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I wrote last week that there was a consensus view that any Donald Trump import tariffs would be good for US equities, hurt non-US equities and push the dollar and interest rates higher. The problem with this view is that – as the chance of a Trump second term has risen – the dollar and interest rates have been falling not rising. Part of the story of course is that Trump is still only a 60% or so favourite and he may not alter much on the tariff side outside of China. But another part of the story is that, of course, there is more going on right now than just politics.
And here I would highlight a few of the trends we have seen this quarter:
- It looks increasingly likely that the Fed and Bank of England will start cutting rates in September. US GDP growth came in a pretty healthy 2.8% for Q2 and UK GDP growth is being revised up. Cutting rates because you can, not because you have to, is actually quite bullish for growth. Interest rate sensitive sectors (and especially property and construction) should have some of the pressure taken off them.
- Lower rates and better growth tends to favour small cap equities over large caps. The UK mid cap 250 index is 4% ahead of large caps this month and in the US the Russell 2000 is over 10% ahead of the (large cap) S&P 500 index. Smaller companies have been on sale recently but you have to have been brave. Some of that braveness has been rewarded.
- The flip side of that is that a lot of the money in the last 18 months has been made in the large cap US technology names. No one likes under-performing! And these are large juggernauts with effectively no debt and less sensitive to movements in the economy. If you are feeling less brave these have been easy (and correct!) investments to own. The problem is there is plenty of optimism built in at today’s prices. If returns are slow to appear on the huge AI investments being made they could easily re-rate lower. The journey of Meta (Facebook) which made huge investments into virtual reality (and 3-D goggles) which have not (yet) amounted to much show an example of the downside risks here. Meta was down -64% in 2022 (compared to -18% for the broader market) as investors worried that much of this investment had been wasted.
Microsoft, Meta, Amazon and Apple all report earnings this week. This will I am pretty sure dictate the tone of equity markets for the next few days and very possibly the quarter, whatever Harris and Trump may get up to. I can’t tell you how those earnings will go and what the market reaction would be but, longer term, if the economy can keep holding up there is I think plenty more upside in the cyclical names. As a portfolio manager you are always looking for some diversification. The good news is today I think there is plenty on offer in global equity markets.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
