Personal Wealth Management Monday Espresso Podcast

Monday Espresso Podcast - 17th February 2025

[00:00:00] Nathan Sweeney: It is Monday, the 17th of February. So today I'm joined by James Athey bond fund manager here at Marlborough. So really excited to have you on the show today. Good morning, James.

[00:00:10] James Athey: Hi, Nathan. Good to be back.

[00:00:11] Nathan Sweeney: So as we all know, there's a lot happening in markets, but I think before we delve into all of the nuances.

[00:00:18] Nathan Sweeney: Let's get a quick recap on how markets are performing. So how were markets doing last week, James?

[00:00:24] James Athey: Yeah, I mean, another good week for risk markets, another good week for equities pretty much across the board, but you know, notable that the performance of European equities year to date has been really stellar.

[00:00:37] James Athey: That's not something that we've been used to, but the outperformance has certainly continued this last week. Bond markets really getting buffeted around by various influences and drivers without really going anywhere.

[00:00:48] Nathan Sweeney: Okay, perfect. And let's look at some of the key headlines of what were actually driving markets last week.

[00:00:53] Nathan Sweeney: And, you know, the big thing that people were talking about was inflation and specifically the price of eggs. So what's going on with inflation in the US?

[00:01:02] James Athey: Exactly, Nathan. Sorry, I couldn't resist. Bird flu is the short answer. So, unfortunately, avian flu has been spreading like wildfire and that's led to, unfortunately, the destruction of a lot of animals.

[00:01:14] James Athey: Obviously, if the amount of chickens reduces significantly, then so does the supply of eggs. And that's seen some really significant upward pressure on egg prices. As you noted, we saw a US CPI report last week and it was, again, notable, that food prices, to some degree, but particularly egg prices, were part of that upside surprise that we saw.

[00:01:35] Nathan Sweeney: Yeah, so obviously inflation is a really hot topic politically and something nobody really wants to go back to, but we have been hearing a lot of talk about tariffs as well. So that could be inflationary. And so Trump has been out again this week talking about tariffs. So what's our take on tariffs?

[00:01:50] Nathan Sweeney: Where are we at?

[00:01:50] James Athey: Yeah. So you know, obviously we've talked about this a lot in the last several months and you know, ultimately our view was always that President Trump saw tariffs as a means to an end. He saw them as a tool. To sort of make advances in other policy areas. Of course, he is focused on the US's big trade deficit and particularly countries where that bilateral deficit is particularly large. But ultimately, as we saw, with respect to the conversation around tariffs on Canada and Mexico, and as we continue to see as he makes further policy and tariff announcements to a significant degree, it seems like these tariffs are intended to bring these countries to the negotiating table to see what he can extract from them for the US in every guise, for the US economy in entirety, but also for US corporations as well.

[00:02:45] Nathan Sweeney: Yeah, so I suppose that's why we've seen this relief rally for European equities. So this big expectation about these big tariffs coming through that really impacted European autos. And clearly that hasn't been the case.

[00:02:58] Nathan Sweeney: We've seen some respite, a respite rally, let's call it for Europe. And then obviously the other big news that's come out this week is Russia, Ukraine and that obviously feeds through to Europe. So what's the latest on that?

[00:03:09] James Athey: Yeah, I mean, again, I think with respect to tariffs, I think the market is to some degree just getting tired.

[00:03:14] James Athey: You're seeing significantly smaller reactions when we see some of these headlines. Again, there' was a big announcement at the back end of last week from president about reciprocal tariffs. But it was then sort of backdated so they're not due to become effective until April. The market sees that as further evidence that maybe it shouldn't be as worried.

[00:03:33] James Athey: But to your point, the other thing that the president has been doing this week, apart from wild tweets in the middle of the night, which obviously he loves to do, is speaking to President Putin. There is some consternation within Ukraine and within Europe that they were excluded in these calls and it seems that the president is, you know, exceeding to some of Russia's demands before a proper negotiation even begins, but from a market perspective, what they're seeing is that progress towards potentially a ceasefire or even potentially a more permanent peace agreement between Russia and Ukraine does seem to be edging closer and again to your point just given the geographical nature of this conflict, Europe has been vastly affected and therefore has further supported European risk assets.

[00:04:21] Nathan Sweeney: Yeah. So the European equities is obviously getting a boost from that news, but clearly another area that's also done well has been UK equities, but we did have some data out on UK growth. So what's your take on UK growth?

[00:04:33] James Athey: Wow. It was a messy report on the face of it. You know, there was an upside surprise.

[00:04:38] James Athey: The market had been expecting a slight negative in terms of quarterly growth. Actually, we saw a slight positive. So 0.1% quarterly growth as opposed to -0.1. These really are pretty small numbers. You might even call it rounding error just given the difficulties of measuring GDP at these early stages, but when we looked into the details of this report, what we saw was much more concerning to be honest. Consumption was lower than expected. Investment was worse than expected. Net exports were a bigger drag on GDP. All of the upside came from government spending. And of course, what's going on in number 11 at the moment is trying to address these fiscal problems, the proximity to the fiscal rules that the Chancellor herself has laid out, suggests that they need to rein in spending. So if the only thing driving the economy at the moment is government spending more than it earns in tax revenue, and that aspect is unsustainable because of their own self imposed limits, then it really does look like the economic picture is darkening for the UK.

[00:05:43] Nathan Sweeney: Yeah, so as we always talk about, the economy is not the stock market, and you know, so a lot of companies in the UK are link to overseas earnings and BP is a good example of a stock which has done quite well . And that's because overseas buyers are seeing opportunities within UK companies. So it's important to make the distinction between the two, but I suppose there's a lot in there, a lot happening.

[00:06:04] Nathan Sweeney: It is actually the one month anniversary of Trump's inauguration. So there's a lot being done. I suppose the last thing we're going to touch on is the Department of Government Efficiency. So I see that they're looking to ban the production of pennies or one cent as they call it in the US. So what's the story there?

[00:06:23] James Athey: Yeah, it's quite an unbelievable state of affairs. Apparently it costs the US Mint 2.8 cents to produce every one cent coin. So they're losing almost double the face value off a coin just for its production. And if you've ever been to the States, really, these things aren't used as currency. You can simply collect them from trays by the till to sort of be used as you know, the make way in a deal, which is 2.99 or 3.99 what have you.

[00:06:53] James Athey: So they haven't functioned as genuine currency for quite some time. And so I think it makes a lot of sense that people no longer have to deal with them, especially if it's costing money to produce them.

[00:07:04] Nathan Sweeney: Okay. Excellent. Thank you, James. A lot of great insight there. So what have we got, coming up this week?

[00:07:09] James Athey: It's back to inflation, I guess is one of the big ones. We've got UK CPI numbers in the middle of the week. Of course, bond investors such as myself will be hoping for continued disinflationary progress. We'll be looking particularly at those kind of core services elements, those elements of inflation pressures in the UK, which are domestically generated.

[00:07:31] James Athey: Which are not really a function of global markets of commodity markets and all of those things which are out of the Bank of England's control we care about what's going on domestically because that really is the stuff that the bank can control but it is also the stuff which is reflective of economic conditions in this country so we believe that disinflationary path is continuing, the bank believes it though they seem to have less faith in their own belief, I think, than we do, but certainly that will be one of the biggest events.

[00:08:04] James Athey: Beyond that, I think Russia and Ukraine, because of the Munich Security Conference over the weekend, I think Russia and Ukraine will remain in the focus and in the headlines.

[00:08:11] Nathan Sweeney: Okay, perfect. Thank you for that roundup and, as always, a pleasure to have you on the show. Thank you for listening in, everybody. If you have any questions, do send them in.

[00:08:18] Nathan Sweeney: We'd love to bring them up and have a great week.