Capital flows to where it is best looked after, and in recent years, investors have become accustomed to the idea that this is the United States. The concept of American Exceptionalism has come to dominate global equity markets. As a result, the US share of the MSCI world index represents more than twice its share of global GDP.
Although the dollar retains its world reserve asset status, the new Trump administration rejects the global policing responsibilities typically accompanying this privilege. Its use of tariffs to re-order the world economy foments speculation about imminent trade wars. However, the first skirmishes in a global capital began before Trump’s Liberation Day.
A cursory glance at the Q1 performance of financial markets year to date indicates the extent to which the world’s capital might have started an era-defining rotation. The dollar’s trade-weighted value fell 5%. Significantly, the safe asset of choice remained gold, which continued its relentless rise, up nearly 20% in the period and more than 50% in $ terms over the last 3 years, a clear signal of caution.
However, the most vivid illustration of the end of American Exceptionalism is the divergence among equity markets. Global investor Sean Peche says this is Trump’s unintended MIGA moment (Make International Great Again), highlighting the importance of geographical diversification. Some compare these times to the capital rotation seen following the collapse of the Soviet Union.
Within weeks of his inauguration, equity investors started to question the notion of the Trump Put, as Treasury Secretary Bessent said he cared more about bond yields than the level of the NASDAQ. As the quarter progressed, the post-November 5th US equity market euphoria seemed like a distant memory.
Five days after the inauguration, a Chinese company that few had ever heard of announced its new AI agent, DeepSeek-R1. Critically, the technical details claimed the company had achieved its milestone in a less compute-intensive manner than typically adopted by the Mag Seven, whose CEOs were present at Trump’s swearing-in. Since then, Nvidia has lost 29% of its value, while Alibaba has gained 62%. The wider NASDAQ 100 is down 12%, and the Hang Seng is up 18%.
Just three weeks later, JD Vance arrived to address Europe’s leaders at the Munich Security Conference to remind his audience of the need for European self-reliance in defence. However, he couldn’t help but add how disappointed the new administration was with its European allies and that they might want to look away as the US negotiated a settlement with Russia to carve up Ukraine. A settlement that the US expected Europe to enforce.
As Vance spoke, German defence company Rheinmetall, whose shares had risen nearly tenfold in price since the invasion of Ukraine three years earlier, were trading at approximately Eur 750; a month later, they had gained a further 75%. German equities haven’t seen moves like this in a generation.
Such was the unifying reaction to the US onslaught that Germany’s Bundestag agreed to release its fabled fiscal debt brake, unleashing a Eur 1 trillion stimulus into its sclerotic economy. The Euro rose 5% against the dollar, and the DAX40 roared to a 12.5% Q1 gain. In a few weeks, the VP’s speech caused a loss of over 20% for dollar-based investors versus the S&P 500, prompting investors to reconsider their geographical weightings.
The Bank of America asset manager survey reported the most significant one-month allocation away from US equities on record. However, precious little has been redirected to the UK.
Over Q1, the FTSE 100 recorded a nearly 5% gain, but the FTSE 250 and AIM indices recorded small losses. The UK remains as cheap and unloved as China and Germany were before their recent rediscovery and rerating.
A rational analysis of the UK’s spring statement from Chancellor Rachel Reeves explains why this might be. While Germany and China can roll out the fiscal stimulus carpet for global capital, the UK has less room to manoeuvre. Its budgetary maths needs OBR and bond market approval and is born of policymakers for whom a Truss rerun would be suicide.
Like her better-qualified counterpart at the US Treasury, Rachel’s primary focus last week was to pacify bondholders. Companies are seen as sources of tax revenue and must yet bear the full brunt of last year’s higher NI and increased employment costs. Meanwhile, reform of equity capital markets is not a policy priority. Above all, remains the prospect that one sweep of Trump’s tariff pen will obliterate Reeves’ wafer-thin £9.9bn fiscal buffer.
So, should investors despair and give up hope for the UK? We certainly don’t believe so. The Great Rotation offers UK investors hope. By UBS estimates, Europe owns $9tn of US equities out of a total foreign ownership of c$18tn, a greater amount than the US holds in overseas equities. It also represents about 20% of the total S&P 500.
As China and Germany have seen, the potential price action is dramatic when this capital is reallocated to smaller markets. With the UK representing less than 4% of the average global portfolio, a tiny slice of the Great Rotation would have a huge impact. All we need is a catalyst, and just maybe the delivery of a bilateral US trade deal is it.
Written by Jeremy McKeown
Chart: S&P 500 – Weekly
Source: TradingView (March 2025)
Explanation
S&P500 (Weekly) – In the previous edition of the Curious Investor, we covered the S&P, and after the week we have just experienced it felt fitting to revisit. At the beginning of March, the S&P broke its ascending trendline after a rounding period of marginally higher highs, this represented a slow down in momentum leading ultimately to a break of support. Since that time, support for a couple of weeks was found at the 5650 level before a continuation to do the downside occurred. The area we are currently at was highlighted a month ago as a natural place for price to be drawn to in any sustained weakness due to convergence of key support levels. The area of focus is now is the 78.6 Fibonacci located around the 5300/5270, this will need to hold otherwise more downside can be expected. It is important to note that a single weekly close is not sufficient to confirm a break of support and a close eye will be now on the next weekly candle to dictate the next move. At the time of writing the S&P is down c15% from the highs, and although the feeling is bearish it remains within a typical correction level.
Further Reading & Listening:
DISCLAIMER
This is for information purposes only and is not to be considered as advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information does not take into account a persons specific investment objectives, financial situation or particular needs of any specific recipient. Opinions expressed are our current opinions as of the date appearing on the document only.
Any working examples, forecasts or data are for illustrative purposes only. Dowgate Wealth does not make representation that the information provided is appropriate for use in all jurisdictions or by all Investors or other potential Investors. Parties are therefore responsible for compliance with applicable local laws and regulations. Dowgate Wealth will not be held liable for any loss or damage resulting directly or indirectly from the use of any information on this site.
