353. Tech, tariffs and turmoil: what’s next for investors?

3 April 2025 (pre-recorded 26 March 2025)

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[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. Markets are off to a volatile start in 2025, with tech dominance being questioned, China surprising investors, and smaller companies struggling — is it time to rethink your portfolio?  I’m Staci West and today I’m joined by Darius McDermott and Juliet Schooling Latter for our first quarterly update of the year. Welcome both.

Darius McDermott (DM): Good afternoon.

Juliet Schooling Latter (JSL): Hi Staci.

[INTERVIEW]

SW: Now this is our first quarterly update, but before we look at what’s been happening this year, I just want to rewind slightly to the end of 2024. Technology and North America were the big winners of last year, and probably not a big surprise to many of our listeners, but I wanted to ask, do you think that this dominance of technology US can continue for the year ahead?

JSL: Yeah, well that’s the million dollar question, isn’t it? Managers are quite divided on this. Some this week have told us that it’s the beginning of the end of US stock market dominance, and others say it’s just a blip. And and we’re equally divided on our team. I’m somewhere in the middle. I think that tech and the US were both due for a pullback. Valuations had become really pretty stretched. And I think it will give investors an opportunity hopefully, to discover are there other areas of investment because so much money has just been sucked out of other areas like the UK <laugh> so I think investors might do better in other areas, you know, over the eight, next 18 months or so.

DM: Yeah, I mean, the first observation to make I think is tech is the US, it is the tech sector that has dragged the US and subsequently the global markets over the last number of years. AI — and I do not claim to be an expert, just for full transparency — but AI is potentially life-changing revolutionary event. Some compared it to sort of the industrial revolution, et cetera. And it has been around that AI theme that’s really driven markets in the last near enough two years. If you look at 2024 and 2023, it was really heavily driven by NVIDIA and other AI stocks. Do we think it will continue?

The other thing just worth mentioning with respect to global markets, and I know we’ll talk about this again, was there was a rather significant election in the US at the end of last year and President Donald Trump got reelected. And what we saw straight after that was a exuberance in markets based on some of his policies. So the good policies, deregulation, lower taxes, good for companies, good for businesses is what the stock market wanted to hear in December and from November onwards. And that really did lead to quite a strong year end rally. The other half of the policies, of course are tariffs and the US’ way of treating its neighbours and allies. And as those policies in the calendar year, post the inauguration at the end of January have started to come more to the forefront, actually what we’ve seen is as we’ve sort of alluded to, is a bit of a reversal in US equities go tech stocks because they’re the dominant part of the US index.

So generally anything that goes down 15%, if you’re gonna buy it before you should be thinking about buying it now. Do I think there will be long-term value in tech and US equities? I do, but the one question I, again, way above my pay grade, but the big Mag 7 are investing so much money in R&D to try and win the who gets AI, generative AI first, I mean, they’re pouring in hundreds of billions. I don’t think there’s gonna be what those of us who invest call a return on equity. So every pound you spend, do you want to get one pound and something back in returns either in productivity gains or whatever, you know, more sales, more factories, more plants, more product new lines. I don’t think the hundreds or I mean hundreds of billions being spent on AI research itself will necessarily have a high return on equity.

So the other thing which is a bit boring, and I’m gonna mention it for most answers is valuations. So the US market is and was at the turn of the year at the upper end of its long-term valuation history. That in itself doesn’t mean it can’t keep going up, but what it does mean historically is your future returns over the next decade tend to be lower when the index itself is at a high starting valuation. So yeah, there’s been a bit of a sell off in in the US and tech because they were the more, they were some of the richer parts of the US market.

SW: So for our listeners in the UK in particular, we’ve got the end of tax year at the end of this week. And given that story, is now a good time to be kind of rethinking that global diversification in a portfolio. If you’ve got lots of global funds focusing on tech and US [equities] should you be looking to consider other regions? I can say with such a high degree of confidence, I know one of you is going to say UK smaller companies, so <laugh> is this the time to be looking to add more of those areas? Because global has maybe peaked a little bit in the US?

DM: Maybe I should just give a bit of background and then Juliet can, you know, I’ll cross the ball over and Juliet can head them into the open goal, so to speak. But the S&P 500, 37% of the S&P is the Magnificent 7 stocks. I don’t think people are fully aware of quite how concentrated the S&P is. And to put it in another way, the top five stocks in the MSCI world index is 20%. So if you are buying as a lot of people have global or US trackers, you are really pointing one way. And as we may have already or not touched on in the first question, just at least be aware of that. So what I think this year is showing it is maybe then there are other markets for consideration. Jules, I will then now be quiet and let you take the easy wins.

JSL: You could just cut and paste my answer, Staci, from previous podcasts, yes, you should consider smaller companies. Yes, I’d urge people to look at their home market. I mean, it’s so unloved and it’s so cheap. We spoke to one seasoned sort of UK manager this week who’s been doing UK equities for donkeys years. He was talking about, you know, the discount between public and private UK companies is the widest he’s ever seen. And you know, the UK economy might be struggling, but we do have some good companies here and they just fly under the radar because no one has wanted to invest here. But you know, there is evidence that overseas investors are now looking at it with interest and I think fingers crossed, we might see the tide turning this year. So buy now while stocks last.

SW: Well, listeners who want more on the UK story and particular M&A activity, Darius did the episode last week with Jeremy Smith, so that is worth a listen if you want more into that story. But we are going to move right ahead to another area, which I think is going to divide the two of you — not as agreeable as UK smaller companies — and that is China. So another winner last year up nearly 14%, but it’s a dividing topic for the two of you as loyal listeners will know. It is up over 8% year to date. So our fortunes turning in China are things looking up?

DM: So when I said valuations a few minutes ago, I’m not trying to be super clever. I might actually be super clever, but I’m not trying to be. When the US index was expensive and the Chinese index at an index level, Chinese companies were cheap, very, very cheap. In September, I believe there was an announcement of a big stimulus package and Chinese equities roared off. They then pulled back as the market struggled to appreciate whether the stimulus was enough. And of course the tariff word was beginning to get much more prevalent into the US election and clearly post.

But in that period, China was up a really fairly handsome amount and I think, I dunno if it’s been a very strong week, but the MSCI China is actually up 18.1% year to date. And again, I’m not trying to sort of sound smug and super clever, but it was based on valuations. They were cheap. Sometimes you don’t need a catalyst. And interestingly, something I stole from our colleague James, the two of the countries with the worst threat on tariffs, so China and Germany, and they’re the two best performing markets this year. So sometimes valuations matter more than the noise and the rhetoric surrounding.

So China for me is still cheap and I still think over a three, five year period we can make good money. But I like all these things expect we will continue to see volatility and maybe all the gains that, that we sit as we’re recording at the end of March, may gone by our next podcast, who knows.

SW: I think if that’s true, I’ll bring it up because I’ll let Juliet have her moment.

JSL: Yes, please do Stacy.

DM: Just on valuation basis, I know Juliet feels that it is broadly uninvestible, China, now I don’t take quite such a extreme view.

JSL: Well, yeah, I mean, okay, I’ll give you that Darius. It is one of the best-performing sectors over the past six months. But you know, I’m still not a fan. You know, I think the government’s too unpredictable. You know, they can wipe out investments if they so choose and there’s still I think a lack of consumer confidence there and there’s, you know, the ongoing trade war with the US and so forth. So yes, you know, it is doing well. And I take your point about valuations it’s still not expensive, but it’s somewhere I’m afraid, I’m still not keen on.

SW: Well, let’s talk about a region that you are keen on, but has been a under-performer. So India one of the worst performing sectors years date down roughly 9%. Now you are a long-term fan of this country and the story in India. So what is going on? Should investors be worried or is this just yet another opportunity to buy and diversify away from some of those global names? What’s been happening?

JSL: Well, obviously Staci, it is, it’s just another buying opportunity.

SW: <Laugh> Obviously

JSL: <Laugh> I mean, India has had a pullback. So it was sort of Q3 growth last year was lower than expected, but then, you know, it bounced back in the fourth quarter, core quarter to sort of 6.2%. You know, that level of growth is something that Stama can only dream of <laugh>. And the long term structural story remains intact. You know, government CapEx is picking up as well. But, you know, India’s doubled its GDP in the past 10 years. It’s done better than all the other G7, G20 economies, and it’s actually on the cusp of overtaking Japan as the world’s fourth largest economy. And I can give you some short term information, you know, if you want <laugh>.

So foreign buying has picked up in recent days, and the in India sector is back to being the top performer over the past month. And if you really want to be short term, it was up 4% last week. <Laugh>. So it’s not, it’s not an area where you’ll get a smooth ride, but you know, as I’ve said here before, you know, I’ve invested there for over a decade and I’ve just fought and held. And you know, it’s a bumpy ride, but over the long term it’s done pretty well.

DM: Well, Jules and I have worked together for quite a long time and we try hardest not to agree where at all possible, but on India, I’m afraid we do agree as we do on UK small companies. Yeah, I think the long term story, as Juliet has highlighted, is absolutely true. But valuations have got a little bit ahead of themselves, having had a very strong stock market for a number of years and things just slow down. You don’t take when valuations are at peak, you don’t even need bad news. You just need a stopping or a reduction of good news. So yeah, long term we’re both big believers in India and have invested personally and, you know, by the range of VT Chelsea Managed Aggressive and Balanced funds have exposure to India as we like it so much.

SW: Well, we’ve covered quite a few areas already but there’s one more that I wanted to get into, which was US smaller companies, so again, one of the worst performing sectors here to date down roughly 10%. We’ve talked about valuations for UK smaller companies, but my question is the story in US for their smaller companies there, is it a similar valuation story of being unloved or is this a knock on effect from Trump? What’s happening there?

JSL: I think the underperformance of US smaller companies has sort of rather taken everyone by surprise because as Darius mentioned you know, Trump, despite all his, many, many folks you know, he was viewed as sort of business friendly, but he’s rather spooked markets with, you know, always his sort of wide ranging policies. So, you know, tariffs are very inflationary for a start. You know, there’s funding cuts, immigration crackdown, slashing of the government workforce. So the, you know, people are concerned that this is gonna damage the economy.

And one of the interesting things is how much consumer confidence has declined. The American economy is built on consumerism and a nervous consumer is one that doesn’t spend. There’s also, you know, his treatment of Zelensky and talk of taking over Canada has made everyone rather nervous. You know, he’s something of a loose cannon. People are, you know, very concerned, you know, a large proportion of Canadian tourists usually visit the US. And that’s set to decline. Plus the US imports electricity from Canada, which the Canadians have now put a 25% tariff on in this, you know, tit for tat tariff war. So all in all, he’s brought a lot of instability and businesses won’t invest during instability and markets don’t like instability.

DM: No, they don’t. And again, I wonder when you look at US smaller companies actually, US smaller companies have done, okay, last time we checked they were at a slight premium to their long-term average. But the big issue here is they are hugely overshadowed by US mega cap companies, which have gone and dominated the market and are trading at, I mean the S&P’s trading at like record premium, certainly on a cyclically adjusted P/E, whereas US world companies are just gently okay. And you can see if you look at performance, it really was at or around the time of the election in America, there was a real uptick in US smaller companies as they like the sound, deregulation, lower taxes and all that good stuff. But since the inauguration, it’s been a different story and say that market uncertainty caused by the US president has spooked the US stock market full stop, and smaller companies haven’t been immune.

SW: So we’re getting to the end much to Darius’s joy of today’s episode, but I want to finish back in the UK. So the Bank of England’s interest rate decisions have been a key focus already this year. And I’m just curious of how this has influenced markets, particularly bonds, and what should investors be watching for in the next kind of two or three quarters maybe?

JSL: Well, I mean, the UK and the the Bank of England are in a bit of a tricky position at the moment because you know, the economy isn’t actually doing terribly well. They reduced forecast for GDP due to tax rises, which has led companies and consumers to cut back on spending, et cetera. But, you know, at the same time we’ve got quite persistent inflation. So normally the Bank of England would cut interest rates when the economy was struggling and boost spending and boost the stock market in the bond market. But if it wants to keep inflation under control, arguably it should keep interest rates higher for longer. So it’s <laugh> it’s a bit difficult to say really.

We learned that in February CPI fell slightly more than expected from 3% to 2.8%, but core inflation does remain high. So you know, the Bank of England cut rates in February, but it sort of kept them on hold in March. Markets I think are currently anticipating that rates will probably end the year at 3.75%. But the problem is we’re at the mercy of other sort of geopolitical factors. So I guess investors should be looking out for, you know, the any resolution to the war in Ukraine. Tariffs obviously are quite inflationary. So we’re rather at the mercy of outside factors, I think.

DM: Yeah, I don’t think we’ll get quite so many cuts. The base rate is 4.% as we sit here today. We have just enjoyed, not the budget, but the Spring Statement where the chancellor has told us that that growth is going to be half as good in the UK as was previously predicted. Yes, inflation is stubbornly high, so low growth height inflation, not really, I mean, you’d want to cut rates for the growth side of the ballot of the equation, but you can’t cut rates and fuel inflation on the other half of the equation. So I can see rates maybe being cut, if I was a gambling man one to two times further this year. But if I had to pick one or the other, I’d say one, I think, you know, I’d be surprised if rates finish the year above, sorry, below 4%.

So yeah. What does that mean for fixed income?

Well, we’re getting a reasonable yield now. There’s still a fair yield on gilts, the UK government bonds and corporate bonds. What isn’t attractive is the spread, which is the extra bit you get paid for owning a company debt, a corporate bond over the government bond, that’s called a spread. Now that is very narrow because we’re in fairly benign economic conditions, but the starting all in yield because of the government part, government bond part of that, that yield is fair. And you know, UK 10 year gilt so yielding 4.7% or thereabouts depending on market’s reaction to the statement today. But if you can get 5.5% on a corporate bond.

I met recently with a fund manager who runs a corporate and a strategic bond fund. And I said, well, with spreads being so tight, your job must be difficult. And he absolutely shut me down and said, no, I can find loads of corporate bonds company issued debt with only two and three years worth of duration. That means you are lending them them for two or three years at 1.5% to 2% above the base rate. So he said, if you, as fund managers do, and clearly they’re experts in that area, you know that they can get good returns with shorter duration bonds, which are the bit that are sensitive to rate movements one way or the other and actually get a fair yield, you know, sort of 5.5% to 6%.

So if one has a look around and if we go to the most excellent FundCalibre website, you can search for funds that have yields and you know, there are still funds yielding 5-6%. So yeah, the risk that you are taking by lending to a company over lending to the UK government, that spread is not particularly attractive on a valuation perspective. But the starting all in yield is fair. And if I can get 6% coupon each year, that’s perfectly handsome to for me.

SW: So given that there are decent yields, then should investors be rethinking their equity bond allocations for their portfolio as we come to end of tax year?

DM: I think bonds should be part of most people portfolios. I think younger people at the beginning of their savings journey can probably take more risk than owning bonds. But people who are at or approaching retirement or in retirement who a need the yield, which these government bonds offer, but also historically you get some diversification between equities and bonds. Yeah, I would have no objection to having a fair allocation in the funds that we oversee the VT Chelsea Managed range. We’ve got a decent chunk of bonds of different types, got some emerging market debt, some high yield and some government bonds. We’ve got a decent chunk of government bonds because you’re getting a fair return. And the one thing I do know about government bonds, if something comes up to spook the markets, government bonds are a risk off asset and people pile in and then yields go down and prices go up. So a fair yield and also a bit of a risk off hedge to a portfolio should something nasty come up and spook stock markets.

JSL: Yeah, I mean I largely agree with Darius on that. The one thing I would say is that high yield isn’t so risk off. So if we do see the, you know economy sort of tanking, you don’t necessarily want to be in high yield because high yield does come with higher risk and we’ll likely see defaults increase there. So that might be one area to avoid if we see a sharp economic downturn.

SW: Well, on that cheery note before I start getting kicked under the table, we will leave it there. Thank you both for your time. We went through quite a lot today and a lot of different areas. As I said, we go into more in depth in a number of the things that we did an overview for today in past episodes. So do have a look back through. But again, thank you both and I look forward to doing it again in three months.

DM & JSL: Thank you Staci.

SW: Thanks for listening and for weekly insights from the team, please visit fundcalibre.com – and for weekly interviews with our Elite Rated managers, don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.