Personal Wealth Management Monday Espresso Podcast

Monday Espresso Podcast - 10th February 2025

[00:00:00] Nathan Sweeney: It is Monday, the 10th of February. Today, I'm joined by Andrew Shaw, investment analyst within the team for fixed income. It's great to have you on the show this morning, Andrew. Good morning and welcome.

[00:00:10] Andrew Shaw: Morning Nathan.

[00:00:11] Nathan Sweeney: So Andrew, let's start with a quick recap of performance for markets last week.

[00:00:15] Andrew Shaw: Markets were generally up last week. It was a good week for equities. The only detractor really across the G7 was Japan. Japan was down for the week.

[00:00:24] Nathan Sweeney: So good to see some good performance coming through from markets last week. But we did have a lot of noise in the media around trade and tariffs and tariffs being imposed and then not being imposed.

[00:00:36] Nathan Sweeney: So quite unsettling for investors generally. So I wanted to bring this back to basics. So let's start with what is a tariff?

[00:00:45] Andrew Shaw: It's a good question. At a very high level, a tariff is a tax that's imposed by a government on imported goods and services by making products that are made outside the country more expensive.

[00:00:56] Andrew Shaw: Tariffs ultimately aim to protect domestic industries and generate revenues for that government.

[00:01:02] Nathan Sweeney: Okay. So we've obviously got tariffs are now being implemented on some countries. So who's essentially in the firing line when it comes to tariffs?

[00:01:13] Andrew Shaw: Well, last week, last Saturday, it was Donald Trump imposed tariffs on Mexico, Canada and China.

[00:01:20] Andrew Shaw: And those tariffs were 25% on Mexico and Canada and 10% on China. So that's who was in the immediate firing line. He has threatened the EU and the UK with tariffs too.

[00:01:32] Nathan Sweeney: Okay. And the interesting thing is obviously that over the weekend, these tariffs were expected to be put in place by the 4th of February.

[00:01:41] Nathan Sweeney: That didn't happen. So why the rollback?

[00:01:45] Andrew Shaw: So some people see the tariffs as a negotiating tactic. I mean, Mexico promised to send 10,000 soldiers to the Mexico US border, and this was to stop the flow of fentanyl and illegal migrants across the border. And similarly, Justin Trudeau has announced that $1.3 billion dollars are going to be put in place to create a border plan.

[00:02:05] Andrew Shaw: Which is going to include a joint US Canadian task force, and that's to combat organized crime, and again, the floor fentanyl across the border.

[00:02:15] Nathan Sweeney: Okay, so I think that really is a good example of, you know, the negotiation tactics which Trump likes to employ. So, coming out with obviously outlandish statements like 25% tariffs, and then using that as a tool to negotiate exactly what he's looking to do.

[00:02:31] Nathan Sweeney: So kind of an interesting takeaway from that, but I did see some of the data out this week. We did have the trade deficit widened. So ultimately it just means that the US is buying more stuff from other countries than they're buying from the US so the trade deficit is still an issue, and it's something that Trump will look to address.

[00:02:52] Nathan Sweeney: So I think that really kind of leaves China, because you mentioned the tariffs were not put in place for Mexico and Canada, but they were for China. So how do we expect the relationship with China to unfold when it comes to tariffs?

[00:03:06] Andrew Shaw: Well, it's a good question again. The 10% tariff on imports from China was for a number of things.

[00:03:13] Andrew Shaw: However, China's come out and now responded in a what is seemingly a trade war and they've imposed tariffs of 15% on coal and liquid natural gas from America, 10% on crude oil as well. And then on certain items like farm equipment and certain cars, so they're going to be implemented from the 10th of February.

[00:03:33] Andrew Shaw: So we'll see how that plays out.

[00:03:35] Nathan Sweeney: Yeah. And. I think that, you know, one of the questions we had coming in from clients this week was around, the potential impact that tariffs could have. Would they be inflationary? Is it something we need to worry about? And yeah, I kind of think our key takeaway from that is that there's only one real question investors should be asking is that, will these tariffs lead to a recession?

[00:03:56] Nathan Sweeney: The reason I say that is because if we look at data going back to 1928 and if we
look at the S& P specifically, we've had declines of 10 percent or more in a calendar year only on 12 occasions. And if we look at those specific occasions, nine of those 12 declines were caused by US recessions. And, you know, two of them are actually linked to World War II and the most recent, which was in 2022, was linked to everybody thinking there was going to be a recession because of rising interest rates, which rose at a really fast pace to tackle inflation. So when we actually look at the data in the US and we look at the economic growth that remains stable, unemployment is low, oil price is pretty low, so there's no sign of a recession.

[00:04:40] Nathan Sweeney: So I think our takeaway from this is that clearly we'll monitor the impact of tariffs, but there's no need for concern at this point, because it doesn't look like it's going to create a recession. Now, a lot of focus there on the US, but there were obviously other regions releasing data during the week.

[00:04:56] Nathan Sweeney: And I suppose the big data point was the Bank of England. So what's your takeaway for that?

[00:05:01] Andrew Shaw: Well, the Bank of England cut interest rates from 4. 75% down to 4. 5%. And so this is good for UK borrowers and companies. One thing to note from this was that the monetary policy committee voted seven to two in favour of this 25 basis point cut.

[00:05:19] Andrew Shaw: However, the two votes were actually for a 50 basis point cut, which is the sentiment seems to be turning more dovish at the MPC.

[00:05:28] Nathan Sweeney: Yeah, okay, that's interesting because, you know, clearly we might get rate cuts coming through quicker in the UK. What have we got coming up this week?

[00:05:35] Andrew Shaw: Now there's inflation data coming out of the US this week, along with GDP data for the UK, retail sales data is out on Friday in the US as well. In the EU, we have GDP growth rates as well, so a few key indicators coming out this week.

[00:05:53] Nathan Sweeney: Yeah. And a couple of companies still releasing earnings. I think my kids will be focused on Monday because that's when McDonald's releases and that's now their favourite restaurant at the moment in time. So thank you for joining me on the show today, Andrew, obviously there's a lot happening in markets.

[00:06:05] Nathan Sweeney: So, if you do have any questions and you want us to bring them up on the show, send them in and we'd be more than happy to pick them up. Have a great week, everybody.