The implementation of tariffs up to 25% on goods imported from Canada, Mexico and China led to fears of a trade war that sent equity markets tumbling. The S&P 500 fell over 1% when the tariffs were announced on 3 February, while European stocks dropped almost 2% and Asian equities almost 3%. The threat of tariffs quickly brought Canada and Mexico to the negotiating table and they were subsequently paused, leading to a quick market rebound.

While Trump 2.0 has begun as many expected – with leverage applied to adversaries and allies alike to effect strategic outcomes in the interests of the US – it also presents numerous investing opportunities, says Cohen, Portfolio Manager of the Robeco BP US Large Cap Equities strategy.

“The policies of the new administration are causing some consternation in the market, but you have to understand this in the context of the broader macro picture,” he says. “This is going to impact key markets in the US and the global economy in a meaningful way. It will present opportunities in ways that people may not expect.”

The principal macro reason cited for the tariffs is the colossal trade imbalance that the US has with the rest of the world, widening to USD 78.2 billion in November 2024. Imports of USD 351.6 billion are led by food and drinks, semiconductors and oil. The deficit was USD 25.4 billion with China and USD 15.4 billion with Mexico¹.

“This massive trade imbalance and the fiscal deficits are increasingly threatening the US’s fiscal position,” Cohen says. “In December 2001, when China entered the World Trade Organization, the US national debt was USD 6 trillion. Today, it's USD 36 trillion. So, it's up sixfold over 24 years.”

“We're now at the point where the US is running massive trade and fiscal deficits purely as a function of this global trade order. So, Trump and his new administration are all pointing toward a rebalancing of the global trade situation, and tariffs are a means to do that.”

Then there is the deregulation also promised by Trump amid a push for the US to make more of its own goods. “Every sector of the US economy, with the exception of healthcare, is likely to be deregulated,” Cohen says.

“The big policy is to generate revenue from tariffs, deregulate the economy, and then lower taxes on individuals and corporations so that you start to stimulate and bring more manufacturing and production back to the US.”

“Coming out of Covid in 2021, there was this big narrative about reshoring, nearshoring, friendshoring – and it never happened to any meaningful degree. Now the opposite may come true. We’re going to see deals to invest in the US power sector, in US data centers, and meaningful attempts to reshore key parts of the industrial supply chain that feed into the defense industry.”

This bodes well for generating alpha through stock picking, Cohen says. The Robeco BP US Large Cap Equities strategy has a strong track record of outperforming the Russell 1000 Value Index since the inception of the UCITS strategy in Europe in 2010, with the vast majority of performance driven by strong stock selection.

“Reshoring or nearshoring is very good for cyclicals, and for us, as value investors,” Cohen says. “The financial system finances it, so it means the US financials do quite well, and the value space we invest in is made up of over 20% financials. And then you have industrials, materials, energy and the semiconductors parts of tech outside of the Magnificent Seven to look at.”

“I think it's likely to be an epic stock-picking environment for the next several years, because if you can understand where industrial policy is going, what it's targeting, where the deregulation is likely to hit and what end markets are likely to be impacted, you can allocate capital toward those areas and away from other areas which are facing headwinds.”

“Our portfolio has always generated the vast majority of alpha from stock picking. We have always aligned with the ‘three circles’ approach, in finding good fundamental businesses that are trading at attractive valuations and at opportunistic times when earnings are improving, when the business momentum is improving.”

“Momentum is the art of what we do in not only identifying where business momentum is improving, but also where it's decelerating. This does involve anticipation and understanding the landscape of capital flows and to some extent, the macro, which means keeping up with what Trump is doing.”

Additionally, there is M&A activity that was largely subdued under the Biden Administration and may return under Trump. “I also think we’re going to see an uptick in consolidation around the economy,” Cohen says. “We had a very anti-merger and acquisition policy for the last four years, but that's about to change meaningfully.”

“A lot of these consolidations are going to be done with an eye toward introducing generative AI tools automating labor to reduce costs, and you need cash flow to be able to do that. Large caps will benefit disproportionately from small caps for that reason.”

“I also think the consolidation is going to happen in areas that you wouldn't expect intuitively, such as in advertising, media and certainly in financials, where there will probably be a wave of regional bank mergers to try and create scale to introduce systems that can automate the back office, and provide services that customers want. I would want to be overweight large caps for that.”

In all, Trump 2.0 may not be the market disaster that many fear, despite the familiar rhetoric and bluster, Cohen believes. “Someone wisely said you should take Trump seriously but not literally,” he says. “Once you look at this through that lens, a lot of his actions make a lot more sense.”

“The tariffs are also about negotiating leverage. It’s not just about the trade imbalance; it’s also about illegal immigration and fentanyl, and the illegal drugs coming into the US, which are not just coming through Mexico, but also from Canada. He's asked them to stop the flow, they haven't done what he's asked for, and so he's using these onerous tariffs as a way to get what he wants.”

“Politicians are about narratives and headlines. While these tariffs are disruptive, they're purposeful, and you can't look for unipolar explanations. You need a broader understanding of some of the issues affecting the US in relation to its bordering nations as well as competitor nations.”

Footnote:

¹ https://tradingeconomics.com/united-states/balance-of-trade