Reality bites on US exceptionalism and it will come under pressure, says Orbis’ chief investment officer

Contrarian investor Alec Cutler thinks US exceptionalism will be put to the test as markets increasingly realise that Donald Trump now cares less about the stock market and economy.

Bermuda-based chief investment officer of Orbis Investment Alec Cutler.

Contrarian investor Alec Cutler believes US exceptionalism will be put to the test as markets increasingly realise that Trump 2.0 cares less about the stock market and economy than Trump 1.0 did.

The US sharemarket tried to resume its post-correction rebound on Wednesday after the Federal Open Market Committee showed it’s alert to the economic risk from Donald Trump’s policies.

However, FOMC members’ interest rate projections skewed less dovish and their economic forecasts leant in the direction of a stagflation scenario that could be hard for policy makers to manage.

Australia’s ASX 200 index rose 1.2 per cent to 7918.9 points on Thursday after the US S&P 500 jumped 1.1 per cent and S&P 500 futures climbed 0.5 per cent in after-hours trading.

It was the highest daily close for the Australian market in almost two weeks.

It came after the S&P 500 fell as much as 10 per cent from its record high of 6144.15 points, sparking a similar pullback in the Australian market, as the US President pressed ahead with his aggressive trade policies. Further increases in US tariffs are due to be announced on April 2.

Bermuda-based Mr Cutler, who oversees about $64.5bn as chief investment officer at Orbis Investments, has been underweight with the booming US stock market for some years.

However, since its inception in February 2017 his Orbis Global Real Return fund has still managed to return 9.7 per cent net of fees versus 8.5 per cent for its benchmark return of 8.5 per cent.

The fund is currently ranked number one among multi-asset real-return funds over the one, three and five-year time frames and also since inception, according to Zenith Investment Partners.

This year the fund has performed strongly with a 5.3 cent return for the first two months versus just 1.2 per cent for the S&P 500. Orbis’s investments outside the US – in Europe, South Korea, Japan and India have taken off with its stakes in defence and industrial companies soaring.

In December “everyone was into American exceptionalism” and investors thought ‘Trump is the stock market’s guy’”, Mr Cutler told The Australian.

But it now seems as though Mr Trump “might be trying to engineer a recession, Tariffs are really bad and he’s frustrating all of our allies and trading partners”.

Whereas in his first term Mr Trump was highly sensitive to the stock market’s reactions to his policies, Mr Cutler said the US President was basically pushing ahead with what he promised during his campaign.

“It’s a lot easier to be in a bar at Mar a Lago and say, ‘let’s campaign on this’, than it is to actually govern and try and do it,” Mr Cutler said.

One of his concerns is that Mr Trump’s team isn’t anticipating how the rest of the world will react.

“So just because you engineered a recession, typically in the last 40 years, that’s meant that the 10-year yield has gone down,” he said. “But the 10 year was also supposed to go down when the Fed started cutting rates in September. You also need inflation to go down.”

In his view, the odds that inflation doesn’t fall back to the 2 per cent target by 2027 as the FOMC expects are higher than investors realise, because tariffs will increase US prices and Mr Trump’s US immigration policies will shrink the labour supply in ways that will push up prices.

“What happens if you get a recession and the 10-year yield doesn’t go down? Now you’re now you’re in big trouble,” he said.

Moreover, he said investors should be wary of extrapolating the post-FOMC rebound in stocks.

“From what I hear, the market rallied in particular because investors didn’t sense any conflict from Powell vis-a-vis Trump,” Mr Cutler said. “You didn’t say anything that would light Trump up, so that was seen as ‘okay maybe they’re gonna play ball or something’.

“But it can also be that the market was down 10 per cent in three weeks.”

On Thursday, Mr Trump said the Fed should cut interest rates.

“The Fed would be MUCH better off CUTTING RATES as U.S.Tariffs start to transition (ease!) their way into the economy (sic),” the President posted on his social media site, Truth Social. “Do the right thing.”

As for whether investors should take the view that Mr Trump will be able to engineer a strong economy in time for the midterms in November 2026 and the presidential election in November 2027, Mr Cutler said he “might be inclined” to invest on that basis if the S&P 500 were trading on a PE multiple of 10.

“If the US market was selling for 10 times earnings, I might be inclined to say that, but the US market is selling at 24 times earnings and it’s priced for perfection,” he said.

“So even if you can wave your magic wand and say that two, three years from now America will be exceptional, we’ve got to get from here to there, and meanwhile there’s going to be doubt.

“And if he does want to dial in a recession, corporate profits are going to go down. So the US market is going to go from 24 times earnings to 35 times earnings, and we’ll be okay with that?”

As a contrarian investor, Orbis is almost always buying on the basis of intrinsic value, but will buy stocks on high multiples if they’re down a lot relative to its history, and it has a lot of growth rate.

“The US has been on such a run for so many years that people think it’s exceptional – that it doesn’t need to abide by the laws of physics, chemistry, human nature, capitalism and markets,” Mr Cutler said.

“But who would have thought that Europe would be one of the strongest markets this year.”

Originally published as Reality bites on US exceptionalism and it will come under pressure, says Orbis’ chief investment officer