Follow the fiscal

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Articles by Gemma

Gemma Cairns-Smith

Investment Specialist

4 April 2025

This year has been full of shocks, from JD Vance casting doubt on US security guarantees in Munich to Volodymyr Zelenskyy’s Oval Office humiliation. But the biggest surprise is yet to fully sink in: the era of US exceptionalism is ending – if it hasn’t already ended.

Trump’s policy mix is likely to cause economic disruption. His focus on tax cuts, tariffs and curbing immigration could easily restoke inflation, whilst policy uncertainty and cuts to fiscal spending may slow growth. Nearly all of Trump’s policies fall in the bucket of ‘sweeping change’ and carry the risk of serious volatility. US equities may well have another short-term surge, but the era of unquestioned US outperformance looks unlikely to return.

If global markets manage to avoid a nasty sell-off, and it’s a big if, we think diverging fiscal policy will bring a rotation in geographical leadership. This month’s chart shows G7 countries’ average budget balances versus their real per capita GDP growth. It demonstrates a clear relationship: more government spending has resulted in proportionally higher inflation-adjusted growth, and this has buoyed stock markets.

Markets follow the fiscal spigots, and today Germany and China are turning on the taps just as the US is turning its off. As a result, capital may start to flow out of the US towards the previously unloved and under-owned parts of the global equity market.

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Germany has decided to go ahead with massive borrowing to fund rearmament. The reforms are extensive: defence spending above 1% of GDP to be exempted from the constitutional debt brake; a €500 billion fund (12% of GDP) dedicated to infrastructure spending; and an increase in the deficits regional governments are permitted to run. In combination, this large and continuous stimulus outstrips the spending booms that came with the postwar Marshall Plan and with German Reunification in the early 1990s. Some reports suggest it could amount to €1 trillion of additional government expenditure over the next decade (21-23% of 2024 GDP).

Meanwhile, in China, the Politburo is promising to support increased consumption and cushion the impact of an escalating trade war with the US. Whilst its ‘action plan’ is light on details, the stimulus is bigger and more widespread than most realise. China’s fiscal situation is complicated, with no fewer than four separate budget accounts. Combined, the projected deficit is around 11% of GDP, its largest ever.

These policy shifts from Germany and China are long-awaited, meaningful and directionally positive. But investors have amassed a significant overweight in US assets and the dollar predicated on long-term US exceptionalism. Whilst it will take time for institutions to alter their strategic asset allocations, the investment supertanker may have started to turn.

As we expected, equity markets have been rotating away from the US so far this year. We have a portfolio constructed to thrive if conditions worsen, whilst being ideally situated to seize the opportunities presented by these evolving equity market dynamics.

Articles by Gemma

Gemma Cairns-Smith

Investment Specialist

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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