The Impact of Tariffs on Global Markets
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SIMON BROWN: I’m speaking with Philip Short, a global portfolio manager at Flagship Asset Management. Philip, thank you for joining me. The tariffs introduced during President Trump’s administration are somewhat unpredictable. They fluctuate, but there are definitely more of them compared to the Biden administration.
Initially, the market’s reaction seemed somewhat indifferent. However, we’ve observed rising volatility with significant upswings followed by a downtrend. It appears the market is finally recognizing these changes and, to be honest, showing some concern.
PHILIP SHORT: Absolutely, Simon. A key observation from the latter part of last week was the data emerging from the US indicated substantial uncertainty. The University of Michigan’s surveys revealed that US consumers anticipate higher inflation and are reducing their travel expectations. Credit card spending appears to be declining, which might reflect increasing apprehension.
SIMON BROWN: Initially, the expectation was that the impact would primarily affect supply chains or specific sectors, such as the US automotive industry, where vehicles may touch multiple borders during production.
However, the situation seems broader, affecting both retail and business sectors. For instance, Delta Airlines recently noted a decline in bookings.
PHILIP SHORT: Yes, Delta specifically cited a noticeable drop in demand from government employees and contractors. It appears that the consequences of changing dynamics are starting to manifest.
Additionally, US Treasury Secretary Scott Bessent has indicated that there is a strategic focus behind these tariffs, which isn’t solely about generating revenue but also about ensuring America’s supply chain security and encouraging domestic manufacturing.
SIMON BROWN: Many individuals are reacting as if the situation is dire, yet there are still viable investment opportunities. You recently shared some insights on this, highlighting companies with strong domestic market presence and adaptable supply chains to navigate these challenges.
PHILIP SHORT: Correct. If you want to remain invested in the US, there are options available in the UK, Europe, Japan, and other regions. A crucial point regarding tariffs is that the prices of those affected goods will rise ultimately.
Conversely, energy prices for oil and gas have seen a decline of 10% to 15% since Trump took office, which is advantageous, as consumers are facing significant energy costs. Currently, this contributes to deflation, and Bessent has announced intentions to increase oil-equivalent energy production in the US by three million barrels per day.
Furthermore, yields on US ten-year treasuries—ties to corporate borrowing and mortgage rates—have decreased by 0.15% in the past two months. Borrowing costs are trending down and expected to continue in that direction.
Thus, it’s not solely an inflationary scenario. While the prices of affected products rise, energy costs and borrowing expenses are decreasing.
SIMON BROWN: You mentioned Europe, which I view as a chronic underperformer. This might be a bit unfair since we’re comparing it to the US, which has consistently outperformed over the past decade. My impression of Europe is that while it may not have as much of a tech orientation, it does host excellent companies with appealing valuations.
PHILIP SHORT: Indeed, particularly in Germany, where legislation has capped their debt-to-GDP ratio at around sixty-something percent. Unlike other nations, they haven’t deployed aggressive fiscal spending, which has limited their ability to stimulate their economy. A considerable segment of their economy faces stiff competition from China, especially in automotive and manufacturing. Technology seems the most promising area for rapid growth due to its scalability.
Nonetheless, to revisit your question, there are still outstanding companies in Europe; it simply requires more diligent searching to uncover them.
SIMON BROWN: Is it accurate to suggest that the tech sector is relatively insulated from tariffs? This likely varies by company. For instance, Apple might feel the pinch since much of its production occurs in China, despite Foxconn expanding its manufacturing footprint globally.
And, of course, if you’re operating in consumer-facing areas like advertising—think Meta or YouTube—you may nonetheless be affected despite being categorized as tech.
PHILIP SHORT: That’s a valid observation. However, regarding our earlier discussion about bringing manufacturing back to the US, Apple recently announced a $500 billion investment over the next four years to facilitate this shift. Likewise, TSMC, the leading semiconductor manufacturer, has committed to investing $150 billion in US manufacturing facilities.
It appears they are making early strides in successfully relocating manufacturing back to the US.
SIMON BROWN: There’s a notion that, despite the headlines warning of market volatility and significant declines, what we’re experiencing might just be background noise. It boils down to the need for a diversified portfolio across various geographies, sectors, and asset classes, without overly fixating on short-term fluctuations.
PHILIP SHORT: Indeed, especially during downturns. While there will always be short-term fluctuations, one must focus on valuations. Currently, the US S&P 500 is trading at around 21 times forward earnings, a level significantly above its historical median and average. As uncertainty increases, investors tend to scrutinize valuations more closely, leading to heightened volatility in the market.
SIMON BROWN: I appreciate that insight. It seems that the uncertainty compels us to pay closer attention to those elevated PE ratios and similar metrics.
We’ll conclude our discussion here. Thank you, Philip Short, global portfolio manager at Flagship Asset Management, for your time.
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