April 16, 2025 • 49 mins
Donald Trump's Liberation Day roiled markets and caused a seismic shift in expectations for global trade and the economy. His subsequent 90-day pause on tariffs and perennial hunt for deals have created uncertainty and left investors wondering, what next? In this webinar, we'll discuss just that. Bob Kaynor, our Head of US Small and Mid Cap Equities, gives his insights from the frontline on both Wall Street and Main Street. Alex Tedder, CIO (Equities), will reflect on where to find opportunities under the new world order. Finally, George Brown, our Economist, will discuss the effect Trump's policies may have on the broader economy. Stu Podmore, Investment Propositions Director, will be your host.
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(00:01):
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(00:25):
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Welcome to the Investor Download, the
(00:49):
podcast about the themes driving markets
and the economy now and in the future.
I'm your host, David Brett.
Hello.
I hope you're all well.
Today we have a special recording for you.
It's all about the market chaos of thelast week and what might happen next.
(01:10):
The show is hosted by my colleague, StuPodmore, and features fund managers Alex
Tedder and Bob Kaynor, alongwith economist George Brown.
Stu will do full introductionsat the start of the pod.
This was a live event, so there arealso questions from the audience.
We hope it covers all yourburning questions, too.
There aren't many technical terms used inthis recording, but Treasury Inflation
(01:34):
Protective Securities or TIPS,as they're known, are mentioned.
They're a type of treasury bond that'sindexed to an inflationary gauge to
protect investors from a decline inthe purchasing power of their money.
Anyway, sit back and I hope you enjoy.
On Apple Podcasts,Spotify, or wherever you get your
(01:54):
podcasts, you're listeningto the Investor Download.
Hello, everybody, and Welcome.
My name is Stuart Podmore.
I work for the ClientGroup here at Schroders.
Great that you could join us.
In fact, you're joining us from all aroundthe world today, so many thanks for that.
This is the week that shook markets.
What lies ahead?
Well, news flash straight up front, folks.
(02:14):
I think more markets are goingto get more shakes from here.
But one of the first things we've gotto try and do is take a step back.
It's very easy to be drawn into this.
We worry about markets all the time.
But in terms of 2025, we'vehad the deep seek surprises.
We've had the defence spend surprises thatare related to the German fiscal break
(02:36):
being loosened, and nowwe've had Liberation Day.
I think to put this into context, we aredefinitely in a de-globalised regime with
inflation shocks, having previously beenin a globalised world
with deflationary shocks.
So there's definitely been a change there.
We've talked about that for a while nowthrough regime shift and what
(02:57):
we described as the 3D reset.
I think that goes a long way to explainingsome of the populist policies that we've
been seeing, particularly from DonaldTrump on Liberation Day,
given the fact that Western liberaldemocracy populaces have seen a reduction
in their living standards,and they have reacted to that.
Now, to help me discuss all of thistoday, I'm joined by a three-person panel.
(03:22):
Firstly, George Brown, who is the SeniorEconomist here at Schroders, and he
specialises on the US, sohe's got plenty to say.
We've Alex Tedder, who is the ChiefInvestment Officer
for Equity here at Schroders.
We've got Bob Kaynor, live from the US.
Bob heads up our global small and mid-capteam, and he'll be talking very
(03:43):
specifically about theexperience stateside.
I've got to say that actually the reactionor the tariff announcements that came from
Trump most recently were worse,perhaps, than markets expected.
He said everybody, I think this is adirect quote, "Everybody was
getting a little bit Yippy.
" But actually, the question here is,if there's going to be some short term
(04:05):
pain in Donald Trump's wordsfor long term gain, just how long
will that short term pain be?
How intense will some of that pain be?
And will we get round tothat longer term gain?
There's some really important questionsthere, given the fact
that we've seen the fourth highestvolatility with the VIX index
(04:25):
currently above 30 points in 60 years.
So With an introduction like that, it'squite a tough ask to
go straight to George.
But I wondered if it's possible for you,for the benefit of the audience, it's very
difficult to keep up with all of thisstuff, but could you just give us a
reasonable summary of where weare on the tariff side of things?
(04:45):
Okay, absolutely.As you say, it's hard to keep up.
I was working Sunday morning, reactingto the announcement on Saturday.
If we take a step back, before Trump wasinaugurated, the tariff rate
in the States was about 3%.
Now, he's announced various tariffs, like20% on China initially, 25% on Canada and
Mexico, steel and aluminum,cars and car parts.
(05:08):
But then, of course, we had LiberationDay, and that was where the big
announcement on the tariffs came through,such that if you recall that the tariff
rate was about 3%,the cumulative impact of these measures
would have taken it to about 25%,the tariff rate.
That's about the highestin about 120 years.
Now, what does all thatmean for the economy?
Well, the framework that we've developed,which looks at how this will transmit
(05:31):
through to the economy through growth andinflation, every 1% rise in the tariff
rate would lead to inflation being 0.
1% higher and growth being negative 0.
05, so one-twentieth of a % down.
When you think about that rise of about22%, that's going to have
(05:51):
an effect of about 2.
6% on inflation and dragdown growth by about 1.2%.
These are big, bigshocks to the US economy.
Yes.
Now, what has happened since then, ofcourse, is, of course, we have the turmoil
in markets, not just in terms of equities,but obviously on the bond market
as well and in the dollar.
We've had some reversals.
We've had the 90 day pauseon various economies.
(06:13):
They're going to go down to that 10%baseline tariff that Trump's talked about.
But on the flip side of that, China isgoing to face 145% additional tariff.
Those two measures, effectively, byour estimates, offset each other.
That still leaves it 25.3%. But the newsat the weekend is quite significant.
The exemption for electronics andcomputers because that takes down the
tariff rate by about five percentagepoints because computers and electronics
(06:37):
are the number one biggestimport for the United States.
It's a big exemption.
The net impact now is going to be, by ourestimates, in terms of the tariffs,
2% on inflation, subtractingabout 1% from growth.
So still a big impact, but lessthan it was, say, a few weeks ago.
In your previous forecast, you talkedabout an aggressive Trump scenario.
(06:58):
I think you put a probabilityof 23% on that, George.
So are we in aggressiveTrump territory now?
Does it mean that, therefore, as yourforecast stated at the time, that we could
now see a risk of stagflation in the US?
Absolutely.
I mean, stagflationary is probably thebest outcome we can hope for right now.
Recession is very much onthe cards, I would say.
(07:19):
In terms of the probability, it'shard to say, but it's probably 50/50.
It's a coin flip probably at this stage.
But yeah, in terms of whether or not we'rein that aggressive Trump world, in terms
of the effective tariff rate that we'dassumed, that average tariff rate, it was
about 25%, so about wherewe were with Liberation Day.
Certainly, the box is ticked on that side.
But the other element of aggressive Trumpthat we haven't seen so far, which we
(07:43):
assumed in that scenario, is a veryaggressive policy on immigration.
On the campaign trail, we had JD Vance,the vice President, talking about
deportations of maybe 1million immigrants a year.
That's very significant because if youlook at the jobs market since the
pandemic, a lot of that has been driven byforeign labour, whereas the so-called
(08:04):
domestic-born part of the populationhas effectively stagnated.
That's a demographic story.
Very much, foreign workers have been thebig source of supply
for a lot of companies.
If we would see a clamp down on that,then that would take us certainly,
I think, into a recessionary world.
He softened a little biton immigration of late.
Did you spot that?
(08:24):
Yeah, he softened alittle bit on Saturday.
It got missed a bit because of the tariffannouncement or the the
exemptions on electronics.
So there's been a bitof a softening on that.
But of course,Trump is quite temperamental, and
there is still a lot of uncertainty.
So I wouldn't necessarily put that to oneside and say that that has
been settled definitively.
I still think that is a key risk.
(08:46):
Sounds like he was burying some good news.How strange.
But look, thank you, George.
We've got plenty to cover in terms of...
I want to get on to deficits, andI want to get on to bond yields.
But if I could come toyou first, Alex, does...
It's a blunt question, but does Trumpcare about what happens in the markets?
He said to everybody they were getting alittle bit yippy and that people needed
(09:08):
to stop panicking and just to calm down.
He definitely cares,he definitely cares, Stu.
We could see that on the weekend.
It was actually Friday night, wasn't it?Not Saturday.
But the backtracking on a whole bunchof traiffs that we've seen since then,
whether it's electronics or cars,is a huge deal.
(09:30):
To my mind, what he'sresponding to is two things.
One, the bond markettelling him, and George alluded to this
already, telling him that actually therecould be a problem here if
he carries on at this rate.
I think that's a very valid concern.It's always the bond market.
Think of Liz Trust in the UK back then.
It's probably no differentfor Donald Trump, ultimately.
(09:51):
So you could say thatcheck is already working.
Also the equity market, which is a simplefact that we were discussing this before.
Americans hold a lot of shares,a lot of stocks and shares.
42% of household assets are investeddirectly in the US stock market.
Therefore, every drawdown, and we've seena big drawdown in US shares this year,
(10:13):
every drawdown hits them in the wallet,and that is going to feed through into his
ratings and ultimately into his legacy.
I think the checks andbalances are working.
So the question is, what do we end upwith and has the damage already been done?
Yes.
But would you feel more optimistic at themoment, Alex, though, as an investor,
(10:33):
global equity, first and foremost,without perhaps the thematic important
angle there, but just global equity,straight perspective on this.
Would you feelbetter right now, given that we at least
have an understanding of howit's all been calculated?
Do you feel as if you canstart pricing risk again?
I will say that I do respect the factthat tariffs in the United States at 2.
(10:58):
8% prior to the whole Liberation Day thingwere very, very low.
Trump actually has a point about tariffsrelative to other countries.
It's just the way he's doing it that iscreating this complication, this
uncertainty, andultimately this drawdown in markets.
And so the longer that uncertaintypersists, the more damaging it is
(11:22):
to the real economy and to markets.
So we go into an environment wherenegotiations are taking
place on a bilateral basis.
It takes a bit of time.
I mean, it's not easy towork through, is it, George?
I would imagine the extension of that timejust gives a greater sense of
uncertainty in the markets.
Stuart, by the way, online has said, well,if there's going to be 90 days
(11:45):
before the tariff are reimposed?
Are we going to go through thewhole similar shock process?
That is the question.How do markets then price that in?
Exactly.
George, you give your view in a sec.
But from my standpoint, as an equityinvestor, you've got
the S&P back at 5,400.
We got quite low.
You've got markets actually rallyingsomewhat on this news about backing off
(12:10):
from some of the tariff arrangements.
The market is incredibly dialed into thelevel of tariffs and what
actually is going to happen.
So volatility is definitelythe name of the game.
Uncertainty is the name of the game.
The question is, what do we end up with?
And that is where I reallydon't have an answer yet.
(12:32):
Because 10% tariffs, you couldprobably accommodate in most countries.
You might disagree, George.
145% tariff for China, youdefinitely can't accommodate.
So what do we actually end up with?
I'm not sure.
If we don't end up with a solution, thereis drawdown risk in the S&P, and there is
drawdown risk in other markets globally.
(12:53):
Okay, George, do you wantto add anything to that?
No, I thought that waspretty comprehensive.
It's just if I look at it from a macroperspective, for corporates, it's going
to be a really challenging environment.
This is the concern thatwe might ultimately get these extension
after extension after extension and suchthat the tariffs never get to
as high as they're threatened.
(13:13):
But I think that the risk thatthey do get to that level.
We're already seeingcorporates take action.
We've seen reports, let's say, of Applechartering this plane
out of India, let's say.
Shifting five train loadsof iPhone back to the US.
Absolutely.
There's there's been news of various othercompanies already starting to put tariffs
(13:33):
into their pricing structure andhaving a separate line as well.
That's certainly going to feedinto Trump's approval ratings.
But that uncertainty is clearly going tohave an impact on hiring and investment.
To the extent, we just don't know yetin terms of how severe that will be.
But that uncertainty, even if we do getthose extensions, even if we do get some
(13:53):
resolution, that's not going to go away.
That's probably now going to persistfor the rest of Trump's term.
That's going to be a bigheadwind for the US economy.
I want to come back to you on China, butactually, I want to bring Bob in because I
just wondered, is it possible, Bob, foryou to give us a couple of
sentences on what the mood is like?
You're talking to a lot of thoseRussell 2000, Russell 2500 companies.
(14:15):
You're picking those stocks.What do you hear?
So I think what we've been hearingprobably for the last month is
that business is really on hold.
Decisions are not being made around CapEx.
Strategic decisions are just on hold.
We talked to a number of our companieswhen this kicked off at the end of
(14:36):
February and early March, and their handswere up, and it feels like
everybody's taking a knee.
And I think it's going to be reallyinteresting when you go through earnings
season, which is really just kicking off.
I suspect that companies arejust going to pull guidance.
Our initial thought process was,how much risk is there to guidance?
And I think they have an opportunity justto pull guidance altogether in the face
(15:00):
of the uncertainty that we're seeing.
So I think that that's the reality.
I think there is a tremendous amount ofvolatility, but I also think
we've all seen a few cycles.
Our market was down 22 2% at it's worse.
It's not exactly the time you're supposedto be taking a defensive position.
I feel like that opportunityprobably sailed a month or so ago.
(15:23):
And so it really is, how areyou going to capitalise on this?
And the nice thing, or if there is a nicething about these this highly correlated
sell offs, is it creates opportunity.
Companies get penalised just becauserisk is coming out of the market.
And so there is an opportunity to upgradeand find better companies that are a
little bit more protected in aperiod of significant uncertainty.
(15:47):
I think that's a fair point.
And I suppose when the Russell 2000 wasdown about 20% year to date,
in very short, brief, simple language.
Are you seeing that as a buyingopportunity as a stock picker?
I would say absolutely onthe individual stock level.
(16:09):
I think there is an increased amount ofdispersion that you're seeing in terms of
the way stocks are behaving ormaybe the way they should be.
So one of the things that we alwayslook at is return on investment capital.
And companies with very high return oninvested capital are not really
outperforming those with lowreturn on invested capital.
(16:30):
And for us, that's an opportunity toupgrade the portfolio, if you will.
But I do think that when you see a marketthat's down 22%, which it was a couple of
weeks ago, I think there'slots of opportunity there.
And I know last week, Ithink the headline was, it was the best
week in the equity market since November.
(16:51):
I don't think anybody felt like it was thebest week in the equity
market in a long time.
So I think sentiment isreally negative, right?
And the sentimentindicators are on a floor.
And if you look at the University ofMichigan consumer confidence numbers,
there's cohorts of those respondents thatare at COVID and great
(17:12):
financial crisis lows.
And I just don't think that'swhere we are, at least not yet.
Right.Can I add something?
Yes, of course.
See, I agree with Bob.
It's interesting because it's a two-waypull for me from a large-cap perspective
because S&P earnings,the consensus is still assuming about 13%
(17:33):
year-on-year growthfor S&P earnings this year.
It started the year about20, 21% year-on-year.
It's now come down to 13.
That still strikes meas quite high, maybe.
Maybe not.We'll have to see.
But certainly the trend is downwards.
The S&P is still trading ataround 22 times earnings.
So on that relatively elevated number,it's still trading on 22 times earnings.
(17:57):
The long term average for the S&Pis around 18, 19, depending on
which time period you choose.
So the S&P is still expensive versus itshistory and earnings are coming down.
But to Bob's point, what's happened isthat a lot of stocks are sold down and the
good companies have sold down as much ormore, in many cases, as
(18:19):
the less good companies.So that could be an opportunity.
I think it is an opportunity.
It strikes me that it was only a few weeksago at the Schroders Investment Conference
when I was talking to you, Alex, aboutthe Magnificent We've had a complete flip.
The rest of the world, stocks in the MSCI,All Countries World Index, is now flipped.
And 90% of those companies around theworld are now outperforming the
(18:42):
Magnificent Seven or haveoutperformed in recent weeks.
So as a global investor, then, presumably,you've got your work cut out seeking
those opportunities as aresult of all that's happened.
You do.
So the tariffs on electronics, the flipflopping, obviously doesn't help the Mag7.
So let's be I'm sorry about that.But you're right.
The Mag7 as a group I've done prettypoorly, actually for quite some time now.
(19:06):
It's a very disparate group, but generallyspeaking, they've done really poorly, and
some have done exceptionallypoorly like Tesla.
It just doesn't seem right.
To Bob's point, theseare great businesses.
That hasn't changed.
If we can have some confidence aroundthe macro picture, the tariff picture,
actually, these companiescould start to do a lot better.
We'll see, but thatwould be our base case.
(19:28):
That's one aspect.
And the other aspect is the simple factthat the rest of the world is still a heck
of a lot cheaper than the US,which maybe we'll come on to.
Yeah.Well, yeah, I think we will.
We've had a questionfrom Domendra, actually.
I've got a very quick questionfor both Alex and Bob.
Before I come back to George,it's pretty blunt, actually.
(19:49):
Is US exceptionalism over?
Bob, what do you reckon?
I would say that the evidence would, atleast the recent evidence, would say yes.
When I look at all the major marketsaround the globe, Germany, France, UK,
Japan, Australia, China, they're alloutperforming every index in the US.
(20:12):
Other than the Dow, actually, the DowJones is the best performing index in the
US right now, which I find interesting.
But yeah, and I think we were talkingabout it earlier before we went online.
I think the relationship between thedollar and bond yields are significant and
something that I don'tthink you can lose sight of.
And if you I want the ultimate auditor onUS exceptionalism, I do think it is the
(20:35):
dynamic that you're going to playout between the dollar and bonds.
Okay.I might come back to you on that one.
But just Alex, US exceptionalism, the samequestion for you, or were
you going to add something?I never want to bet 100 % against the S&P.
It is a lot of very good businesses there,and it's the deepest market,
(20:55):
the most liquid market.
There's a lot ofopportunity in that market.
But, to Bob's point, you have a currencythat's working against you right now.
I mean, the Euro isstrengthening very materially.
You also have expectations in Europe, inJapan, in China that are
very low relative to the US.
And you have valuations thatare very low relative to the US.
(21:16):
Take Europe, for example, probably tradingon around 14 times this year's full year
earnings compared to the US on 22 times.
So at some point, that gap will close.
I'm not saying it'll be..
What do you call it?Aligned.
But you could see the gap closing further.
And therefore, I think incrementally, itmakes sense
(21:39):
to move, if you're an asset allocator, tomove some money away from the S&P
into other areas.And that has been happening.
I think that will continue.
Well, I know for a fact, amulti-asset team is considered that.
If I can just add on to that, because Ithink it's an important distinction that
we've been trying to make in ourasset class for a number of years.
While the US is expensive, that isentirely a function of what's
(21:59):
happening in the the large cap market.
The Russell 2000, which is a small capbenchmark, is currently
trading at 14 times earnings.
So if you believe in thedynamism of the US markets, and it said it
will continue, we'll obviously go throughsome short term machinations here.
You can access the US market at the samemultiples that you're accessing
(22:20):
the rest of the world.
And I think that's justsomething people lose sight of.
There are two separate markets in the US.
There is the large cap market,and there is everything else.
That's a good point.I was going to come back to you, George.
It seems the right moment just to comeback and talk bond yields then and also
just talk a little bit, and bob touched onthis, the US dollar valuations and
(22:40):
the weakening of the US dollar.
Just explain a little as to what'sbeen happening there for our audience.
Yeah, it's a good question.
To this point about, is itthe end of US exceptionalism?
Well, just as it is for the markets, itdoes seem to be for the macro as well,
because this isn't some exogenous shock.This does seem to be...
Well, it is a self-inflictedeconomic pain that they're going through,
(23:04):
and it's going to hit the US the hardest.
That's been reflected in, let's say, thedollar, which is down about 9%, and
actually, when we're thinking about theeconomic impact, when I gave those numbers
earlier, the 2% on inflation that's goingto be higher as a result of the tariff
as they stand today, 1% lower on growth.
That does assume the regression is basedon history, and that assumes that the
dollar does appreciate, which ithistorically has done
(23:25):
during these episodes.
The fact it's going the other way meansthat inflation might be another of a 0.
5 percentage point ishigher than that, so 2.
5%, and growth might be down 1.
25%, so another 25 basis points.
Now, to the yields point as well,obviously, there are lots of different
factors at play, andsome parts of it are question marks over
(23:46):
the fiscal sustainability of the UnitedStates, given that it's
going down this road.
There's also various technical factors,like hedge funds are being closed out of
basis point trades, we won't go into that.
But then obviously, there's thisquestion as well about China's response.
I think that's really interesting becauseChina obviously holds a
huge amount of treasuries.
Directly, the tick data, it's the treasurydata from the US,
(24:09):
something like $760 billion, the last timeI checked, is owned by China, but actually
it probably owns more than that throughclearing banks in Luxembourg and Belgium.
That number is maybeclose to $1.5 trillion.
There's a risk there that if China were tosell down its holdings of US Treasury
bonds, you could see a furtherrise in yields as a consequence.
(24:31):
Yes.
I suppose the impact on the capitalaccount and that risk of capital flow
could become more significantin the short term.
That actually the demand or the financialflow into the US dollar will start
to dry up a little in spite ofits reserve currency status.
It's so bizarre.Yeah.
(24:52):
Obviously, for decades, forhundreds of years, the United States has
enjoyed this exorbitant privilegeand managed to fund its twin deficits
through the kindness of strangers as MarkCarney, the now Canadian Prime Minister,
used to say when he was theBank of England governor.
Yeah, it's an interestingdimension to this.
(25:12):
Just coming back to this China point,though, I I'd say that
to our minds, in terms of that riskmaterialising, I would put probably quite
a low probability on Chinadumping its treasuries.
Number one is it's a bit like shootingyourself in the foot because, of course,
it's going to cause the value of China'sassets to plummet as a consequence.
Obviously, interest rates wouldrise quite sharply in the US.
(25:33):
That's going to weigh down on US demandthat's going to hit the
Chinese economy in the process.
But then you've got the question markof what do you pivot into instead?
Do you move away to other emerging marketdebt, for instance, or do you move
into gold, which looks more likely?
But it's difficult either way.
But then on the other side of theequation, what could happen is the Fed
(25:53):
could just restart QE as a consequence.
The numbers I gave you earlier, $760billion that China owns directly, It owns
about that, presumably, if we're makingsome very generous assumptions in Belgium
and Luxembourg, $1.5 trillion in total.Well, guess what?
The peak of the Fed's balancesheet in terms of treasuries was 1.
5 trillion higher than it is today.
(26:15):
We could go back to the pandemic peaks andpurchase all those bonds
if China was to sell.
It just seems to be a zero sum game there.Okay.
While we're on ChinaCan I ask George a question?
Is inflating away effectivelythe federal debt, ultimately?
Could that be an objective?
I forget the number of the amount thatTIPS makes up of the treasury market.
(26:37):
This is the issue.
I think it's somethinglike 25%, I could be wrong.
But this is the issue that this argumentabout inflating away the debt, people
forget about the TIPS market, and that's abig part of that, and
that adds the element.
Then you've got the flip sideof that on the yield front.
If you've got inflation, it's higher as aresult, then interest rates
have to be higher as a result.
(26:57):
No, I don't really believe in thisargument about inflating the debt away,
but you can get this fiscalfinancing, I think is the term for it,
which is effectively what the Bank ofEngland was doing at the
peak of the Liz Trust crisis.
It was lending a hand to the government,and that's certainly what you could see in
the US if you're were to see a big,prolonged, and excessive
(27:17):
period of treasury selling.
But I just want to on the China side ofthings, I know when we had Trump one in
the first presidency, and there was talkof of tariffs and a trade
war with China at that point.
There was a commitment from China tobuy $200 billion additional US goods.
It didn't materialise, but actually, theinflation print in the US didn't
(27:39):
really change as a result of that.So what's different now?
Yeah, that's right.
So when we did the analysis, obviously,the trade war was just with China,
it wasn't with the rest of the world.
And so, yes, China was facing these muchhigher tariffs, but there was
two responses that Beijing took.
One was to devalue its currency, andthat helped to cushion some of the blow.
And that seems to be its strategythis time around as well.
(28:01):
But the other part of its strategy, whichmight not be repeated this time, is
it was able to reroute shipments.
Let's say a good destined from China tothe US, it might stop off
on Vietnam along the way.
They might have peeled off the made inChina sticker, stamped it made in Vietnam.
For all intents of purposes, it was aVietnamese good, but realistically,
it was a Chinese good.
It circumvented the tariffs that way.
(28:24):
But the fact that now the rest of theworld is facing this baseline 10% tariff
means that maybe that's notgoing to be quite as feasible.
The administration also saidthey're going to clamp down on that.
I'm not sure how they'regoing to police that.
But certainly, if you've got 145% tariffon China, 10% on the rest of the
world, there's still a big gap there.
There's still some scope touse rerouting, but it's obviously not
(28:44):
going to be quite as effectiveas it was in the past.
Before I go back to Bob,actually, I just wanted...
Glenn's asked a really good question,actually, about American tax
cuts, because we did mention it.
But do those tax cuts that have beenproposed, potentially, especially,
corporation tax reductions,do they negate the impact of those
consumer price increasesand associated sentiment?
(29:05):
Do you think that that will...
I think what Glenn's getting at here is,could we not be,
or could we be more open to the idea of astronger, wealthier US in five years time.
I think we shouldn't dismiss that.We shouldn't dismiss it.
Yeah.Okay.
So medium term, it couldbe a positive benefit.
Like the Tax Cuts and Jobs Act of 2017,these are the big tax cuts by Trump.
(29:27):
These have clearly, although they faced aopposition from the Democrats at the time,
realistically, they're goingto back them this time around.
That has been a positive force for the USeconomy, clearly.
But in terms of the near term impact, Idon't think it's going to be enough to,
let's say, prevent the USfrom falling into recession.
But longer term, coming back to this pointthat Bob and Alex are raising about long
(29:52):
term US prospects, actually, that could bea continued positive dynamic for the US.
Thank you for that, George.
Now, Bob-Sorry.I may-Yes, Alex.
Because the positive scenario, I think alot of these deals are going to be done
with the quid pro quo thatthe country where Trump takes the tariff
(30:12):
away or reduces the tariff investsmore directly in the United States.
We started to see that.
You have Novartis the weekend announcingthat they set up a huge new facility in
the US, billions of dollars in newcapacity directly in the
United States for production.
Nvidia talking about reshoring it'sa super computer manufacturing
(30:32):
directly into the United States.
You're going to see, I think, a lot ofdeals that will bring capacity
back into the US,and they could ultimately be
pretty positive for the economy.
So I think there is method in the madness.Do you know what I mean?
It's just the timing to George's point.
Bob, would you agree with that?
Do you see in your space at the moment, inyour universe of stocks, do you see
(30:55):
companies starting to considerthat reshoring aspect here?
Yeah, I think we've actually been under, Idon't want to call it a manufacturing
renaissance, but probably for the past 15years, we've started to see a reshoring,
near-shoring initiative, certainly aroundthe Tax Cut and Jobs Act there
was a lot of incentive to do that.
And it was interesting, there'sthe carrot and the stick.
(31:16):
In the first Trump administration,it was more carrot.
In the second, it feels likeit's a little bit more stick.
But we are seeing that.
We are seeing increased manufacturingcoming near shore or on onshore.
I think one of the interestingpieces is, do we have the labour?
We're going to have to modify ourimmigration policies if we're trying to
(31:38):
bring all these jobs back becauseyou can do the math.
And I don't think we have thepeople to build the factories.
So we will see how thatplays out over time.
But the onshore and near-shoringis something we've been seeing.
But the reality is, even with that,we do have a global supply chain.
And so whether you're a small-cap companyor a large-cap company,
your supply chain is global.
(32:00):
And that's, I think, what we'retrying to navigate right now.
And while I'm with you, Bob, couldI just ask as well around any...
You mentioned dispersion earlier, and wetalked about the stock-level dispersion,
but I just wondered if you're getting asense for the audience about any sector
dispersion that might be of interest.
Are you looking at any particular sectorsthat might be beneficiaries here,
(32:24):
that you identified?
Yeah, and I'm interested to hear Alex'stake, because I think that has been the
initial knee-jerk reaction from themarket, at least in equities,
it's to go to the safest places.
You've seen staples, you've seen utilitiesoutperform, but you haven't seen that
distinction within particular sectors, ifyou're an industrial company,
(32:48):
you're considered at risk.
And wherever you are in the industrialsupply chain, you're getting
repriced along with everything else.
And that's where I thinkthe opportunity is.
I think the initial reaction from themarket has been very much, if you're going
to stay in equities, reallocate to theclassic defensive part of the market.
But Alex, I'd love to hear yourperspective on that as well.
(33:12):
Yes, you're absolutely right, Bob.
That has been the classic knee-jerkreaction every time there is this economic
slowdown or potential economic slowdown.
And in this case, ithappened very, very quickly.
If you think about January, thatwas still a great month for growth.
It was a great month for technology.
It It was a great month foranything related to better
(33:33):
than average return on capital.
And yet in the following months and weeks,we've seen a classic about face towards
stocks that are defensive and sectors thatare defensive, tobacco
being a case in point.
I think that right now, theopportunity is beyond those sectors.
(33:53):
To your point, I think it's withinindustrials because there clearly
will be a lot of beneficiaries.
And within technology, To give an example,if a lot of manufacturing
capability is going to come to the US,whether it's Taiwan Semi or NVIDI or
whoever, they're going toneed lithography in the US.
ASML is a great companybased in the Netherlands.
(34:16):
That is obviously a leadingsupply of lithography equipment.
It's been a very poor performer for sometime over tariff worries
in China and all the rest.
But actually, there's a bull story thatsays there's a whole new leg to the
demand for for lithography equipment thatreally isn't priced in at this point.
So I think it speaks to Bob's point isthat actually now is the time, painful as
(34:37):
it feels, to look at some of theseareas that have been hit really hard.
Because Graham, actually, in the audiencehas said, well, he thinks that
Trump is in do or die mode.
And I'm not asking you, Alex,to look into the mind of Trump.
I don't think any of us can do that.
But he says, well,if you're going to force this
reshoring process, it takes a while.
We discuss reshoring as if it's theeasiest thing in the world, But actually,
(35:02):
Graham's point here is you'regoing to run out of time.
And when do you start doing that?
When do you not start doing that?
I'm sure it's a mess.
But look, this is the issue, which is,and this is what we're all dancing around
and struggling with, is the shortterm versus the medium term.
I mean, on a short term basis, there is8 to 10 % downside in the S&P, right?
(35:24):
If the tariff stuff just goes the wrongway and there aren't any agreements and
the data starts turning down, which Ithink it might,
confidence is definitely turning down,then we could have another
pullback in the market for sure.
So that is a concern for all of us, verydifficult to hedge and expensive to
(35:45):
hedge if you want to do it fully.
So clearly, you want to stick withsome of these defensive names.
But at the same time, you want to belooking ahead and finding those
opportunities that have been sold downaround the world quite aggressively
based on the whole tariff uncertainty.
So I think it's a combination of both.
I know that sounds easy, and it's not, butthat's what we're paid
(36:07):
to do as active managers.Yes, absolutely.
Now, I want to come back to you, George,because we talked a little
bit about China previously.
We're going to berunning towards the end of this broadcast
shortly, but I just wanted to ask a littlebit more about Europe,
and in particular, the idea that theimpact that this might have on Europe's
economies,what also might be the implication for the
(36:30):
ECB policy rate and policymakers inEurope, and how that might continue or
extend the opportunity that we've seen,definitely in European equity,
particularly European value equity.
So what are your observations?
Because we've had a couple of questionshere from people about what an
opportunity is there for Europe?
What does this mean for the dumpingof cheap stuff onto the markets?
(36:53):
We're all thinking in China here.What's your view?
Stolen my thunder with that lastbit there with the dumping of goods.
So If we look at wherethe reciprocal tariff was supposed to be
20% on the EU, but nowthey're going to be 10%.
At the time when we ran the numbers on thereciprocal tariffs at
20%, it was going to be a hit of0.3 to 0.4% on European growth.
(37:16):
Now, that's going to roughly halfwith the 10% baseline tariff.
There's an argument there for the ECB tostart to cut rates, especially though,
because even before Liberation Day, we hadthe tariffs on automobiles, and obviously,
that's a big, big component of EU exports,not just obviously concentrated in
countries such asFrance, Germany, and Italy, but right
(37:38):
through the supply chain as well, throughother countries and services as well.
Then, as you rightly point out, on theflip side of that as well, or in addition
to that, the risk is that we get thisdumping of Chinese goods, and especially
with tariff rates at 145%being imposed the US on China.
There's certainly a very elevated riskthat China just floods the market with
(37:58):
cheap goods, and especiallyelectric cars as well.
You're already seeing thatin the UK, aren't you?
We're massively seeing it.
The UK has imposed, I think it was lastyear, car tariffs on Chinese electrical
vehicles to offset some of that dumping.
We could get some tariffs thatgo on to try and offset that.
But what I thought was interesting is thatyou are seeing some companies now
(38:20):
as well just hiking prices globally.
So Sony, for instance,are hiking the prices of its
PlayStation console globally.
In response, well, theyhaven't quoted the tariff.
It's very clear that it's something likeexchange rate movements and uncertainty.
But clearly, that seems to be challengingthat notion that you might get
(38:43):
deflationary pressure from the tariffs.
But in terms of what it all means for ECBpolicy, clearly there's
clearly an opportunity there for them tocut rates more aggressively in response.
Whereas if we compare it to the Fed, let'ssay, they're between a
rock and a hard place.
Yes, you're going to have the hit togrowth and it It could be a recession.
But at the same time,Bob rightly pointed out that you've got
(39:04):
the inflation expectations from theMichigan survey now, the
highest since the 1980s.
That puts them in a really difficultpredicament as such that they're probably
not going to be able to cut rates, atleast from our perspective on
the Schroders economics desk.
Two further questions that come out ofthat, which I just want to raise as well.
Just on China first, do you see theplaybook changing at all for China?
(39:24):
Some people have said, Well, might this bethe moment when through the loosening of
fiscal policy, that China really makes acommitment to domestic consumption, or do
you think it'll just go the usual route?
Yeah, it's hard to see how itwould try to encourage that.
One issue for China that has plaguedconsumption is there's got
(39:46):
a very high savings rate.
I'm not really sure what theauthorities can do there.
Maybe they can increase the SocialSecurity net, but there's clearly a
cultural barrier there toreducing that saving rate.
But that's somethingthey could tackle there.
But in terms of what...
I think from China's perspective, reallythe game, or at least the ultimate
objective, ought to be reducingthese tariffs as soon as possible.
(40:09):
That would be the best possible outcome.
It comes back to that phase one agreementthat was agreed between Trump and China in
2020, which is they were going to buy200 billion extra worth of US goods.
Maybe striking some deal along that lineand buying more US, investing more in the
US is probably the best course of actionfor China to take rather than hunker down
(40:29):
and try and weather this, the best resultis clearly going to be, how do we get
Trump to come to a negotiating table andget a deal that gets
these 145% tariffs down?
Best guess on economic growth?
Can I hold you to aforecast for China in 2025?
Probably not, no, because the ChinaEconomist is away, but clearly,
(40:50):
the forecasts are under review.
For the US, at the very least, I thinkwe're looking at calendar year
growth of 1% for this year.
To give you some perspective, before allthe tariff announcements, we
were assuming 2.5% growth.
That's a big downgrade on that.
But if you get a recession, it'seasily going to come down to not 0.
5% or 0% for the US.
We've heard a lot about thepolitical relationships.
(41:12):
I don't want to get deep into politicshere, but the political relationships.
A lot of people have been comparing andcontrasting the Mexican President, Claudia
Scheinbaum's response to Trumpversus that of Mark Carney in Canada.
I just wondered, how do you anticipateEurope might play this with with the US?
Yeah, so the European response is moredifficult because, of course, they all
(41:34):
have to come togetherin a unified response.
Obviously, Trump istrying to pick them off.
That is the leaders individually.
We're seeing Meloni, for instance, goingafter the White House on her own, trying
to get Trump to make some concessions.
I think the European response is going tobe more challenging versus, let's say,
the US in terms of how they retaliate.
(41:55):
But I think what is clear is that therewill be some unified response
in terms the fiscal response.
There seems to be definitely some, whilethere are disagreements on how to
retaliate against the US, there's clearlyseems to be some consensus there amongst
European leaders that some fiscal stimuluswill be needed if you do get
a big tariff war with the US.
(42:16):
Well, above and beyondwhat Germany is already...
Precisely.
The defence spending that Germany is goingto unleash is going to
be a huge, huge benefit.
But I think that's more of a medium-termstory rather than short-term.
But it's interesting about how that'sgoing to play out as well, because
we're talking about thesedeals that can be struck.
(42:36):
The deal for the EU and the US seems to beon the LNG front, liquefied natural gas.
Natural gas.Natural gas, sorry.
But also on defence spending is clearlysomewhere where Germany and other European
nations could be appeasing Trump bypurchasing more defence
equipment from the United States.I'm sure that is part of the deal.
(42:56):
Okay.
That's interesting.
You think that as well.
Is that something you've looked at?
Ultimately, pragmatism will prevail.
It has to, because otherwise, looking atan end to the current world order,
I just don't see that happening.
So my base case is 10% probably sticks.
I think we probably end up with 10%tariffs, and we end up with a bunch of
deals where Europe buys more from US.
(43:16):
So I think it does settle down.
It's just the speed atwhich it settles down.
It's a big question.
Well, look, we're getting closetowards the end of our broadcast today.
Thank you very much indeed for thoseaudience members who've sent in questions.
I think if you want to start as acollection of guests thinking about how
you might summarise what we've talkedabout, and indeed, maybe slip in the odd
(43:40):
prediction, if that's not too much to ask.
I think I might come to you first, Bob.
In a way, maybe answer this question,because this is a great question.
Is there a scenario where the US prospershere?
Yes.
I think we're I think there is a littlebit of a painful rebalance that's
(44:03):
going to occur around global trade.
I do think that when you go through theseperiods, historically, you can look back
over time, and there's usuallyeither a fiscal or monetary response.
And I think George laid out why it'sunlikely you're going to see the
Fed come in and save the day.
The fiscal response isa little bit harder.
I think the off-ramp looks more like aseries of deals and negotiations with
(44:28):
trading counter parties thatyou can see play out over time.
I recognise that what happened last week,I think it was Wednesday,
challenges that a little bit.
But I do think it's the fiscal response,if you will, that we're going to see is
going to be a little bit more measured.
It's not going to be a big bazooka.
It could be.Trump's very unpredictable.
(44:50):
But I think that's the workingorder from our mindset.
But I think ultimately,you go back over time.
I mean, you can hear politicians on theright or left talk about how
the US tariff system is unfairand things need to change.
(45:10):
So I think Trump's doing what he believesis right for America in the long
run, it's going to be very painful.
And I think one of the realities that wedidn't touch on is that he's got a very
narrow window here to make these changes,which is why it feels so chaotic for
everybody, both companies that are tryingto manage businesses as well as us
who are trying to to manage money.
(45:33):
Well, thank you for that, Bob.
I think for you, if I could come to you,Alex, as that global equity point, and
also weave in maybe a final question fromWolfgang, which is if you were taking
European investor's perspective here,would you go US small mid-cap with Bob
or multinationals?
I think I know what youranswer is going to be.
(45:54):
I'd do both.
i do both, for sure.
And that is the point slightly is it'sso fluid, the situation.
There's clearly, I think any investor hasgot to look at the bear case, which is
extremely negative, which isa fiscal issues, debt issues, deficit
(46:17):
issues, the whole thing spiralling.
That would be extremelynegative for global markets.
There's a bull case, which is anaccelerated process of adjustment.
Yes.Neither of those is very likely.
To Bob's point, the most likelyaspect is a central aspect of a muddle
through with deals, and eventually,you get to a situation that's stable.
(46:38):
In that environment, the only thing youcan do as an equity investor is to look
around for those areas that have beenunfairly neglected or where
expectations are very low.
You have those in US small cap, you havethose in Europe, definitely, you have
those in Asia, too, forexample, in markets like Japan.
That would be my approach.
Combined with your insight into earningsand the forecasts for earnings, For sure.
(47:00):
Which is where you often findanomalies you can exploit.
Absolutely.Okay.
Maybe the final word for you, George.
We started with you.
Are we going to finish with you?
Can you leave us with one or two sentencesabout the future under
these circumstances?
I can do.
Maybe I'll start with the glass half fulland I'll end with the pessimism, which
(47:22):
is probably the wrong way around.
But the attention that's going to turn toin the second half of this year
is very much on the tax cuts.
There's certainly some good newsto look forward to on that front.
I think there could besomething that's being underpriced by the
market at this stage, and thatcould be that positive catalyst.
The downside is that the midterms are nextyear, and that after that, Trump looks
(47:43):
very likely to lose hismajority in the House.
That's just history.
The midterms are rarelykind to the President.
That's right.
What happened during Trump's first termafter the midterms, when he was hit very,
very hard and lost his majority,is that then he did things that
he didn't require Congress to do.What was that?
It was the Trade War, it was Tariffs,and he could turn his attention
(48:07):
to immigration as well.
I would say that we've maybe got somepositive news to maybe come through
later this year, maybe early next year,but the flip side is after the midterms as
well, we could see, again, thisaggressive Trump come through, at
least on the protectionist front.
That was the show.
(48:27):
We very much hope you enjoyed it.
You can subscribe to the investordownload wherever you get your podcast.
And if you want to get in touch withus, it's schroderspodcasts@schroders.
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New shows drop every otherThursday at 05: 00 PM UK time.
(48:47):
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(49:08):
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Please contact your financial advisorbefore making any investment decisions..
The value of investments and the incomefrom them may go down as well as up,
and investors may not get backthe amounts originally invested.
Past performance is not aguide to future performance.
The information is not an offer,solicitation or recommendation of any
funds, services or products,or to adopt any investment strategy.
This pod is marketing material issued bySchroder Investment Management Limited,
(00:25):
registered number 189-3220 England.
Authorised and regulated by the FinancialConduct Authority for
informational purposes only.
Please contact your financial adviserbefore making any investment decisions.
Welcome to the Investor Download, the
(00:49):
podcast about the themes driving markets
and the economy now and in the future.
I'm your host, David Brett.
Hello.
I hope you're all well.
Today we have a special recording for you.
It's all about the market chaos of thelast week and what might happen next.
(01:10):
The show is hosted by my colleague, StuPodmore, and features fund managers Alex
Tedder and Bob Kaynor, alongwith economist George Brown.
Stu will do full introductionsat the start of the pod.
This was a live event, so there arealso questions from the audience.
We hope it covers all yourburning questions, too.
There aren't many technical terms used inthis recording, but Treasury Inflation
(01:34):
Protective Securities or TIPS,as they're known, are mentioned.
They're a type of treasury bond that'sindexed to an inflationary gauge to
protect investors from a decline inthe purchasing power of their money.
Anyway, sit back and I hope you enjoy.
On Apple Podcasts,Spotify, or wherever you get your
(01:54):
podcasts, you're listeningto the Investor Download.
Hello, everybody, and Welcome.
My name is Stuart Podmore.
I work for the ClientGroup here at Schroders.
Great that you could join us.
In fact, you're joining us from all aroundthe world today, so many thanks for that.
This is the week that shook markets.
What lies ahead?
Well, news flash straight up front, folks.
(02:14):
I think more markets are goingto get more shakes from here.
But one of the first things we've gotto try and do is take a step back.
It's very easy to be drawn into this.
We worry about markets all the time.
But in terms of 2025, we'vehad the deep seek surprises.
We've had the defence spend surprises thatare related to the German fiscal break
(02:36):
being loosened, and nowwe've had Liberation Day.
I think to put this into context, we aredefinitely in a de-globalised regime with
inflation shocks, having previously beenin a globalised world
with deflationary shocks.
So there's definitely been a change there.
We've talked about that for a while nowthrough regime shift and what
(02:57):
we described as the 3D reset.
I think that goes a long way to explainingsome of the populist policies that we've
been seeing, particularly from DonaldTrump on Liberation Day,
given the fact that Western liberaldemocracy populaces have seen a reduction
in their living standards,and they have reacted to that.
Now, to help me discuss all of thistoday, I'm joined by a three-person panel.
(03:22):
Firstly, George Brown, who is the SeniorEconomist here at Schroders, and he
specialises on the US, sohe's got plenty to say.
We've Alex Tedder, who is the ChiefInvestment Officer
for Equity here at Schroders.
We've got Bob Kaynor, live from the US.
Bob heads up our global small and mid-capteam, and he'll be talking very
(03:43):
specifically about theexperience stateside.
I've got to say that actually the reactionor the tariff announcements that came from
Trump most recently were worse,perhaps, than markets expected.
He said everybody, I think this is adirect quote, "Everybody was
getting a little bit Yippy.
" But actually, the question here is,if there's going to be some short term
(04:05):
pain in Donald Trump's wordsfor long term gain, just how long
will that short term pain be?
How intense will some of that pain be?
And will we get round tothat longer term gain?
There's some really important questionsthere, given the fact
that we've seen the fourth highestvolatility with the VIX index
(04:25):
currently above 30 points in 60 years.
So With an introduction like that, it'squite a tough ask to
go straight to George.
But I wondered if it's possible for you,for the benefit of the audience, it's very
difficult to keep up with all of thisstuff, but could you just give us a
reasonable summary of where weare on the tariff side of things?
(04:45):
Okay, absolutely.As you say, it's hard to keep up.
I was working Sunday morning, reactingto the announcement on Saturday.
If we take a step back, before Trump wasinaugurated, the tariff rate
in the States was about 3%.
Now, he's announced various tariffs, like20% on China initially, 25% on Canada and
Mexico, steel and aluminum,cars and car parts.
(05:08):
But then, of course, we had LiberationDay, and that was where the big
announcement on the tariffs came through,such that if you recall that the tariff
rate was about 3%,the cumulative impact of these measures
would have taken it to about 25%,the tariff rate.
That's about the highestin about 120 years.
Now, what does all thatmean for the economy?
Well, the framework that we've developed,which looks at how this will transmit
(05:31):
through to the economy through growth andinflation, every 1% rise in the tariff
rate would lead to inflation being 0.
1% higher and growth being negative 0.
05, so one-twentieth of a % down.
When you think about that rise of about22%, that's going to have
(05:51):
an effect of about 2.
6% on inflation and dragdown growth by about 1.2%.
These are big, bigshocks to the US economy.
Yes.
Now, what has happened since then, ofcourse, is, of course, we have the turmoil
in markets, not just in terms of equities,but obviously on the bond market
as well and in the dollar.
We've had some reversals.
We've had the 90 day pauseon various economies.
(06:13):
They're going to go down to that 10%baseline tariff that Trump's talked about.
But on the flip side of that, China isgoing to face 145% additional tariff.
Those two measures, effectively, byour estimates, offset each other.
That still leaves it 25.3%. But the newsat the weekend is quite significant.
The exemption for electronics andcomputers because that takes down the
tariff rate by about five percentagepoints because computers and electronics
(06:37):
are the number one biggestimport for the United States.
It's a big exemption.
The net impact now is going to be, by ourestimates, in terms of the tariffs,
2% on inflation, subtractingabout 1% from growth.
So still a big impact, but lessthan it was, say, a few weeks ago.
In your previous forecast, you talkedabout an aggressive Trump scenario.
(06:58):
I think you put a probabilityof 23% on that, George.
So are we in aggressiveTrump territory now?
Does it mean that, therefore, as yourforecast stated at the time, that we could
now see a risk of stagflation in the US?
Absolutely.
I mean, stagflationary is probably thebest outcome we can hope for right now.
Recession is very much onthe cards, I would say.
(07:19):
In terms of the probability, it'shard to say, but it's probably 50/50.
It's a coin flip probably at this stage.
But yeah, in terms of whether or not we'rein that aggressive Trump world, in terms
of the effective tariff rate that we'dassumed, that average tariff rate, it was
about 25%, so about wherewe were with Liberation Day.
Certainly, the box is ticked on that side.
But the other element of aggressive Trumpthat we haven't seen so far, which we
(07:43):
assumed in that scenario, is a veryaggressive policy on immigration.
On the campaign trail, we had JD Vance,the vice President, talking about
deportations of maybe 1million immigrants a year.
That's very significant because if youlook at the jobs market since the
pandemic, a lot of that has been driven byforeign labour, whereas the so-called
(08:04):
domestic-born part of the populationhas effectively stagnated.
That's a demographic story.
Very much, foreign workers have been thebig source of supply
for a lot of companies.
If we would see a clamp down on that,then that would take us certainly,
I think, into a recessionary world.
He softened a little biton immigration of late.
Did you spot that?
(08:24):
Yeah, he softened alittle bit on Saturday.
It got missed a bit because of the tariffannouncement or the the
exemptions on electronics.
So there's been a bitof a softening on that.
But of course,Trump is quite temperamental, and
there is still a lot of uncertainty.
So I wouldn't necessarily put that to oneside and say that that has
been settled definitively.
I still think that is a key risk.
(08:46):
Sounds like he was burying some good news.How strange.
But look, thank you, George.
We've got plenty to cover in terms of...
I want to get on to deficits, andI want to get on to bond yields.
But if I could come toyou first, Alex, does...
It's a blunt question, but does Trumpcare about what happens in the markets?
He said to everybody they were getting alittle bit yippy and that people needed
(09:08):
to stop panicking and just to calm down.
He definitely cares,he definitely cares, Stu.
We could see that on the weekend.
It was actually Friday night, wasn't it?Not Saturday.
But the backtracking on a whole bunchof traiffs that we've seen since then,
whether it's electronics or cars,is a huge deal.
(09:30):
To my mind, what he'sresponding to is two things.
One, the bond markettelling him, and George alluded to this
already, telling him that actually therecould be a problem here if
he carries on at this rate.
I think that's a very valid concern.It's always the bond market.
Think of Liz Trust in the UK back then.
It's probably no differentfor Donald Trump, ultimately.
(09:51):
So you could say thatcheck is already working.
Also the equity market, which is a simplefact that we were discussing this before.
Americans hold a lot of shares,a lot of stocks and shares.
42% of household assets are investeddirectly in the US stock market.
Therefore, every drawdown, and we've seena big drawdown in US shares this year,
(10:13):
every drawdown hits them in the wallet,and that is going to feed through into his
ratings and ultimately into his legacy.
I think the checks andbalances are working.
So the question is, what do we end upwith and has the damage already been done?
Yes.
But would you feel more optimistic at themoment, Alex, though, as an investor,
(10:33):
global equity, first and foremost,without perhaps the thematic important
angle there, but just global equity,straight perspective on this.
Would you feelbetter right now, given that we at least
have an understanding of howit's all been calculated?
Do you feel as if you canstart pricing risk again?
I will say that I do respect the factthat tariffs in the United States at 2.
(10:58):
8% prior to the whole Liberation Day thingwere very, very low.
Trump actually has a point about tariffsrelative to other countries.
It's just the way he's doing it that iscreating this complication, this
uncertainty, andultimately this drawdown in markets.
And so the longer that uncertaintypersists, the more damaging it is
(11:22):
to the real economy and to markets.
So we go into an environment wherenegotiations are taking
place on a bilateral basis.
It takes a bit of time.
I mean, it's not easy towork through, is it, George?
I would imagine the extension of that timejust gives a greater sense of
uncertainty in the markets.
Stuart, by the way, online has said, well,if there's going to be 90 days
(11:45):
before the tariff are reimposed?
Are we going to go through thewhole similar shock process?
That is the question.How do markets then price that in?
Exactly.
George, you give your view in a sec.
But from my standpoint, as an equityinvestor, you've got
the S&P back at 5,400.
We got quite low.
You've got markets actually rallyingsomewhat on this news about backing off
(12:10):
from some of the tariff arrangements.
The market is incredibly dialed into thelevel of tariffs and what
actually is going to happen.
So volatility is definitelythe name of the game.
Uncertainty is the name of the game.
The question is, what do we end up with?
And that is where I reallydon't have an answer yet.
(12:32):
Because 10% tariffs, you couldprobably accommodate in most countries.
You might disagree, George.
145% tariff for China, youdefinitely can't accommodate.
So what do we actually end up with?
I'm not sure.
If we don't end up with a solution, thereis drawdown risk in the S&P, and there is
drawdown risk in other markets globally.
(12:53):
Okay, George, do you wantto add anything to that?
No, I thought that waspretty comprehensive.
It's just if I look at it from a macroperspective, for corporates, it's going
to be a really challenging environment.
This is the concern thatwe might ultimately get these extension
after extension after extension and suchthat the tariffs never get to
as high as they're threatened.
(13:13):
But I think that the risk thatthey do get to that level.
We're already seeingcorporates take action.
We've seen reports, let's say, of Applechartering this plane
out of India, let's say.
Shifting five train loadsof iPhone back to the US.
Absolutely.
There's there's been news of various othercompanies already starting to put tariffs
(13:33):
into their pricing structure andhaving a separate line as well.
That's certainly going to feedinto Trump's approval ratings.
But that uncertainty is clearly going tohave an impact on hiring and investment.
To the extent, we just don't know yetin terms of how severe that will be.
But that uncertainty, even if we do getthose extensions, even if we do get some
(13:53):
resolution, that's not going to go away.
That's probably now going to persistfor the rest of Trump's term.
That's going to be a bigheadwind for the US economy.
I want to come back to you on China, butactually, I want to bring Bob in because I
just wondered, is it possible, Bob, foryou to give us a couple of
sentences on what the mood is like?
You're talking to a lot of thoseRussell 2000, Russell 2500 companies.
(14:15):
You're picking those stocks.What do you hear?
So I think what we've been hearingprobably for the last month is
that business is really on hold.
Decisions are not being made around CapEx.
Strategic decisions are just on hold.
We talked to a number of our companieswhen this kicked off at the end of
(14:36):
February and early March, and their handswere up, and it feels like
everybody's taking a knee.
And I think it's going to be reallyinteresting when you go through earnings
season, which is really just kicking off.
I suspect that companies arejust going to pull guidance.
Our initial thought process was,how much risk is there to guidance?
And I think they have an opportunity justto pull guidance altogether in the face
(15:00):
of the uncertainty that we're seeing.
So I think that that's the reality.
I think there is a tremendous amount ofvolatility, but I also think
we've all seen a few cycles.
Our market was down 22 2% at it's worse.
It's not exactly the time you're supposedto be taking a defensive position.
I feel like that opportunityprobably sailed a month or so ago.
(15:23):
And so it really is, how areyou going to capitalise on this?
And the nice thing, or if there is a nicething about these this highly correlated
sell offs, is it creates opportunity.
Companies get penalised just becauserisk is coming out of the market.
And so there is an opportunity to upgradeand find better companies that are a
little bit more protected in aperiod of significant uncertainty.
(15:47):
I think that's a fair point.
And I suppose when the Russell 2000 wasdown about 20% year to date,
in very short, brief, simple language.
Are you seeing that as a buyingopportunity as a stock picker?
I would say absolutely onthe individual stock level.
(16:09):
I think there is an increased amount ofdispersion that you're seeing in terms of
the way stocks are behaving ormaybe the way they should be.
So one of the things that we alwayslook at is return on investment capital.
And companies with very high return oninvested capital are not really
outperforming those with lowreturn on invested capital.
(16:30):
And for us, that's an opportunity toupgrade the portfolio, if you will.
But I do think that when you see a marketthat's down 22%, which it was a couple of
weeks ago, I think there'slots of opportunity there.
And I know last week, Ithink the headline was, it was the best
week in the equity market since November.
(16:51):
I don't think anybody felt like it was thebest week in the equity
market in a long time.
So I think sentiment isreally negative, right?
And the sentimentindicators are on a floor.
And if you look at the University ofMichigan consumer confidence numbers,
there's cohorts of those respondents thatare at COVID and great
(17:12):
financial crisis lows.
And I just don't think that'swhere we are, at least not yet.
Right.Can I add something?
Yes, of course.
See, I agree with Bob.
It's interesting because it's a two-waypull for me from a large-cap perspective
because S&P earnings,the consensus is still assuming about 13%
(17:33):
year-on-year growthfor S&P earnings this year.
It started the year about20, 21% year-on-year.
It's now come down to 13.
That still strikes meas quite high, maybe.
Maybe not.We'll have to see.
But certainly the trend is downwards.
The S&P is still trading ataround 22 times earnings.
So on that relatively elevated number,it's still trading on 22 times earnings.
(17:57):
The long term average for the S&Pis around 18, 19, depending on
which time period you choose.
So the S&P is still expensive versus itshistory and earnings are coming down.
But to Bob's point, what's happened isthat a lot of stocks are sold down and the
good companies have sold down as much ormore, in many cases, as
(18:19):
the less good companies.So that could be an opportunity.
I think it is an opportunity.
It strikes me that it was only a few weeksago at the Schroders Investment Conference
when I was talking to you, Alex, aboutthe Magnificent We've had a complete flip.
The rest of the world, stocks in the MSCI,All Countries World Index, is now flipped.
And 90% of those companies around theworld are now outperforming the
(18:42):
Magnificent Seven or haveoutperformed in recent weeks.
So as a global investor, then, presumably,you've got your work cut out seeking
those opportunities as aresult of all that's happened.
You do.
So the tariffs on electronics, the flipflopping, obviously doesn't help the Mag7.
So let's be I'm sorry about that.But you're right.
The Mag7 as a group I've done prettypoorly, actually for quite some time now.
(19:06):
It's a very disparate group, but generallyspeaking, they've done really poorly, and
some have done exceptionallypoorly like Tesla.
It just doesn't seem right.
To Bob's point, theseare great businesses.
That hasn't changed.
If we can have some confidence aroundthe macro picture, the tariff picture,
actually, these companiescould start to do a lot better.
We'll see, but thatwould be our base case.
(19:28):
That's one aspect.
And the other aspect is the simple factthat the rest of the world is still a heck
of a lot cheaper than the US,which maybe we'll come on to.
Yeah.Well, yeah, I think we will.
We've had a questionfrom Domendra, actually.
I've got a very quick questionfor both Alex and Bob.
Before I come back to George,it's pretty blunt, actually.
(19:49):
Is US exceptionalism over?
Bob, what do you reckon?
I would say that the evidence would, atleast the recent evidence, would say yes.
When I look at all the major marketsaround the globe, Germany, France, UK,
Japan, Australia, China, they're alloutperforming every index in the US.
(20:12):
Other than the Dow, actually, the DowJones is the best performing index in the
US right now, which I find interesting.
But yeah, and I think we were talkingabout it earlier before we went online.
I think the relationship between thedollar and bond yields are significant and
something that I don'tthink you can lose sight of.
And if you I want the ultimate auditor onUS exceptionalism, I do think it is the
(20:35):
dynamic that you're going to playout between the dollar and bonds.
Okay.I might come back to you on that one.
But just Alex, US exceptionalism, the samequestion for you, or were
you going to add something?I never want to bet 100 % against the S&P.
It is a lot of very good businesses there,and it's the deepest market,
(20:55):
the most liquid market.
There's a lot ofopportunity in that market.
But, to Bob's point, you have a currencythat's working against you right now.
I mean, the Euro isstrengthening very materially.
You also have expectations in Europe, inJapan, in China that are
very low relative to the US.
And you have valuations thatare very low relative to the US.
(21:16):
Take Europe, for example, probably tradingon around 14 times this year's full year
earnings compared to the US on 22 times.
So at some point, that gap will close.
I'm not saying it'll be..
What do you call it?Aligned.
But you could see the gap closing further.
And therefore, I think incrementally, itmakes sense
(21:39):
to move, if you're an asset allocator, tomove some money away from the S&P
into other areas.And that has been happening.
I think that will continue.
Well, I know for a fact, amulti-asset team is considered that.
If I can just add on to that, because Ithink it's an important distinction that
we've been trying to make in ourasset class for a number of years.
While the US is expensive, that isentirely a function of what's
(21:59):
happening in the the large cap market.
The Russell 2000, which is a small capbenchmark, is currently
trading at 14 times earnings.
So if you believe in thedynamism of the US markets, and it said it
will continue, we'll obviously go throughsome short term machinations here.
You can access the US market at the samemultiples that you're accessing
(22:20):
the rest of the world.
And I think that's justsomething people lose sight of.
There are two separate markets in the US.
There is the large cap market,and there is everything else.
That's a good point.I was going to come back to you, George.
It seems the right moment just to comeback and talk bond yields then and also
just talk a little bit, and bob touched onthis, the US dollar valuations and
(22:40):
the weakening of the US dollar.
Just explain a little as to what'sbeen happening there for our audience.
Yeah, it's a good question.
To this point about, is itthe end of US exceptionalism?
Well, just as it is for the markets, itdoes seem to be for the macro as well,
because this isn't some exogenous shock.This does seem to be...
Well, it is a self-inflictedeconomic pain that they're going through,
(23:04):
and it's going to hit the US the hardest.
That's been reflected in, let's say, thedollar, which is down about 9%, and
actually, when we're thinking about theeconomic impact, when I gave those numbers
earlier, the 2% on inflation that's goingto be higher as a result of the tariff
as they stand today, 1% lower on growth.
That does assume the regression is basedon history, and that assumes that the
dollar does appreciate, which ithistorically has done
(23:25):
during these episodes.
The fact it's going the other way meansthat inflation might be another of a 0.
5 percentage point ishigher than that, so 2.
5%, and growth might be down 1.
25%, so another 25 basis points.
Now, to the yields point as well,obviously, there are lots of different
factors at play, andsome parts of it are question marks over
(23:46):
the fiscal sustainability of the UnitedStates, given that it's
going down this road.
There's also various technical factors,like hedge funds are being closed out of
basis point trades, we won't go into that.
But then obviously, there's thisquestion as well about China's response.
I think that's really interesting becauseChina obviously holds a
huge amount of treasuries.
Directly, the tick data, it's the treasurydata from the US,
(24:09):
something like $760 billion, the last timeI checked, is owned by China, but actually
it probably owns more than that throughclearing banks in Luxembourg and Belgium.
That number is maybeclose to $1.5 trillion.
There's a risk there that if China were tosell down its holdings of US Treasury
bonds, you could see a furtherrise in yields as a consequence.
(24:31):
Yes.
I suppose the impact on the capitalaccount and that risk of capital flow
could become more significantin the short term.
That actually the demand or the financialflow into the US dollar will start
to dry up a little in spite ofits reserve currency status.
It's so bizarre.Yeah.
(24:52):
Obviously, for decades, forhundreds of years, the United States has
enjoyed this exorbitant privilegeand managed to fund its twin deficits
through the kindness of strangers as MarkCarney, the now Canadian Prime Minister,
used to say when he was theBank of England governor.
Yeah, it's an interestingdimension to this.
(25:12):
Just coming back to this China point,though, I I'd say that
to our minds, in terms of that riskmaterialising, I would put probably quite
a low probability on Chinadumping its treasuries.
Number one is it's a bit like shootingyourself in the foot because, of course,
it's going to cause the value of China'sassets to plummet as a consequence.
Obviously, interest rates wouldrise quite sharply in the US.
(25:33):
That's going to weigh down on US demandthat's going to hit the
Chinese economy in the process.
But then you've got the question markof what do you pivot into instead?
Do you move away to other emerging marketdebt, for instance, or do you move
into gold, which looks more likely?
But it's difficult either way.
But then on the other side of theequation, what could happen is the Fed
(25:53):
could just restart QE as a consequence.
The numbers I gave you earlier, $760billion that China owns directly, It owns
about that, presumably, if we're makingsome very generous assumptions in Belgium
and Luxembourg, $1.5 trillion in total.Well, guess what?
The peak of the Fed's balancesheet in terms of treasuries was 1.
5 trillion higher than it is today.
(26:15):
We could go back to the pandemic peaks andpurchase all those bonds
if China was to sell.
It just seems to be a zero sum game there.Okay.
While we're on ChinaCan I ask George a question?
Is inflating away effectivelythe federal debt, ultimately?
Could that be an objective?
I forget the number of the amount thatTIPS makes up of the treasury market.
(26:37):
This is the issue.
I think it's somethinglike 25%, I could be wrong.
But this is the issue that this argumentabout inflating away the debt, people
forget about the TIPS market, and that's abig part of that, and
that adds the element.
Then you've got the flip sideof that on the yield front.
If you've got inflation, it's higher as aresult, then interest rates
have to be higher as a result.
(26:57):
No, I don't really believe in thisargument about inflating the debt away,
but you can get this fiscalfinancing, I think is the term for it,
which is effectively what the Bank ofEngland was doing at the
peak of the Liz Trust crisis.
It was lending a hand to the government,and that's certainly what you could see in
the US if you're were to see a big,prolonged, and excessive
(27:17):
period of treasury selling.
But I just want to on the China side ofthings, I know when we had Trump one in
the first presidency, and there was talkof of tariffs and a trade
war with China at that point.
There was a commitment from China tobuy $200 billion additional US goods.
It didn't materialise, but actually, theinflation print in the US didn't
(27:39):
really change as a result of that.So what's different now?
Yeah, that's right.
So when we did the analysis, obviously,the trade war was just with China,
it wasn't with the rest of the world.
And so, yes, China was facing these muchhigher tariffs, but there was
two responses that Beijing took.
One was to devalue its currency, andthat helped to cushion some of the blow.
And that seems to be its strategythis time around as well.
(28:01):
But the other part of its strategy, whichmight not be repeated this time, is
it was able to reroute shipments.
Let's say a good destined from China tothe US, it might stop off
on Vietnam along the way.
They might have peeled off the made inChina sticker, stamped it made in Vietnam.
For all intents of purposes, it was aVietnamese good, but realistically,
it was a Chinese good.
It circumvented the tariffs that way.
(28:24):
But the fact that now the rest of theworld is facing this baseline 10% tariff
means that maybe that's notgoing to be quite as feasible.
The administration also saidthey're going to clamp down on that.
I'm not sure how they'regoing to police that.
But certainly, if you've got 145% tariffon China, 10% on the rest of the
world, there's still a big gap there.
There's still some scope touse rerouting, but it's obviously not
(28:44):
going to be quite as effectiveas it was in the past.
Before I go back to Bob,actually, I just wanted...
Glenn's asked a really good question,actually, about American tax
cuts, because we did mention it.
But do those tax cuts that have beenproposed, potentially, especially,
corporation tax reductions,do they negate the impact of those
consumer price increasesand associated sentiment?
(29:05):
Do you think that that will...
I think what Glenn's getting at here is,could we not be,
or could we be more open to the idea of astronger, wealthier US in five years time.
I think we shouldn't dismiss that.We shouldn't dismiss it.
Yeah.Okay.
So medium term, it couldbe a positive benefit.
Like the Tax Cuts and Jobs Act of 2017,these are the big tax cuts by Trump.
(29:27):
These have clearly, although they faced aopposition from the Democrats at the time,
realistically, they're goingto back them this time around.
That has been a positive force for the USeconomy, clearly.
But in terms of the near term impact, Idon't think it's going to be enough to,
let's say, prevent the USfrom falling into recession.
But longer term, coming back to this pointthat Bob and Alex are raising about long
(29:52):
term US prospects, actually, that could bea continued positive dynamic for the US.
Thank you for that, George.
Now, Bob-Sorry.I may-Yes, Alex.
Because the positive scenario, I think alot of these deals are going to be done
with the quid pro quo thatthe country where Trump takes the tariff
(30:12):
away or reduces the tariff investsmore directly in the United States.
We started to see that.
You have Novartis the weekend announcingthat they set up a huge new facility in
the US, billions of dollars in newcapacity directly in the
United States for production.
Nvidia talking about reshoring it'sa super computer manufacturing
(30:32):
directly into the United States.
You're going to see, I think, a lot ofdeals that will bring capacity
back into the US,and they could ultimately be
pretty positive for the economy.
So I think there is method in the madness.Do you know what I mean?
It's just the timing to George's point.
Bob, would you agree with that?
Do you see in your space at the moment, inyour universe of stocks, do you see
(30:55):
companies starting to considerthat reshoring aspect here?
Yeah, I think we've actually been under, Idon't want to call it a manufacturing
renaissance, but probably for the past 15years, we've started to see a reshoring,
near-shoring initiative, certainly aroundthe Tax Cut and Jobs Act there
was a lot of incentive to do that.
And it was interesting, there'sthe carrot and the stick.
(31:16):
In the first Trump administration,it was more carrot.
In the second, it feels likeit's a little bit more stick.
But we are seeing that.
We are seeing increased manufacturingcoming near shore or on onshore.
I think one of the interestingpieces is, do we have the labour?
We're going to have to modify ourimmigration policies if we're trying to
(31:38):
bring all these jobs back becauseyou can do the math.
And I don't think we have thepeople to build the factories.
So we will see how thatplays out over time.
But the onshore and near-shoringis something we've been seeing.
But the reality is, even with that,we do have a global supply chain.
And so whether you're a small-cap companyor a large-cap company,
your supply chain is global.
(32:00):
And that's, I think, what we'retrying to navigate right now.
And while I'm with you, Bob, couldI just ask as well around any...
You mentioned dispersion earlier, and wetalked about the stock-level dispersion,
but I just wondered if you're getting asense for the audience about any sector
dispersion that might be of interest.
Are you looking at any particular sectorsthat might be beneficiaries here,
(32:24):
that you identified?
Yeah, and I'm interested to hear Alex'stake, because I think that has been the
initial knee-jerk reaction from themarket, at least in equities,
it's to go to the safest places.
You've seen staples, you've seen utilitiesoutperform, but you haven't seen that
distinction within particular sectors, ifyou're an industrial company,
(32:48):
you're considered at risk.
And wherever you are in the industrialsupply chain, you're getting
repriced along with everything else.
And that's where I thinkthe opportunity is.
I think the initial reaction from themarket has been very much, if you're going
to stay in equities, reallocate to theclassic defensive part of the market.
But Alex, I'd love to hear yourperspective on that as well.
(33:12):
Yes, you're absolutely right, Bob.
That has been the classic knee-jerkreaction every time there is this economic
slowdown or potential economic slowdown.
And in this case, ithappened very, very quickly.
If you think about January, thatwas still a great month for growth.
It was a great month for technology.
It It was a great month foranything related to better
(33:33):
than average return on capital.
And yet in the following months and weeks,we've seen a classic about face towards
stocks that are defensive and sectors thatare defensive, tobacco
being a case in point.
I think that right now, theopportunity is beyond those sectors.
(33:53):
To your point, I think it's withinindustrials because there clearly
will be a lot of beneficiaries.
And within technology, To give an example,if a lot of manufacturing
capability is going to come to the US,whether it's Taiwan Semi or NVIDI or
whoever, they're going toneed lithography in the US.
ASML is a great companybased in the Netherlands.
(34:16):
That is obviously a leadingsupply of lithography equipment.
It's been a very poor performer for sometime over tariff worries
in China and all the rest.
But actually, there's a bull story thatsays there's a whole new leg to the
demand for for lithography equipment thatreally isn't priced in at this point.
So I think it speaks to Bob's point isthat actually now is the time, painful as
(34:37):
it feels, to look at some of theseareas that have been hit really hard.
Because Graham, actually, in the audiencehas said, well, he thinks that
Trump is in do or die mode.
And I'm not asking you, Alex,to look into the mind of Trump.
I don't think any of us can do that.
But he says, well,if you're going to force this
reshoring process, it takes a while.
We discuss reshoring as if it's theeasiest thing in the world, But actually,
(35:02):
Graham's point here is you'regoing to run out of time.
And when do you start doing that?
When do you not start doing that?
I'm sure it's a mess.
But look, this is the issue, which is,and this is what we're all dancing around
and struggling with, is the shortterm versus the medium term.
I mean, on a short term basis, there is8 to 10 % downside in the S&P, right?
(35:24):
If the tariff stuff just goes the wrongway and there aren't any agreements and
the data starts turning down, which Ithink it might,
confidence is definitely turning down,then we could have another
pullback in the market for sure.
So that is a concern for all of us, verydifficult to hedge and expensive to
(35:45):
hedge if you want to do it fully.
So clearly, you want to stick withsome of these defensive names.
But at the same time, you want to belooking ahead and finding those
opportunities that have been sold downaround the world quite aggressively
based on the whole tariff uncertainty.
So I think it's a combination of both.
I know that sounds easy, and it's not, butthat's what we're paid
(36:07):
to do as active managers.Yes, absolutely.
Now, I want to come back to you, George,because we talked a little
bit about China previously.
We're going to berunning towards the end of this broadcast
shortly, but I just wanted to ask a littlebit more about Europe,
and in particular, the idea that theimpact that this might have on Europe's
economies,what also might be the implication for the
(36:30):
ECB policy rate and policymakers inEurope, and how that might continue or
extend the opportunity that we've seen,definitely in European equity,
particularly European value equity.
So what are your observations?
Because we've had a couple of questionshere from people about what an
opportunity is there for Europe?
What does this mean for the dumpingof cheap stuff onto the markets?
(36:53):
We're all thinking in China here.What's your view?
Stolen my thunder with that lastbit there with the dumping of goods.
So If we look at wherethe reciprocal tariff was supposed to be
20% on the EU, but nowthey're going to be 10%.
At the time when we ran the numbers on thereciprocal tariffs at
20%, it was going to be a hit of0.3 to 0.4% on European growth.
(37:16):
Now, that's going to roughly halfwith the 10% baseline tariff.
There's an argument there for the ECB tostart to cut rates, especially though,
because even before Liberation Day, we hadthe tariffs on automobiles, and obviously,
that's a big, big component of EU exports,not just obviously concentrated in
countries such asFrance, Germany, and Italy, but right
(37:38):
through the supply chain as well, throughother countries and services as well.
Then, as you rightly point out, on theflip side of that as well, or in addition
to that, the risk is that we get thisdumping of Chinese goods, and especially
with tariff rates at 145%being imposed the US on China.
There's certainly a very elevated riskthat China just floods the market with
(37:58):
cheap goods, and especiallyelectric cars as well.
You're already seeing thatin the UK, aren't you?
We're massively seeing it.
The UK has imposed, I think it was lastyear, car tariffs on Chinese electrical
vehicles to offset some of that dumping.
We could get some tariffs thatgo on to try and offset that.
But what I thought was interesting is thatyou are seeing some companies now
(38:20):
as well just hiking prices globally.
So Sony, for instance,are hiking the prices of its
PlayStation console globally.
In response, well, theyhaven't quoted the tariff.
It's very clear that it's something likeexchange rate movements and uncertainty.
But clearly, that seems to be challengingthat notion that you might get
(38:43):
deflationary pressure from the tariffs.
But in terms of what it all means for ECBpolicy, clearly there's
clearly an opportunity there for them tocut rates more aggressively in response.
Whereas if we compare it to the Fed, let'ssay, they're between a
rock and a hard place.
Yes, you're going to have the hit togrowth and it It could be a recession.
But at the same time,Bob rightly pointed out that you've got
(39:04):
the inflation expectations from theMichigan survey now, the
highest since the 1980s.
That puts them in a really difficultpredicament as such that they're probably
not going to be able to cut rates, atleast from our perspective on
the Schroders economics desk.
Two further questions that come out ofthat, which I just want to raise as well.
Just on China first, do you see theplaybook changing at all for China?
(39:24):
Some people have said, Well, might this bethe moment when through the loosening of
fiscal policy, that China really makes acommitment to domestic consumption, or do
you think it'll just go the usual route?
Yeah, it's hard to see how itwould try to encourage that.
One issue for China that has plaguedconsumption is there's got
(39:46):
a very high savings rate.
I'm not really sure what theauthorities can do there.
Maybe they can increase the SocialSecurity net, but there's clearly a
cultural barrier there toreducing that saving rate.
But that's somethingthey could tackle there.
But in terms of what...
I think from China's perspective, reallythe game, or at least the ultimate
objective, ought to be reducingthese tariffs as soon as possible.
(40:09):
That would be the best possible outcome.
It comes back to that phase one agreementthat was agreed between Trump and China in
2020, which is they were going to buy200 billion extra worth of US goods.
Maybe striking some deal along that lineand buying more US, investing more in the
US is probably the best course of actionfor China to take rather than hunker down
(40:29):
and try and weather this, the best resultis clearly going to be, how do we get
Trump to come to a negotiating table andget a deal that gets
these 145% tariffs down?
Best guess on economic growth?
Can I hold you to aforecast for China in 2025?
Probably not, no, because the ChinaEconomist is away, but clearly,
(40:50):
the forecasts are under review.
For the US, at the very least, I thinkwe're looking at calendar year
growth of 1% for this year.
To give you some perspective, before allthe tariff announcements, we
were assuming 2.5% growth.
That's a big downgrade on that.
But if you get a recession, it'seasily going to come down to not 0.
5% or 0% for the US.
We've heard a lot about thepolitical relationships.
(41:12):
I don't want to get deep into politicshere, but the political relationships.
A lot of people have been comparing andcontrasting the Mexican President, Claudia
Scheinbaum's response to Trumpversus that of Mark Carney in Canada.
I just wondered, how do you anticipateEurope might play this with with the US?
Yeah, so the European response is moredifficult because, of course, they all
(41:34):
have to come togetherin a unified response.
Obviously, Trump istrying to pick them off.
That is the leaders individually.
We're seeing Meloni, for instance, goingafter the White House on her own, trying
to get Trump to make some concessions.
I think the European response is going tobe more challenging versus, let's say,
the US in terms of how they retaliate.
(41:55):
But I think what is clear is that therewill be some unified response
in terms the fiscal response.
There seems to be definitely some, whilethere are disagreements on how to
retaliate against the US, there's clearlyseems to be some consensus there amongst
European leaders that some fiscal stimuluswill be needed if you do get
a big tariff war with the US.
(42:16):
Well, above and beyondwhat Germany is already...
Precisely.
The defence spending that Germany is goingto unleash is going to
be a huge, huge benefit.
But I think that's more of a medium-termstory rather than short-term.
But it's interesting about how that'sgoing to play out as well, because
we're talking about thesedeals that can be struck.
(42:36):
The deal for the EU and the US seems to beon the LNG front, liquefied natural gas.
Natural gas.Natural gas, sorry.
But also on defence spending is clearlysomewhere where Germany and other European
nations could be appeasing Trump bypurchasing more defence
equipment from the United States.I'm sure that is part of the deal.
(42:56):
Okay.
That's interesting.
You think that as well.
Is that something you've looked at?
Ultimately, pragmatism will prevail.
It has to, because otherwise, looking atan end to the current world order,
I just don't see that happening.
So my base case is 10% probably sticks.
I think we probably end up with 10%tariffs, and we end up with a bunch of
deals where Europe buys more from US.
(43:16):
So I think it does settle down.
It's just the speed atwhich it settles down.
It's a big question.
Well, look, we're getting closetowards the end of our broadcast today.
Thank you very much indeed for thoseaudience members who've sent in questions.
I think if you want to start as acollection of guests thinking about how
you might summarise what we've talkedabout, and indeed, maybe slip in the odd
(43:40):
prediction, if that's not too much to ask.
I think I might come to you first, Bob.
In a way, maybe answer this question,because this is a great question.
Is there a scenario where the US prospershere?
Yes.
I think we're I think there is a littlebit of a painful rebalance that's
(44:03):
going to occur around global trade.
I do think that when you go through theseperiods, historically, you can look back
over time, and there's usuallyeither a fiscal or monetary response.
And I think George laid out why it'sunlikely you're going to see the
Fed come in and save the day.
The fiscal response isa little bit harder.
I think the off-ramp looks more like aseries of deals and negotiations with
(44:28):
trading counter parties thatyou can see play out over time.
I recognise that what happened last week,I think it was Wednesday,
challenges that a little bit.
But I do think it's the fiscal response,if you will, that we're going to see is
going to be a little bit more measured.
It's not going to be a big bazooka.
It could be.Trump's very unpredictable.
(44:50):
But I think that's the workingorder from our mindset.
But I think ultimately,you go back over time.
I mean, you can hear politicians on theright or left talk about how
the US tariff system is unfairand things need to change.
(45:10):
So I think Trump's doing what he believesis right for America in the long
run, it's going to be very painful.
And I think one of the realities that wedidn't touch on is that he's got a very
narrow window here to make these changes,which is why it feels so chaotic for
everybody, both companies that are tryingto manage businesses as well as us
who are trying to to manage money.
(45:33):
Well, thank you for that, Bob.
I think for you, if I could come to you,Alex, as that global equity point, and
also weave in maybe a final question fromWolfgang, which is if you were taking
European investor's perspective here,would you go US small mid-cap with Bob
or multinationals?
I think I know what youranswer is going to be.
(45:54):
I'd do both.
i do both, for sure.
And that is the point slightly is it'sso fluid, the situation.
There's clearly, I think any investor hasgot to look at the bear case, which is
extremely negative, which isa fiscal issues, debt issues, deficit
(46:17):
issues, the whole thing spiralling.
That would be extremelynegative for global markets.
There's a bull case, which is anaccelerated process of adjustment.
Yes.Neither of those is very likely.
To Bob's point, the most likelyaspect is a central aspect of a muddle
through with deals, and eventually,you get to a situation that's stable.
(46:38):
In that environment, the only thing youcan do as an equity investor is to look
around for those areas that have beenunfairly neglected or where
expectations are very low.
You have those in US small cap, you havethose in Europe, definitely, you have
those in Asia, too, forexample, in markets like Japan.
That would be my approach.
Combined with your insight into earningsand the forecasts for earnings, For sure.
(47:00):
Which is where you often findanomalies you can exploit.
Absolutely.Okay.
Maybe the final word for you, George.
We started with you.
Are we going to finish with you?
Can you leave us with one or two sentencesabout the future under
these circumstances?
I can do.
Maybe I'll start with the glass half fulland I'll end with the pessimism, which
(47:22):
is probably the wrong way around.
But the attention that's going to turn toin the second half of this year
is very much on the tax cuts.
There's certainly some good newsto look forward to on that front.
I think there could besomething that's being underpriced by the
market at this stage, and thatcould be that positive catalyst.
The downside is that the midterms are nextyear, and that after that, Trump looks
(47:43):
very likely to lose hismajority in the House.
That's just history.
The midterms are rarelykind to the President.
That's right.
What happened during Trump's first termafter the midterms, when he was hit very,
very hard and lost his majority,is that then he did things that
he didn't require Congress to do.What was that?
It was the Trade War, it was Tariffs,and he could turn his attention
(48:07):
to immigration as well.
I would say that we've maybe got somepositive news to maybe come through
later this year, maybe early next year,but the flip side is after the midterms as
well, we could see, again, thisaggressive Trump come through, at
least on the protectionist front.
That was the show.
(48:27):
We very much hope you enjoyed it.
You can subscribe to the investordownload wherever you get your podcast.
And if you want to get in touch withus, it's schroderspodcasts@schroders.
com.
And you can find out much,much more at schroders.
com/insights.
New shows drop every otherThursday at 05: 00 PM UK time.
(48:47):
In the meantime, keep safe and go well.
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investors may not get back theamounts originally invested.
Past performance is not aguide to future performance.
The information is not an offer,solicitation or recommendation of any
funds, services or products, orto adopt any investment strategy.
(49:08):
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