It’s a mile a minute lately, isn’t it? Not a day goes by without something fairly substantial dropping on markets. Yet, in the main, investors are shrugging them off.
The US has knocked out some more trade agreements and hit other nations with punitive tariffs to bring them to the table. Well – as we’ve mentioned before – these aren’t trade agreements in the traditional, or probably even legal, sense.
They are memoranda. Loose agreements by nations that are roughly equivalent to a handshake agreement between neighbours. You clean my car and empty my letterbox when I’m away and I’ll invite you to my backyard barbecues. That sort of thing.
OK, that’s a bit glib. But it’s not far wrong. These deals have force because the US is levying tariffs and other governments are negotiating, changing policies and accepting them rather than challenging them. It’s testament to president Donald Trump’s will and the economic and geopolitical heft of the US that other nations see more risk to themselves in fighting than conceding.
When a new neighbour appears, there’s nothing forcing them to go along with the agreement you cooked up with their predecessor
At the end of the day, without the monopoly of power that comes from a state, all law is civil. That is to say, legal rights are only as powerful as your ability to enforce them. When the parties are states, well, it’s all a power game dressed up as a negotiation. And the US has enough power to get its way right now.
And yet. When a new neighbour appears on the other side of the fence, there’s nothing forcing them to go along with the agreement you cooked up with their predecessor. If you had written it down and filed it in the land registry as a restrictive covenant, it would be different. The car-washing for sausages quid pro quo would need to continue.
Similarly, Trump’s memoranda are not binding beyond Trump’s tenure for either side. Sure, inertia is one of the greatest forces in human history and should never be underestimated. But in the back of everyone’s mind is the reality that these arrangements can be changed at whim and with a moment’s notice. Trump himself has done that enough already. The longevity of these policies is hard to predict.
Messy policy mix, but business conditions are good
Businesses need to consider a timeframe of decades when making decisions about what to build and where, how many skilled staff they will need and whether a nation they plan to operate in can provide them. We will be watching closely to see whether this lurking uncertainty is affecting companies’ appetite to invest, both in production and research and development.
While inflation is still above the central bank’s target, we think the world is still structurally disinflationary
Trump’s ‘America First’ platform of fewer foreign entanglements, higher tariffs, tax cuts, public spending cuts and lessened regulation was widely signposted ahead of time. Most investors expected these measures to boost American workers, juice consumption, encourage business investment and drive the dollar and US stocks higher.
However, there was always the other side of the coin. That these policies – along with a clampdown on immigration, both illegal and legal – could refire inflation, clog up supply chains and generally make it harder or more expensive to do business.
This messy mix of policies – where it’s difficult to know which countervailing forces will prevail – leaves a lot of tinder around for people to create whichever campfire tale they want to tell. As I write, the pendulum of worry is swinging away from tariff-fired inflation and toward recession.
We’re generally optimistic about the economic environment. We think recession is unlikely, especially with everyone and the Fed’s dog laser-focused on jobs growth and the unemployment rate. And while inflation is still above the central bank’s target, we think the world is still structurally disinflationary.
Regardless of the shorter-term hurdles chucked in its way, technology – particularly AI, but not solely because of it – is continuing to make it cheaper to get things done. We think that should help keep inflation in check even as rates fall.
David Coombs: Managing risk in the face of volatility
Take Schneider Electric, a French engineering company that we added to our portfolio recently. Schneider supplies the kit and know-how for maintaining and improving electrical circuits big and small. These range from site-specific needs for big power users, like hospitals, factories, data centres and the like to electricity generators and the power grid itself.
As the use of electricity continues to increase, ageing grids around the world need serious investment. Not only that, but with more energy sources and greater variable loads, the infrastructure needs to be that much smarter. We think Schneider is well placed to help deliver these important improvements.
Still, there are always risks. And they come out of the wings like raptors in the stage show of Enron. We can’t know the future, and there are certainly a lot of changes flowing through the global economy right now. With that in mind, we have been reviewing our diversifying and defensive assets, too.
After selling most of our gold towards the end of last year because of concerns that the price had soared unsustainably high, the yellow metal has continued to forge ahead. Since the beginning of the year, gold has jumped 25% (20% in sterling because of general dollar weakness).
As the use of electricity continues to increase, ageing grids around the world need serious investment
This seems to be driven by long-term changes in how central banks store their monetary reserves: many emerging market nations, most particularly China and Russia, are buying lots more gold than they used to and fewer US government bonds. With this in mind, we wanted exposure to gold, yet we are still aware that the price is very high, historically speaking.
To invest in gold while keeping protection in place in case of a big fall from its high level, we bought the Goldman Sachs 15% Callable Gold structured product. This gives us the return of gold but with complete capital protection if gold falls over its five-year life.
The trade-off is that Goldman Sachs can redeem it at any point and pay us a 15% coupon for each year that has elapsed. Effectively, this caps our potential annual return at 15%.
Investments like this should help cushion our losses should markets take a tumble, while giving us very attractive returns should financial markets continue to press higher in the coming years.
David Coombs is head of multi-asset investments at Rathbones
