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Three separate thoughts this week on markets covering Trump (of course), UK interest rates and some life in an unloved part of the UK market.
First, Trump’s ability and desire to dominate the headlines remains unparalleled. What is interesting to me is that the market continues to look through the announcements and executive orders and remains pretty sceptical that much of this will actually happen. Trump announced surprise tariffs on Canada and Mexico last weekend and the MSCI World index fell 1% on the Monday following it. I would add a 1% fall or gain is very much business as usual for equity markets. And lo and behold the tariff implementation has been delayed for another month. Trump and his surprises are not going anywhere but ultimately it is economics that matters more than presidents. As an example of this, here are sector returns for the US market under Trump’s first presidency and Obama. Two very different presidents but similar looking sector returns to me. And it is of course ironic that energy (a sector that Trump actively campaigned for) actually lost money under his presidency. (Renewable energy and ESG focussed stocks similarly had a rough time performance wise under Biden.)
My message is Trump – so far at least – is having less impact on your investment portfolios than you might think. What is probably more important is the path of UK interest rates from here. The Bank of England cut interest rates by 0.25% on Wednesday and, surprisingly, two committee members voted for a 0.5% cut. This is in spite of the fact that core UK inflation remains above the bank’s 2% target. Part of the reason is that forward looking survey data is not so rosy. The Bank’s Decision Maker Panel (DMP) survey of over 2,000 UK firms shows businesses are cutting employment right now. This is isn’t too surprising when you think that employing people became more expensive for firms after October’s national insurance rises. Recessions and rising unemployment go together. The Bank of England only has two and half more cuts priced in this year (so interest rates are expected to end 2025 between 3.75% and 4.0%). We continue to think there a good chance the Bank cuts further and faster than this.
A more gloomy economic outlook is one reason UK equities remain unloved. And the investment trust sector of the UK market (smaller, less liquid, underperforming) remains even more so. However at some point prices become cheap enough to attract new investors into the market. On Thursday BBGI Global Infrastructure received and accepted a takeover bid from British Columbia Investment Management which was at a 21% premium to the BBGI closing price and, just as importantly, a 3% premium to its net asset value (NAV). Many such trusts continue to trade at large discounts to their NAV and generate attractive cash yields of 7% or more. The headwinds (size, liquidity, historic performance) remain in place, but there looks to be a couple of good reasons to own them today. If interest rates do fall faster than the market thinks, those yields will look more and more attractive once again. And each M&A deal validates NAVs and reduces the supply of these sorts of assets. This sector has taken plenty of pain over the last few years, but falling interest rates and more potential M&A means there is at least a chance for some gains ahead.
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.
