economy and Trump was elected on the promise of bringing down inflation. The actions taken by President Trump liken those of Turkish President Erdogan who has wrecked the Turkish economy by insisting that interest rates were the cause of, rather than the cure for inflation. This belief caused The Turkish president to insist on lower interest rates and when more sensible minds demurred, he replaced the head of the central bank with his own son in law, who acceded to his demands. The Turkish Lira fell in value against an international basket, resulting in rising prices for energy and imported agricultural commodities. At its peak inflation in Turkey rose to 73.5% per annum, though a new realisation has brought with it policies to raise interest rates again and fight inflation. The US equity markets seem temporarily bolstered by the new tariff agreements and perhaps out of a sense of relief, because the tariff war could have been much worse, strengthened at first. This is still dangerous territory however, and the markets will be as volatile as the US president himself. It is now time to reduce exposure to US risk in the form of currency, equities and bonds. The risks of future sharp falls are simply too high. European politicians and European industry, fearing much higher tariff levels, declared the one sided 15% agreed levels if not acceptable, then liveable with. The United States will be allowed to export motor vehicles to Europe without tariffs, but whether enough customers will buy them, remains doubtful. Once Trump’s term in office ends, these tariffs will undoubtedly come up for renegotiation. In place of US exposure, European equities, large and small cap, can be seen as a partial alternative, the European, especially the German markets, will have to digest the tariff news, but there are other large customers outside the USA where demand can compensate for a reduction in US demand.

The Chinese economy is faltering slightly at present due in large part to an over investment in speculative domestic property building. China has the second largest economy in the world, and it will recover its poise. The US president seems to believe that China too can be bullied into bending to his will. This is however a fundamental misunderstanding of the personality of President Xi. The Chinese president grew up under the pressures of persecution under the cultural revolution under Chairman Mao which saw his own father imprisoned and formed the personality of the younger Xi.

President Xi may have learned the hard methods of Chairman Mao, but he has also learned to have patience and view the world from a very long perspective. It is too easy to believe that China can be swiftly pressured into submission. They won’t be.

An ever more economically important China will inevitably cause friction with Europe and surplus goods which otherwise would have been sold in the US, will instead end up for sale in Europe. There is a danger that Chinese goods and innovations such as sophisticated electric cars will provide fierce and often subsidised competition. A specialised investment manager with a track record of success in the field can distinguish between government subsidized strength and genuine investment opportunities in efficiently managed Chinese companies.

While we are focussed on the dangers of the US under its present leadership, the rest of the world is still thriving. In Europe there is still unspectacular, yet consistent growth, especially in northern countries and in the arms companies seeking to benefit from the production of weapons following the Russian attack on Ukraine. Our investment focus should be switched towards Europe and to the countries in Southeast Asia and India which are benefiting from an increased global demand for their lower production costs. Japan too, is climbing out of its decade long economic malaise. There are many opportunities in these areas which will provide good, stable investment chances.

Now is the time, perhaps more than ever before, that it is essential to have a very broadly diversified portfolio of investments, both geographically and by market sector. It would be wrong to become complacent about the risks facing us. There will undoubtedly be shocks in individual sectors, often caused by the pronouncements of a self-serving small group of US politicians and their advisers. A broadly diversified portfolio of equity funds will shield against many of the worst shocks. A high proportion of short-dated bond funds will help guard against sudden increases in interest rates.

Crypto currencies and their memes should still be avoided at all costs. The Trumpian US markets are an encouragement for the worst excesses of the Crypto crooks and while there is short-term froth in the market and even some main-tier banks have begun to offer Crypto accounts, the impending disaster is seemingly inevitable.