O’Connor Global Multi-Strategy Alpha Monthly Letter

Uncertainty and the threat around US tariffs under the new Trump Administration have kept markets lively over the past two months. So far, we have heard lots of rhetoric but have seen little enacted, with only tariffs on China announced and delays to proposed tariffs on Canada and Mexico. The market seems to be pricing in a chance that Trump is using the threat of tariffs as a bargaining tool and won’t follow through with a full menu of protectionist policies. However, we believe this is unlikely to be the case and that the market should be prepared for a backdrop of ongoing volatility related to tariffs, which will likely require companies to adapt and respond.

From a longer-term perspective, trade has always been a channel for significant global shifts in production and consumption patterns. While the US accounts for 29% of global consumption, it produces only 15% of the world's goods. Meanwhile, China accounts for 32% of global manufacturing but just 12% of consumption (Figure 1). Note that the share of manufacturing and consumption is more balanced in other main trading blocs. Over the past few decades, the US has effectively accepted de-industrialization for cheaper goods, but now seems keen to shift this.

Figure 1: Production and consumption statistics

Source: Deutsche Bank Research, UN Industrial Development Organization, World Bank Open Data (all in constant 2015 USD, data as of 1 January 2024. The data are presented in base 2015 dollars to eliminate inflation)

In recent years, the US trade imbalance with China has improved considerably. By contrast, the contribution to the US trade deficit from countries like Mexico and Vietnam has meaningfully increased; these “connector economies” are backward integrated into Chinese supply chains and horizontally integrated into the US economy. The EU and Canada have also been meaningful contributors to increasing the US trade deficit, and given this, we think it is particularly unlikely that the EU will escape from the line of tariff fire.

Figure 2: 2018–2024 change in trade balance as % of 2024 trade deficit 

Sources: BEA, as of 31 December 2024.

Volatility relating to tariffs could present opportunities on a macro level as it may distort the valuation gap between US and rest-of-world (ROW) equity markets, and on a micro level as tariffs are felt on companies’ income statements. We continue to research the sectors and companies which could be impacted by changes to tariffs, positively or negatively. With more crowding and hedge fund beta impacting US Equity L/S, we continue to shift the mix of our equity exposure away from the US and towards Asia, LatAm, Europe and the Middle East. We’ve also increased our exposure to our Commodity team this month, as well as to our Merger Arbitrage and Event Driven strategies; we decreased exposure in Convertibles and Working Capital. Over the longer term, we expect a choppier market environment under the Trump administration which may lead to under- or overshooting estimated outcomes. This, we believe, will require active and dynamic re-positioning, for which, in our view, our investment strategy is well suited.