Investors search for trade war havens

Much has been written since Trump’s inauguration two months ago about how U.S. policy volatility is disrupting global markets, including in emerging markets, Europe, and in the U.S. itself.

It is true that investor expectations have been confounded: a weaker - rather than stronger - dollar, the S&P500 sent tumbling rather than soaring, and a potential new dawn for Europe’s defense sector.

Yet fully accepting this narrative of globally all-encompassing U.S. trade war disruption at face value is too facile, even if understandable amid Trump 2.0 “flooding the zone” on economic policy.

Limited damage - for now

While heightened uncertainty is already causing long-term economic scarring, in some respects investors are unfazed.

Canada successfully sold $3.5 billion of its government bonds to U.S. buyers at a typical spread this week, despite the Trump-instigated tariff war.

Meanwhile, sovereign investors from abroad are continuing to pile into U.S. government debt, suggesting that these retain some of their appeal as a safe haven.

Even though China is trimming its holdings of Treasuries and the dual impact of a depreciating dollar and U.S. equity market decline has hit foreign investors hard, the damage from the growing trade ructions has yet to spread into some key sovereign debt markets.

Where to hedge against the trade war

U.S. trade policy has left vast swathes of the global economy relatively unaffected, and, in fact, many countries are deepening trade links.

It seems that the Indian Ocean is one of the main regions where globalization will continue to thrive.

India itself is negotiating free trade agreements with the EU and New Zealand, which - in turn - recently signed a trade deal with the UAE.

In fact, some investors are increasing allocations to equities in the UAE, amid its new trade agreements and facilitating of targeted immigration.

An accord between China and the Maldives came into effect in January, while Australia and Malaysia are each negotiating a bilateral deal with the EU.

The EU is also finalizing an agreement with Mexico, following its December 2024 deal with Mercosur, though Europe’s future remains clouded by the war in Ukraine and the fiscal risks of ramping up defense spending.

In East Asia, China, Japan, and South Korea have participated in trilateral meetings to enhance economic cooperation. However, security concerns over Taiwan and North Korea places an upper limit on the strengthening of regional trade ties.

So investors have plenty of geographic choices to insulate themselves from the U.S. trade war.

These options come in addition to traditional havens like the Japanese yen and gold, which have strengthened significantly in recent months.

Disclaimer: The content provided in this newsletter is for informational purposes only and should not be construed as financial, investment, or other professional advice. While I strive to ensure accuracy, I make no guarantees regarding the completeness or reliability of the information presented. Readers are encouraged to conduct their own research and consult with qualified financial professionals before making any investment decisions. The author and publisher are not responsible for any actions taken based on the information provided.