The first four months of 2025 have been marked by considerable volatility on global securities markets. In January, stock markets rose on the expectation that Trump 2.0 would bring tax cuts, deregulation and a pro-business agenda. But those hopes began to fade once the president was sworn in.

In early April, President Trump delivered what can only be described as a global shock. Declaring 3 April “Liberation Day”, he announced that all countries wishing to sell goods in the United States would have to pay a minimum 10% tariff. Countries running a trade surplus with the US would face even higher tariffs; the exact rate would depend on the size of their trade imbalance with America.

At various times, Donald Trump has justified the use of tariffs as an excellent tool for achieving his objectives in negotiations with other countries. The United States considers the People's Republic of China its biggest competitor on the international stage and has long employed both tariffs and other trade restrictions to slow China's development and protect its own position.

Both President Trump and many Americans seem to believe they have an inherent right to do whatever is necessary to maintain their country's economic and military leadership in the world. President Trump has demonstrated through both words and actions that he believes in the right of the stronger to impose and change rules as he sees fit.

Investment decisions are made by private companies, not heads of state

The US is undeniably the world’s largest and most attractive market. The current administration seems to think that dealing with its partners from a position of strength will help it get its way. But investment decisions are made not by governments; they are made by private businesses and investors. It remains to be seen whether the US will succeed in attracting fresh investment. Reshaping supply chains and building new factories takes time, but financial capital can be redirected in a matter of days.

By the end of April, it was already apparent that President Trump’s Liberation Day address had done little to convince financial investors to put their money into the US. Both US equities and bonds came under heavy selling pressure. After all, why invest in a country where the president and his cabinet speak and behave more like impulsive mafia bosses than stewards of stability?

Many investors are baffled by Trump and his team’s style. One right-wing analyst attempted to defend it by comparing it to professional wrestling – a spectacle of face paint and flamboyant costumes that the president himself is known to enjoy. While wrestling may seem chaotic and emotional, the analyst argued, it is in fact a carefully choreographed performance. History suggests it would be unwise to underestimate Trump. He has said that “tariffs” is his favourite word in the English language, and I believe that statement should not be taken lightly.

Trump has long opposed free trade and supported protectionist measures, a stance he has held since the 1980s, well before entering high office. You can watch clips of his past interviews here, or view an interview with US Commerce Secretary Howard Lutnick here, in which Lutnick lays out the administration’s economic strategy and posture towards international partners.

The new president has made it clear that he no longer cares much about the stock market. In his words, restoring America’s greatness will require some bitter medicine. This, too, should be taken seriously – it is likely that during this administration, Trump’s attention will be focused less on equity markets and more on the bond market.

The Financial Markets' Reaction to Trump's Foreign Trade Policy

The S&P 500 index, which tracks the performance of the largest US companies, reached an all-time high of 6,129.58 points on 19 February, before falling by 23%. Since the start of the year, the US dollar has also seen a significant decline.

Figure 1. EUR/USD exchange rate, Financial Times

US Treasury Secretary Scott Bessent – a former hedge fund manager with a financial markets background – has tried to calm markets and put a more measured spin on President Trump’s remarks. His job, after all, is to find a way to plug the growing hole in the federal budget.

But this task is far from simple. Many investors and economists have concluded that Trump’s primary focus is no longer the economy, but politics and popularity among his MAGA base. A base that, crucially, may not own large stock portfolios or even brokerage accounts, and therefore has little to lose on the financial markets.

Over recent decades, the profits of large US corporations have grown rapidly thanks to globalisation and free trade. Lower-value-added operations have been outsourced abroad, allowing companies to focus on the most profitable activities. This has come at a cost to society: while corporate profits and high-skilled wages have soared, pay for lower-skilled jobs has failed to keep pace with inflation. Lower-skilled jobs were moved out of the United States, while capital flowed into the country more than ever before, as profit margins of U.S. companies increased and exceeded those in the rest of the world.

Most economists since Adam Smith and David Ricardo have argued that specialisation and trade are the key drivers of national prosperity. But Trump and his economic advisers – including Peter Navarro and Stephen Miran – insist that America is being exploited by trading partners who sell more to the US than they buy. While Trump may well succeed in rewriting the rules, the outcome is likely to be a less prosperous world, and Americans themselves will potentially pay the highest price.

At the end of 2024, US companies accounted for 73.5% of the value of the MSCI World Index.

Figure 2. Historical share of US (red), European (blue) and Japanese (black) equities in the MSCI World Index. Source: Societe Generale

Since the 2008 financial crisis, the share of U.S. companies in global indices has grown significantly. This is partly due to the fact that technology companies make up a larger portion of U.S. indices compared to the rest of the world, and these tech companies have experienced rapid growth and substantial increases in valuation over the past 15 years. However, profits and valuation multiples of other U.S. companies have also risen faster than those of their competitors elsewhere. It is highly likely that this trend may now be reversing.

LHV pension funds are geographically diversified

LHV pension funds have long maintained a lower allocation to US equities than to the global index. In our view, US companies have been overpriced for some time, even considering their robust earnings growth. Our funds have also hedged most of the dollar exposure associated with US investments.

While underweighting the US market led to slightly lower relative returns in recent years, this year the opposite has been true. A modest allocation to US stocks, active currency hedging, and a sizeable position in gold and gold mining companies have all worked in the funds’ favour.

The LHV investment team is not afraid to be different. We thoroughly analyze each investment, assess the associated risks, and evaluate the expected return. We follow trends, but not blindly.

We also believe that the USA is a hub of innovation and produces innovation, while Europe tends to produce regulations. However, one must not forget that there is always a price that may prove too high relative to the actual value—especially when there are alternatives available in the world.

Observations from Today’s Pension Fund Market

While the decisions of other pension funds don’t significantly influence our own investment choices, we do keep a close eye on our competitors – what they’re doing and how they’re performing. It’s been quite a few years since other pension funds in Estonia offered genuinely good ideas for where to invest.

Today, apart from LHV, no other Estonian pension fund focuses on individual stocks. It appears that many of our competitors have significantly downsized their investment teams in recent years, aiming to minimise costs and maximise the profits of their management companies. Some still market parts of their portfolios as actively managed, though this is likely only to justify charging fees for a service that is no longer being provided.

With index funds, it makes sense to minimise costs by lowering management fees. Among Estonia’s seven index funds, ongoing charges currently range from 0.28% to 0.31%. The lowest belongs to Luminor’s Index Pensioni Fund (management fee 0.22%, ongoing charges 0.28%), yet even after five years of active sales efforts, its assets remain below €5 million.

It is surprising that the Luminor Index fund, which has the lowest management fees in Estonia, has a significantly smaller asset volume—fifty times smaller—compared to the Luminor 16–50 pension fund, which is one of the most expensive in the country, with assets amounting to €257.4 million. This is despite both funds having the same fund manager and a very similar investment portfolio. Like its sister index fund, the Luminor 16–50 portfolio consists almost entirely of index funds (97.96% in index funds + 1.21% in real estate and private equity funds). The only major difference is the management fee: the Luminor 16–50 fund has a management fee of 0.91% and total ongoing charges of 1.13%.

This serves as proof that Luminor’s aggressive sales tactics in shopping centres can work wonders. Despite having the same fund manager and a nearly identical portfolio, the more expensive Luminor 16–50 fund attracts far more investor money than Luminor Index – a fund that arguably best reflects the spirit of our times.

Some Thoughts on the History of Pension Fund Sales

LHV was the first to start offering pension funds outside of traditional bank branches. I’ll admit I was initially quite sceptical of this sales channel, but I changed my mind quickly. Twenty years ago, bank tellers knew very little about investing, and I believe the LHV representatives working in shopping centres were among the first to truly start spreading financial literacy.

I trained our sales staff in investment principles and regularly received valuable feedback from them about what clients were interested in and what messages resonated. At LHV, we had a good sense of the line between what was acceptable and what wasn’t – and we made sure to stay well on the safe side of that line.

For a long time, our pension funds consistently outperformed the competition, which made them relatively easy to sell: Why wouldn’t you join a fund that delivered significantly better results year after year?

The strategies behind LHV funds were straightforward. Each fund held the same instruments, differing only in allocation, and this was clearly communicated to clients. I always stressed to our sales team that they were not to push clients towards the highest-risk (equity-heavy) funds unless the client was already familiar with the markets and asked for it. That’s also why LHV’s most popular fund has never been the riskiest one in our range.

When there were periods where our funds underperformed the competition, it was immediately reflected in the sales figures. Perhaps that was down to my own confidence – or lack thereof at the time – but there was a clear correlation between returns and results.

As LHV’s long-term clients know, I’ve been cautious about market valuations for more than a decade. In the low interest rate environment, equity prices gradually – then rapidly – lost connection with companies’ actual business performance, and investors began paying more attention to central bank policy than to corporate cash flows. At first, inflation only showed up in asset prices. Then, in 2020, it hit consumer prices too.

When Estonia’s first pension funds launched in 2002, both clients and regulators were primarily concerned with one issue – risk. But after more than 15 years of nearly uninterrupted growth in stock markets, hardly anyone talks about risk anymore. Most clients now actively seek the riskiest funds. Not every salesperson has the motivation to push back, especially when their compensation is tied to sales figures.

After a while, a new and aggressive competitor entered shopping centres: Luminor. They challenged us both in strategy and tactics, and began poaching our top salespeople with more attractive offers. I suspect these offers weren’t just about money. They also gave sales staff more leeway in closing deals. According to feedback my colleagues have received, some of these methods were... creative.

In that kind of environment, maintaining the professionalism and motivation of LHV’s sales team became increasingly difficult. Anyone who has managed a sales team knows that a few exceptionally talented individuals can deliver results ten times above the average. But what if those results are achieved using questionable methods? How many organisations are willing to take the risk of losing their top sellers to a competitor that’s willing to pay more – and perhaps turn a blind eye here and there?

Fortunately, investment information – both in bank branches and fund managers’ online platforms – is significantly better than it was twenty years ago. And in today’s digital age, there’s usually a record of what was said and how it was said. It might not be a bad idea to introduce a mandatory waiting period between investment advice and the final decision, to ensure that such important choices aren’t made in haste or without proper reflection.