What hasn’t changed is our view that US policymaking in the new administration bears many of the hallmarks that we’ve come to associate over the last 35 years with emerging markets—and not the best performing ones, either. The erosion of institutional continuity and effectiveness tends to enable more erratic policymaking. This institutional disruption doesn’t just affect the regulatory stability that companies rely on to make long-term investment decisions, it also undermines predictability of enforcing contracts with suppliers, service providers, and customers. Just seven years ago, investors howled when Mexican President López Obrador unilaterally canceled the completion of an already-under-construction Mexico City Airport, leaving contracts unpaid and long-term investment plans disrupted. Now, the US government—reprising a pattern from President Trump’s business career—is terminating both employment contracts and commercial services contracted for various government agencies.
In our third quarter 2024 letter, we wrote about our potential exposure to new US tariffs and asserted—optimistically—that the risks were modest and manageable. That view was shaped by Trump campaign’s focus on China as the key malefactor behind US trade imbalances. That has proven a misjudgment on our part, as early salvos in the new trade war quickly hit China, the US’s primary geopolitical rival, but then were re-targeted at its closest neighbors, Canada and Mexico, and then at its closest allies in Europe. Before the April 2 “reciprocal tariff” shock, the most directly affected company in our International Equity portfolio was Canadian National Railway, a critical freight transport provider that, despite its name, links US states with each other, but of course also connects the US with its largest trading partner, and—no small thing—one of its top export destinations.
Another area of policy more often seen in developing countries than mature democracies is the practice of governments extracting concessions or favors from companies or individuals in exchange for letting them get on with their normal course of business. The recent case of TSMC investing a further US$100bn in the US after being threatened by targeted, ultra-high tariffs is a distasteful example of such a commitment being demanded from a company. Especially a company that had already responded voluntarily (and at large scale) to Biden-era Chips Act incentives, building a new semiconductor fab in Arizona, slated to ramp up high-volume, advanced chip production this year.
Our point here isn’t to dispute the policies1 themselves, but rather to highlight the harm to predictability, and by extension to business confidence, from abrupt, poorly signaled shifts and their frequent reversal (and the reversal of the reversals.) This is not a business-friendly environment. When the rules of the road become increasingly arbitrary, companies—domestic and foreign alike—become less willing to commit capital. Uncertainty undermines both the appetite for investment and the demand outlook that would justify it. While TSMC’s investment commitment garnered headlines, there will be no headlines for the thousands of business projects that quietly get canceled in the US due to rising policy uncertainty. International Equity portfolio holding Air Liquide is already reversing its plans to build four hydrogen gas pipeline hubs in the US due to abrupt (if not entirely unexpected) regulatory shifts by the new administration. Meanwhile, US consumer confidence is falling as inflation expectations rise in anticipation, rationally, of the higher cost for most of the goods consumers want to buy. This does not strike us as a backdrop that supports elevated stock price valuations in the US. The relative outperformance of non-US markets this quarter—the largest quarterly lead over US stocks in fifteen years—offers a taste of how that could play out.
The world economic order that created vast wealth through open trade and cooperation now faces potentially radical disruption as the US reshapes its own role in that order. As stewards of your capital, our task is to see the world as it is, not as we might wish it to be.
From our vantage point as global investors “here at the edge of the stage,” the challenge of protecting and growing our clients’ wealth feels more daunting than usual. The world economic order that created vast wealth through open trade and cooperation now faces potentially radical disruption as the US reshapes its own role in that order. As stewards of your capital, our task is to see the world as it is, not as we might wish it to be, and anticipate the possible consequences of chaotic and self-destructive economic, business, and foreign policies, even when they stop making sense to us.
From a portfolio perspective, our investment process has always prompted us to understand the industry dynamics that affect how companies operate, to grasp and assess the source of a company’s superior profitability, and to have insight whether that source will endure or evaporate easily as foreseeable pressures arise. Thus, we’ve long harbored an aversion to companies whose profits were especially vulnerable, as we once put it, to “the whims of faceless bureaucrats and capricious politicians.” That practice has given us a leg up in parsing our portfolio holdings and potential new investments for companies situated to better avoid the fallout from a damaging trade war, regardless of its origin. That’s no small task given the size and interconnectedness of the global economy, and the central role of the US within it. Our experience of investing across emerging markets has prepared us to find resilient, growing companies that are operating well outside the line of fire of volatile or heavy-handed governments.
A process grounded in identifying and evaluating resilient companies and assessing their growth prospects feels particularly well suited to the moment.
1Although we have disputed the wisdom of starting trade wars. For the record, we’re also in favor of greater budget discipline in the US because we’re in favor of the US government avoiding being at the mercy of its creditors and resisting the expediency of resorting to inflation to escape its ballooning debt burden. We favor US Treasuries remaining a low-risk, benchmark investment, a feature at the center of the US’s attraction as a capital market and reserve currency provider, right up there with the trusted rule of law.
