Should investors buy or sell America? Markets can’t seem to decide. But “sell America” chatter is back after Moody’s Ratings stripped the American government of its AAA rating, wagging a finger at Washington for a ballooning budget deficit it claims shows no sign of narrowing. Add April’s tariff theatrics – Trump’s opening shot, partial retreat, and fragile truce with Beijing – and you get a messy cocktail of fiscal sprawl and trade angst.

If all of this has given you a macro migraine, then you are not alone. Concerns around tariffs, trade, and debt are now crowding out normal market dynamics. Keeping up feels more like full-contact forecasting than traditional analysis.

But for the “sell America” camp, Trump’s tariffs are seen as a triple threat: slowing growth, pricing instabilities and a souring global appetite for Treasuries and the dollar. For the “buy America” side, an influx of investment into US manufacturing will spur growth and make it easier to service a debt pile that the Congressional Budget Office recently warned was on track to surpass record debt levels set after World War II, reaching 107% of GDP by 2029. 

The current market turbulence bears resemblance to the Covid cycle – both are policy-induced crises, not balance-sheet-driven collapses like 1999 or 2008. This is a confidence shock, triggered not by structural excesses but by extreme policy decisions. As such, markets are trading off policy pivots rather than economic fundamentals.

The Trump administration’s approach – based on flawed economic narratives and a fundamental misunderstanding of the global economy (e.g., the push for balanced trade with smaller nations or reshoring low-wage manufacturing) – is not sustainable. These policies risk engineering a deep recession.

Meanwhile, consider the resilience of the global economy. While the US remains the world’s largest economy, its share of global goods imports has shrunk to 13% – down from nearly 20% two decades ago. It remains a major player, but no longer the primary driver of global trade growth. That role now belongs to Europe and, more recently, China – both of which remain committed to advancing free trade.

And forget comparisons to the 1930s. The world has changed. The US now commands a far smaller share of global GDP, and the perils of protectionism are well understood. Just as Trump’s policies have fueled a surge in Canadian patriotism and sparked a geopolitical and fiscal awakening among Chinese and European leaders, his tariffs are more likely to serve as a cautionary tale for other governments than a model to emulate.

Increasing US dollar hedge

• The US dollar appears to be at a critical inflection point; rolling over against most major currencies from a starting point of over-valuation.

• At the same time, the recent change in Canadian leadership marks a shift to a more business-friendly, pro-growth political landscape.

• We have increased the Canadian dollar hedge on US asset class exposures in client portfolios.

Maintaining equity overweight

• Global equity markets are learning to cope with erratic policy communications from the US government, after a panicked response to the “Liberation Day” reciprocal tariffs in early-April.

• While uncertainty remains elevated, the likelihood of spiraling global trade wars has decreased significantly since the White House announced a pause and willingness to negotiate with trade partners.

• We have maintained a modest overweight to equities this quarter.

Trimming US mid-caps

• Smaller US companies typically have weaker balance sheets, less operational flexibility and limited lobbying influence, making them more exposed to supply chain disruption risks and elevated financing costs.

• Forward earnings confirm these vulnerabilities, as weakening revisions flash warning signals for the small and mid-cap cohorts.

• We have trimmed exposure to US mid-cap equities in client portfolios.

Keeping fixed income underweight

• Longer-term government bond yields in most major markets continue to grind higher as investors demand a larger term premium to compensate for inflation and fiscal largesse concerns. 

• While the higher yields improve the risk/return trade-off, we believe the adjustment at the long-end of the curve has further to run.

• Fixed income exposure has been kept below benchmark this quarter.

Decreasing US bond exposure; adding to EM

• Fiscal profligacy concerns and policy risk are impacting US asset prices, with US bonds and the dollar coming under pressure.

• Simultaneously, the weak dollar and relatively prudent fiscal policy in most emerging market (EM) countries have created a favourable outlook for local currency-denominated EM debt.

• We have added to existing positions in EM local currency sovereign bonds and trimmed exposure to US aggregate bonds (both hedged and unhedged) this quarter.

Initiating India and liquidating Brazilian equities

• The Reserve Bank of India has pivoted to a more accommodative stance, initiating a rate-cutting cycle supported by moderating inflation. This has helped turn around foreign investor confidence, with net inflows resuming this year.

• Conversely, Brazilian equities have done remarkably well year-to-date, but the lagged impact of sharply tighter monetary policy on the domestic economy has created vulnerability looking forward.

• We have elected to take profits on the position in Brazilian equities and initiate a new position in Indian equities in growth-oriented strategies this quarter.

Liquidating US mortgage REITs

• With the US Federal Reserve unlikely to deliver aggressive easing absent a material economic slowdown, a further bull steepening of the yield curve appears constrained.

• As a highly leveraged and rate-sensitive asset class, mortgage REITs are particularly vulnerable to fiscal uncertainties and tariff-related shocks, with higher hedging costs eroding potential returns.

• A high-yielding position in US mortgage REITs has been trimmed in income-oriented strategies and liquidated in balanced strategies this quarter.

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