The Fin-X Wealth view for 2025 outlined that the biggest risk for the next 12 months+ would be geopolitical especially in light of the US elections. Currently sentiment is down and markets/investors/companies have adopted a wait and see attitude.
Investors are questioning the reasons for the latest drawdown in markets over the last month which has seen volatility pick up and share markets rolling off recent highs.
1 Month
Source: Bloomberg
1-Year
Source: Bloomberg
As we commence Autumn and not even two months since Trump was inducted as the 47th President of the US there has been considerable uncertainty. In that short space the world has seen blistering change at a rapid clip on several fronts.
As expected, the US has become an inward looking entity under the Trump policies, putting self-interest and an “America First” thought process into its dealings with all its trading partners. The actions by the Trump administration since taking office towards American exceptionalism has been unprecedented in scope and scale adding to uncertainty and market volatility.
US Tariffs have been imposed on friend and foe without discrimination:
· China has had an additional 10% tariff imposed following the initial 10% that came into effect in February. There is a proposal to charge $1 million port entry fee for Chinese built chips
· Canada and Mexico 25% tariff - “there is confusion as to when exactly it will be imposed”
o On 4th of March the imposition of the 25% tariff impacting goods like beef and lumber from Canada; avocados and tequila from Mexico. Then overnight it was announced that auto tariffs would be deferred for one month (to April)
· Potential higher future tariffs on steel and aluminium
· EU auto imports to be generally 25%
Mohamed El-Erian summarised the goals and objectives of the administrations tariff policies being:
1. To raise revenue
2. Promote fairer trade
3. Pressure adversaries and allies in protecting US industry
The tariffs can be separated into three categories:
1. A set of general tariffs (to raise revenue and the reciprocity side – in effect “fair trade”)
2. Sector specific tariffs to protect certain industries (e.g. steel and aluminium)
3. Tariffs aimed at particular countries to get a set of specific outcomes
There has been mixed messages coming from the Trump administration as to levels of tariffs and implementation dates adding to uncertainty and confusion fuelling market volatility.
Conflict – Trump has forced Ukraine to the “negotiating table” to end the war
· Trump has sided with Russia in attributing blame for the conflict on Ukraine
· Ukrainian President Zelensky flew to Washington on the weekend to sign the Minerals deal to save his country, a meeting that didn’t go to plan resulting in a no deal
· Trump has made it clear that neither Ukraine nor the NATO allies can count on continued US support. This will force European governments to substantially increase their defense budgets in the years to come.
· The shift in US rhetoric towards Russia could have potential global ramifications especially in Europe. Has Putin finally got his way? Only time will tell.
With respect to China – Is Trump trying to drive a wedge between Russia and China by taking a more pro-Russia approach? Possibly?
Who is next on the Trump hit list? Iran?
Companies are trying to adapt under the constantly shifting landscape in the face of inconsistent and ever changing commentary and policies that are being announced and then amended almost daily.
A summary of reporting season on the S&P500 – Q4 2024
On balance S&P500 company reporting scorecard have been relatively positive.
The economy, interest rates and inflation
The US Federal Reserve looks to have paused rate cuts for now. Reading through the last minutes, the Feds surveys showed that companies are looking to increase prices because of the tariff impact. Inflationary expectations are increasing as a result of the new administration’s policies.
Furthermore it looks like the US economy is slowing. The last consumer confidence read was the worst since mid 2021. GDP remains anchored around the 2.3% level and unemployment remains relatively resilient. However the forecast for the next quarters GDP read is minus 1.5%. This is likely as a result of companies forward ordering ahead of tariffs and stockpiling to save costs.
Overseas, there were concerns that the US consumer might be increasingly challenged. Walmart followed Amazon in warning of slower spending. The share price of Walmart slipped by -9.0%, while shares in Block Inc. traded -18.8% lower after missing analyst estimates but providing reasonable guidance.
Several business surveys indicated rising price pressures before the University of Michigan consumer sentiment survey provided another warning on Friday as long-term inflation expectations increased to +3.5%, the highest level since 1995
At the same time, concerns are building that Elon Musk’s DOGE team may hamper growth with deep spending cuts when the expansion is already fragile, even before tariffs are taken into account.
Commenting on the results of the American flash PMI, S&P Global’s Chief Business Economist, Chris Williamson, said:
“The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices.
Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers”.
The US 10 Year bond yield has fallen approximately 60 basis points from 4.8% to 4.2% since the start of the year. The yield curve looks like it is inverting (which is usually a sign of future recessionary conditions). This may result in the US Federal Reserve cutting interest rates more abruptly that previously anticipated.
The Fin-X View
Our investment style and philosophy ensures we focus on the fundamentals of a business when assessing whether we make any formal changes to portfolios. We focus on investing in the best businesses globally with growth profiles that hold up well through changes to the economic and business cycles. Quality is one of our main priorities when selecting assets.
For the time being we aren’t looking to make any significant changes to portfolios during this period, however we recognise that the impact of geopolitical tensions and the uncertainty around tariff impacts will continue to impact the broad market throughout this year.
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