Words on Trump’s Trade War

This week, host Lucy Meagher sits down with Tim Rocks and Max Casey from our Chief Investment Office to unpack the ever-changing global landscape. As Trump ramps up his tariff policies, global markets are feeling the heat. They break down the escalating geopolitical tensions triggered by his aggressive trade stance and explore how they’re sending shockwaves through financial markets. From investor uncertainty to supply chain disruptions, the team examine the key economic risks at play and their impact on businesses, consumers, and the global economy. Tune in to find out more!

This episode is also available on Apple Podcast. 

Lucy Meagher

Welcome to the Words on Wealth podcast. My name is Lucy Meagher, Director and Senior Investment Advisor at Evans & Partners, and I am your host for today’s episode. Joining me today, we have Tim Rocks, our Chief Investment Officer, and also Max Casey, who is a Portfolio Strategist in our Chief Investment Office. Now today, we’re coming to you with a special episode, given there is quite a lot happening on the macroeconomic front and increasing volatility in markets as they respond to the political and economic landscape. We really wanted to bring you an up to the minute update in terms of our views on what’s happening and the implications that these might have for our client portfolios. So with that, we’ll get started. So, Tim I might start with you. Look if we look at you know what’s happening particularly in the US there’s no shortage of headlines and the market seems to really be reacting to a lot of those. Could you just tell us what’s your take on the latest Trump developments?

Tim Rocks

Great, thanks Lucy and welcome all. Well the first caveat is everything’s changing day by day almost and we are recording this just after March 4th so the tariffs on Canada and Mexico and the extra tariffs on China have been implemented. Of course, we don’t know whether they will be permanent or not and that’s part of the challenge here. I think it’s also true that investors aren’t assuming that they’re permanent either. Throughout this whole process, one of the puzzles is that investors have been very keen to see through all a lot of the Trump bluster. Equity markets are now so broadly flat from the election and a lot of the potential downside risks are being ignored. And that’s part of the problem as well because one of the sort conventional wisdoms here is that market falls will act as a constraint on Trump, but if the market isn’t falling, then that’s less of a constraint. So anyway, we don’t know about whether these Mexico and Canada tariffs will continue for all that long. It’s more likely that the China ones will stay in place. But to step back a bit, I think that it’s clear that something is going on. Even if these tariffs are rolled back, they will happen eventually. Some major tariffs will happen eventually. The broader message from the Trump administration is actually that April 2nd is the big day. That’s the day that the whole reciprocal tariff program will be announced. That will include the tariffs on Europe as well and maybe even more on China. So yes, we think this is a big deal. We think there has been an underreaction by markets. We think there are some macro consequences and that is all still to play out.

Lucy Meagher

Yeah, I think, you know, when you talk about those macro consequences, I mean, whether it’s tariffs as you mentioned it, we’re entering into a of a tit for tat stage around those, whether it’s also the very quite real ramifications of DOGE or the Department of Government Efficiency and some of the changes that they’re making there. Do you think that broadly speaking we should be worried about the impact on the US economy and particularly noting parts of the US economy are quite strong at the moment? We’ve got employment running at almost record lows, so should we be worried that there is an impact there?

Tim Rocks

The short answer is yes. I think the economic profession anyway is moving around to the view that the short-term risks to the economy from what is playing out here is material. That even if there are long-term benefits from deregulation and efficiency gains, you do have a sequencing problem, which is that the downside risk from those changes will occur in the short term, over the next six to 12 months, before any benefits will come through. And some of the things that we’re talking about here, well, for tariffs in particular, the issue is that it’s just simply hit to consumers. There’s just less you can buy, because your dollars go further. What is less clear is how disruptive some of these things will be to industry. Now if you’re a business making hiring or capex decisions, it’s very hard to commit to put your signature on something where you’re really not clear what the rules will be in terms of tariffs in a period ahead. And that’s particularly the case in a couple of big sectors where it will be very disruptive, like the auto sector where there’s such big integration in the auto sector across the Mexican and Canadian borders that it’s really a danger to them. And then of course we haven’t even talked about the potential for retaliation. And that is actually quite large in the Canadian front. If the cold Canadian scenario worsens, the reality is that three times as much of US exports go to Canada as to China. So retaliation from China would actually hurt. So that’s just on the tariff side alone, but of course, as you mentioned, we’ve got the austerity cuts as well. We don’t really know what’s going to go on over the next sort of month or so there. And then we’ve got the immigration cuts as well, which feed through to the labor market. But it could also be disruptive to some key industries. So there is some discussion that 15% or more of the construction sector employment is actually illegal. So some jobs just sort of won’t be able to be done.

Lucy Meagher

Yeah, I think if we just focus and drill down a little bit more on that tariffs issue in particular. And it’s interesting, I think overnight we just heard President Trudeau have some very unsavoury comments around his views on the tariffs. They’re obviously very unpopular. But if we look at how tariffs actually work and the impacts on the economy, is it more likely that they’ll have a larger effect on inflation or margins or the economy? How is that sort of going to play out in your view?

Tim Rocks

That’s right. Well, so let’s break each of those down. Inflation is the one that people have talked about the most because it’s pretty obvious that a tariff does increase prices. So imported goods are 15% of consumption. if average tariffs are 10%, then you’re talking about something that’s up to being a one to one and a half percent of the inflation rate. So that’s a mechanical calculation. The reality though could be much more complex. The question is whether firms will be brave enough to pass on some of those, some or all of those price increases. And that goes to some big companies, particularly Apple. Now when we look at who are the largest importers from China to the US, these are mostly not big Chinese companies, they are US companies. And Apple is a banner example. Basically all of Apple hardware, so iPhones, computers and the like, that are consumed in the US are made in China. And the question is whether Apple will be brave enough to effectively make a political statement by increasing those prices. I think it’s much more likely that they decide to take the hit. But that means a hit to margins. You can extend that on to some of the other big importers like Amazon, Walmart and the like. So it may well be that the inflation impact is slightly less than those mechanical calculations. But the bigger or a bigger impact is to margins. So this goes to one of these impacts that it might have on the stock market if margins actually sort of taking a big hit as well. And just further on that, there is the risk that some of these big US companies are targeted for retaliation specifically. So 40% of earnings for the US for the S&P 500 is made offshore. So if there’s a boycott of goods in Europe or in Canada, or if there’s specific targeting of those markets, then that’s vulnerable. And then you’ve also got the possibility that China plays dirty. So they’ve already announced investigations into Apple and Alphabet. During 2018, Tesla factories suddenly had fire inspections and were cut. So there are some definite risks to margins here as well as to inflation.

Lucy Meagher

So yeah, think that’s certainly a very interesting point in terms of the very real ramifications of this political hot potato at the moment. If we then take a step back and look a little bit more broadly outside of the US, what are other major events or focal points that you think we should be looking for?

Tim Rocks

So it’s definitely the retaliation side. I mean within the US I would say that the risk is going to be most acute probably for the next month. the next month is absolutely critical. Not just because the major tariff announcements seem likely to occur around early April, but also because the budget negotiations are coming up in coming weeks basically. So Trump will probably only have one chance to get a bill through Parliament, through Congress and the Senate and this will be now and so what he’s able to achieve on tax cuts and spending cuts we’ll find out but of course there’s the risk that those negotiations go badly and that you get a government shutdown you get a bond market reaction anything sort of could happen which sort of kind of goes to our point around whether these risks are effectively priced into market because really as we think like the risk is really very, this policy risk issue is very, very acute right now.

Lucy Meagher

Yeah, I think looking at those risks and whether they’re priced into markets is a really good segue to bring you in Max. So if we look at, given everything that Tim’s just said about the risks and on the macro front and then we that against the US market. So we’ve enjoyed terrific runs in equity. S &P’s had a terrific run in the past 12 months and if we drill down again, the Magnificent 7 as a group of companies within that has performed close to 40 % in the past 12 months. So given that backdrop, do you think these risks are being priced in?

Max Casey

Yeah, and hi, Lucy and Tim. Yeah, I don’t think they’re adequately being priced in and we’ve been quite vocal on this point and we’ve been writing about this a lot that the market does seem to be discounting certainly the risks around the economic costs of tariffs, and the potential hits to sentiment and confidence that come from geopolitical volatility and then to kind of couple that with some soft economic data that we’ve recently kind of had flowing through, in particular around the US consumer in recent weeks. And that has kind of created this hotbed of volatility, particularly within US markets, because they are priced so expensively. leading up to this sell-off, the S&P 500, it was trading around 22 times forward earnings. And the only time that it had really been trading up around this level was in the period before the tech rec. And we know how that unfolded. And added to that, we had some pretty lofty earnings expectations priced in to markets as well. So the broad market was thinking the S&P 500 would grow earnings at about a 12% compound annual growth rate over the next three years. Now of course there’s some kind of key drivers behind that. The tech sector in particular had been a key driving force in the Magnificent 7. We know how strong they’ve been over the past 12 months. And they’re really the ones now that are leading the correction. So the peak and troughs, and again at the time of recording this, the S&P 500s, about 6% lower from its all-time high. But the Magnificent 7 as a group, they’re sitting around 15 to 16% lower from their peaks. And that’s only over a week’s worth of real carnages as well. So that can certainly get worse. It can go lower from here, just simply because again, the starting point of evaluations is so high, and some adjustments may need to be made to those underlying earnings expectations. In contrast, if we think about the global investment universe, the best performing markets year to date have been those ones where sentiment, where confidence was actually really, really poor. So the Chinese equity market has been the best performer year to date, that’s been driven by this renewal in Chinese tech names and the emergence of DeepSeek and effectively the investment community becoming aware that they are a powerhouse in this space and it’s not just the Americans that have AI tech. And then the other regions being Europe. So European banks in particular have been very, very strong after almost a decade of underperformance. And that’s really been stemmed by, you know, some better than expected economic performance. You’ve had a surprise election result in the US, which is, you know, apparently meant to drive a wave of fiscal stimulus and activity as well. So I think that just kind of shows you that where expectations or where sentiment is very low, you can get some really outsized returns into some really short periods of time if that sentiment does change pretty quickly.

Lucy Meagher

Yeah, okay. I mean, from what you’re saying, it sounds, you know, we’ve had one relatively fully valued market seems to be an opportune time to take some profits. And then, you know, on the other side, you know, Chief Investment Office has been saying for some time around, you know, broadening out of equity returns and a rotation into other parts of the market. You mentioned there a couple of those, you know, if we are to take some profits from the large cap US part of the market, you know, what should we be doing with those proceeds?

Max Casey

Yeah, so I think the key message at the moment is to be patient. We have been raising some cash in recent quarters and if we look across our broad asset allocation recommendations, we are overweight cash just because we couldn’t get comfortable with those valuations and those assumptions priced into the US market. So we are kind of continuing to be patient with that cash. As Tim said before, the headlines are just going to continue to write themselves for the next few months. There’s going to be announcement after announcement around tit for tat tariff wars and that will create volatility. Again, it will create uncertainty. And so I do think we will get plenty of opportunities to deploy that cash into equity markets. If you asked me today where I think the most attractive area to deploy cash was, I would say emerging markets on the back of know, Chinese policy announcements and, you know, the awareness around Chinese technology, DeepSeek’s endorsement of AI. I think that is a trade that has a lot of legs. And even though, you know, we’ve seen a lot of price action in the short term, that is certainly one that could withstand the test of time. Another area that we think’s pretty interesting and we’ve been talking about it a little bit, is Japan. Tim’s written about this a couple of times, but Japan’s in an interesting stage where it’s finally got some inflation to return to its economy, interest rates are progressively rising, real wages are turning positive and that should support consumption. But then you’ve also got these really interesting corporate governance reforms from the Japanese stock exchange which is promoting better use of cash proceeds and returning cash and profits to shareholders. And so we’ve seen that being really well responded to by markets. So that’s certainly one that looks interesting from an equity perspective. The other one that we’ve been speaking a lot about is this US small and mid cap trade. That’s one that’s been certainly volatile over the last couple of weeks. Trump’s been the key driver of that and uncertainty around CapEx plans and business investment. That’s not to say that that idea, that trade, no longer holds. We still think that middle market, traditional US kind of industry will be benefited from Trump’s policies, they will just be over the longer term. So if we think about corporate tax reform, we think about deregulation in energy and financials, these will promote efficiencies within kind of key industries as well. The caveat to that is I think it will be a little bit of a bumpy ride in the near term. Small caps, mid caps, they’re high beta. They move around a lot and they’re dictated to by broader market moves. So that is one that might be just be a little bit of a bumpy ride, but we still see that key thesis intact over the long term.

Lucy Meagher

So that’s, yeah, you’ve raised some suggestions around, I suppose, from equity markets into other equity markets. What about if we look at other asset classes? given the current elevated interest rate cycle, is there opportunities in credit? Is that where clients could sit and wait rather than being in cash? How are you viewing that?

Max Casey

Yep, yeah, so fixed income and credit in particular sounds, it’s been our key core, it’s been our key overweight within our asset allocation for the last 18 months and that’s just been driven by the repricing and interest rates, higher elevated, higher all in yields. And so that still remains. We think credit in particular, Aussie credit, looks like a really interesting place to be. It should be immune from any know, moves in interest rate expectations, credit quality from major issuers, such as the banks, such as the major insurers, is still really positive. And the most recent reporting season supported that as well. And if we just think about the yield differential between Australian credit versus Australian equities, it’s still really supportive of that trade. you we can get to two and a half times more income from a CBA bond than we can from the CBA stock from its dividends. So that’s one that we continue to really bang the table on and it should ensure that client portfolios are durable and they’re able to withstand the volatility that we’re gonna experience within equities over the short term as well. We’re still seeing some really interesting opportunities in private credit, albeit, the risk associated with those names is slightly higher and we are monitoring credit quality and underlying conditions very closely, but it is still one that we can pick up really attractive yield levels and that can contribute to the overall portfolio return really effectively. So we are really supportive of private credit, in particular, like global private credit issuers rather than kind of domestic real estate focused private credit issuers, and then kind of more broadly in the alternative space as well. We’re still seeing some really interesting opportunities, particularly in infrastructure and private equity opportunities. So these asset classes have been really strong performers for us over the last 12 months, albeit it’s been less than equities, but we haven’t endured anywhere near as much volatility. We’d expect that to certainly persist over the medium term. We’re still very confident that most of our underlying infrastructure managers can deliver returns in the range of 8 to 12 percent. They have really important characteristics around defensive cash flows, inflation protection, but then they’re also really at the coal face of what’s going on with renewable energy development, around energy transmission, and compute loads as well. So that’s one that we’re really comfortable with. And then, as I said, the private equity scene still looks really attractive. Valuations within US private equity, while they’re elevated relative to history, they’re certainly nowhere near the same level as what traditional equities are as well. So we think that’s an interesting way to play the strength of the US economy over the long term and some of those kind of corporate supportive policies that Trump will bring in, albeit without taking the valuation premium that you’re getting within US equity markets as well.

Lucy Meagher

Thanks Max, I think you raise some great options there in ways that we can adapt to what’s happening in the current market environment and make sure that our client portfolios are being responsive and flexible to that. And the other point I’d just add is that when we make these calls, largely they’re at the margins, I think it’s important for clients to understand that we’re not saying an outright sell on US equities over a long term for investors. There’s still a very attractive return profile. These are more opportunistic ways to, as I say, adapt to current market environments in your portfolio. So thank you, Tim and Max. That was very informative session. I hope the information doesn’t date too quickly. There’s a lot happening headline to headline at the moment, but we hope that for our clients and those listening today, that’s been able to provide a bit of insight into how we’re seeing things. So thank you for listening and we’ll chat to you again next time.