Equity Research; NATO/ Ukraine implications
2025: NATO / Ukraine implications
The Oval Office meeting was revealing, and its implications are far reaching.
My initial response. This was another moment where the Trump mask slipped, but I say this in sorrow, not anger – this is the result of electing someone whose focus is money, not morality, on self-promotion, not rules, on posturing not leadership. Trump 2.0 has ‘acolytes in the room’, not Trump 1.0 ‘adults in the room’. This is an environment of no brakes, where confidence can suddenly be lost. Arguably this meeting was that point.
Is Article 5 safe? Will the US defend the NATO periphery? Estonia, Lithuania or Latvia? Possibly not. Regardless of EU defence spending above or below 2%, or 3% or 5%, the normal stick the US uses to beat the NATO membership, does this necessarily matter? To what extent is NATO a front for America to sell more military gear to its membership on the false premise of US security? To what extent does the US care about peace or containment?
Under the Nixon Doctrine formulated in 1969, countries have understood that the US foreign policy will support US treaty allies and client states facing military threats via US economic aid and US military aid. On 21st June 2024 President Biden and President Zelensky signed a 10 year bilateral security agreement that prioritized the US long term support for improving Ukraine’s ability to defend its territorial integrity. This was at least a ’client relationship’.
However it now appears clear President Trump will not honour this agreement or provide US security guarantees for Ukraine, either in a peace keeping function or to bolster the Ukrainian position in negotiations. What precise relationship is there now between the US and Ukraine? Possibly none.
President Trump had a tough week with both the French President and UK Prime Minister correcting his commentaries live. Trump claimed the EU had loaned Ukraine ‘the money’. The PM corrected him that the vast majority of the UK/ EU’s funding for Ukraine ‘was gifted’, a concept outside Trump’s understanding.
Neither leader convinced Trump of the need to provide US security guarantees to Ukraine, leaving Zelenskiy wondering what precise benefit Ukraine was gaining in exchange for the ‘minerals deal’ shakedown. In addition, Trump repeated demands for repayment of US aid since February 2022, something the Ukraine is clearly unable to do now.
Coming hot on the heels of interference by key members of the Trump Administration in the German federal elections on 24th February 2025, a US vote in the UN with the Russians blocking the Ukraine statement, and constant statements about Canada becoming the 51st state, the US government has deliberately baited and antagonized its traditional partners despite significant behind the scenes push back.
In a world, where the president’s ability to correctly identity the aggressor and victim is blurred, where he looks fondly on dictator regimes, where America turns on allies, bullying and threatening them with tariffs or loss of funding, where America threatens to withdraw from global institutions be it the UN, World Health Organisation – what geopolitical choices does this leave allies?
This is the real issue that is confronting decision makers. It is a contributory factor to the growth slowdown so far in 2025. The current posture of the US government is creating rising and untenable levels of uncertainty and there appears no real outlet for this problem.
Some take the view that recent layoffs, Chevron, Meta, US government and warnings from WalMart point to consumer hesitancy and a rapidly slowing US economy. Recent US rate cuts have yet to result in meaningful declines in US mortgage rates due to high 30 year US Treasury yields. Could the US economy brake Trump’s chaos?
The US Economic Policy Uncertainty Index based on newspaper reports, Congressional Budget Office and economic surveys has spiked over 2025 to date.
The next step
Worst case scenario, the US withdraws support for Ukraine leaving its fate in the hands of Europe, both for funding and peace keeping. The US could prevent NATO from taking direct action on Ukraine’s behalf.
Russia, with its pygmy €2trn economy similar in size to Italy €2.2trn and less than a tenth of the EU’s €20.3trn, is in a militarily exhausted state and could struggle in the face of a more muscular EU approach, that could require €50bn p.a. However funding might be assisted by tapping the US$300bn in frozen Russian funds held in Europe.
The Russia/ Ukraine war has exposed real weaknesses in the Russian conventional military and hobbled its naval capabilities. It has exposed Russian reliance on other countries manpower for its war effort.
A new self-help mindset is taking hold that whilst challenging will also be liberating. Now the nightmare of Trump 2.0 has happened, and real political challenges emerge, there is also opportunity. Does the UK/ EU want to continue being dependent on swing voters in Pennsylvania, Wisconsin and Michigan every four years. The short-term impact might well be higher taxes but the end result could be a closer UK/ EU relationship and better internal security organization.
2025 : chaos theory, how to respond to chaos?
So far the knee jerk cumulative response has been:-
- Rotation out of US tariff sensitive areas; autos, luxury goods, consumer discretionary/ consumer products, steel, iron ore, semiconductors. According to Goldman Sachs current US tariffs will cut US S&P earnings per share by 2%-3%. However a further 5% increase in the US tariff rate cuts US S&P earnings by 1% – 2%.
- Extensive US tariffs could drive up the US dollar; about 28% of US S&P earnings are ex-USA; a 10% USD appreciation would reduce S&P earnings by 2%.
- Tariff ‘safe havens’; banks, insurers, gold mining, defence, property companies- these are a clear choice.
- Fixed income positive, particularly in medium/ longer dated areas that will benefit the most from monetary easing. This is seen as more likely when Jerome Powell’s term expires in May 2026.
Conclusion
Whilst not wanting to over-react and keeping some faith (but not an evangelical faith!) I am left clinging to the straw of the ‘theory of mean reversion’ (the tendency towards auto stabilization back to average outcomes). I am nonetheless worried about recent events. An ancient Roman type Presidency run autocratically for years by a cruel vengeful old man (Emporer Tiberius springs to mind) has arrived, with the full supporting cast of wealthy oligarchs, devoid of US constitutional checks and balances. Add into the mix, a sort of medieval state, governed by daily proclamations in the form of quickly dispatched executive orders. Combine also a rogue regime that reneges on its treaties, asks civil servants/ public employees to fill out a questionnaire before sacking them via email, that obstructs the free press. This is an untrustworthy counterparty and the whole experience, as with Trump 1.0 will likely end in tears. How we navigate the next four years (assuming it is only four) will be a key challenge for investors. But at least now it has arrived, we can respond to it. I remain hopeful that the UK and EU can address these challenges, together.