With uncertainty a major factor in markets, Ian Rees, Head of Multi Manager Funds, Premier Miton Investors, outlines the eight dominant themes on which the team have been having deliberating in recent weeks.
Since the start of the year there has been more turbulence affecting financial markets, much resulting from the raft of executive orders emanating from the White House. A lack of clarity is creating considerable uncertainty for businesses and financial markets alike. At such times, it can pay to take a more elevated view and avoid being buffeted by very changeable data points. With that in mind, what are the dominant deliberations that we have been having as a team?
1. Destabilisation
With the inauguration of President Trump in January this year, we have seen the emergence of extreme policy uncertainty. The extent of executive orders, along with the manner they have been presented, have caused significant angst and ambiguity for US trading partners and global financial markets. It has been a difficult backdrop for companies to plan, thereby reducing the availability of forward guidance from many. This feeds into market uncertainty and increased volatility. While it may be the case that President Trump is front-loading his term in office with his most difficult policies first, his retorts that “…we are just getting started…” are a warning that we should not expect a quick return to calmer times. As such, being deliberate with diversification and being conscious in the use of a wide range of alternatives assets to bring stabilisation to a portfolio, remains a key consideration.
2. Deglobalisation
Part of the policy shift for the new US Presidency appears to be an active promotion of ‘onshoring’, alongside the imposition of tariffs to promote greater US manufacturing. This has created turbulence in the relationship between the US and its closest trading partners, Canada and Mexico, as well as increasing the frictions with China and Europe. This is causing governments across the world to negotiate new trading arrangements with the US and explore forging new trading relationships away from them. In addition, it is not just the supply of goods being restricted, but also the supply of labour too with the loud desire to secure borders and limit the influx of immigration. This could curtail much of the deflationary influence provided by a growing global labour pool of the last 20 years or so. With trading frictions having increased since the start of the year, the possibility for supply chain disruptions has also risen, so the threat of greater volatility in the inflation outlook and longer duration positions remain.
3. Deficits
We saw with the debacle of the Liz Truss budget that lenders, even to governments, will have their limits in supporting reckless fiscal spending that remains unfunded. As James Carville (political adviser to President Clinton) once opined, the bond markets can intimidate everybody! With government deficits having ballooned following the onset of Covid, the emergence of greater pressure for countries and regions to spend more on their own defence and national security measures, the period of grace in continuing their upward expansion appears at an end. For the UK this has meant Chancellor Reeves has to manage to a borrowing constraint while still seeking to stimulate growth to provide more headroom. In the US, the US debt ceiling is an issue that has largely remained dormant since the 2013 debt ceiling crisis. With the launch of President Trump’s ‘Big Beautiful Bill’ promoting tax cuts and ongoing fiscal spend, US Treasury yields have moved higher to signal their dislike toward the indigestion of new issuance if deficits are not controlled, alongside the volume of re-issuance required. These considerations warrant careful consideration for the extent of duration sensitivity being taken in relation to government bond exposures, especially US Treasuries.
4. Debt costs
Since 2023, the financial markets have been sensitive to the changing expectations of interest rates, feeling the sole preoccupation of markets at many points in this period. With the advent of tariffs, the volatility of rate expectations seems certain to persist, especially given the inflationary consequences are not yet settled. The sanguine view is the permanence of tariff induced inflation is limited by its one-off price impact. However, we also acknowledge that potential disruption to supply-chains caused by tariff and trade restrictions can frustrate that view. In addition, if workers seek higher wage settlements in response to increased prices, then inflation can be more problematic. Of course, the inflation outlook is intricately linked with the growth outlook, so any reduction in demand caused by higher prices may feed deflationary outcomes. The result is that the outlook for interest rates will remain volatile, with the additional concern that any rise in rates has a reflexive action on growth and a greater depressive effect on smaller companies. Given the uncertainties here, we think careful diversification of risk assets will lessen the gyrating forces for portfolios.
5. Devaluation
It has been jubilantly reported that US markets are in positive territory since the inauguration of President Trump in January, despite the turmoil credited to him over recent months. While this is true, it should be recognised that foreign investor returns are approaching double digit declines due to the value of the US Dollar. This is suggestive of an international verdict on his policies and how they are being implemented, despite the more elevated inflationary outlook maintaining US rates and the interest rate differentials. We must remember that a weaker US Dollar is being pursued by the Trump administration. When we couple this with concern around ‘retaliatory tax’ clause 899, being an attempt to weaken the appeal of US assets to foreign owners, we are paying attention to the technical headwind that could develop from growing distrust and appeal of US denominated assets resulting in capital outflows that can continue to weigh on the US dollar. The bottom line is investors should always need to think carefully about taking on the currency risks and volatility involved in moving away from Sterling assets.
6. Decoupling
As we have already seen this year, the US is forging their own path with an ‘America First’ agenda, an isolationist policy stance in stark contrast to the harmonised policy approach that occurred in the wake of Covid. This is seeing a greater divergence of monetary policy as the Federal Reserve has shunned any action, while other regions have been able to cut rates. It is interesting to note that the tremendous surge in US assets. has seen a changing of the guard in terms of equity market leadership. Given this greater regional divergence and signs of a possible reversal in the unbridled lust for the US, broader equity diversification and a return to favour for active management, can emerge as real beneficiaries.
7. Deregulation
It would be wrong to conclude that the outlook is universally downbeat or cautious. One area of opportunity being promoted by the US administration is a move to deregulation. The loosening of rules, regulations and restrictions that shackle and constrain businesses will have a stimulative effect on the economy and the outlook for returns. The only danger this presents is one of over-heating many years down the line if growth and corporate ingenuity get out of hand. So being too cautious can result in missing out on great opportunities from an economy that continues to remain buoyant.
8. De-equitisation
This is a trend more familiarly referred to as ‘buybacks’. It has been a familiar feature for US investors over many years. It sees companies using excess cash-flow generation to buy their own shares. This reduces the number of shares in issue and results in a boost to earnings per share growth. However, this phenomenon is not just restricted to the US market. Buyback activity is notably evident in the UK market currently, having a very positive impact resulting from much lower valuation levels of UK companies. We also see this trend in Europe as well as Japan too. With healthy dividend yields from these markets, the combination of buybacks is providing a very healthy shareholder return outlook to investors.
While there is considerable distraction for investors in looking at market news, it is worth remembering the investment horizon that financial objectives are aiming toward. When managing our portfolios, we start with a return outlook for the next one to three years, rather than believing we can time the market from the multitude of random and temporary moves that are seen. However, worthy active management also requires positive tactical changes to take advantage of market opportunities that arise in the interim. There has already been such opportunity this year on a few occasions, with the prospect that ongoing volatility will allow that to persist for those with a disciplined process to take advantage of them.
Important note:
This information should not be relied upon by retail clients or investment professionals. The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors.The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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