Logic Monday Espresso Podcast

Monday Espresso Podcast - 7th April 2025

[00:00:00] Nathan Sweeney: It's Monday the 7th of April. Today I'm joined by Rory Dowry. Rory is a portfolio manager on our discretionary fund management side. Good morning, Rory.

[00:00:08] Rory Dowie: Hey, good morning, Nathan.

[00:00:09] Nathan Sweeney: So we did have a very eventful week last week. So we're gonna talk about it in detail, what happened in markets, why it happened, what we're expecting going forward, just to make sure you've got all the information that you need for the week ahead.

[00:00:22] Nathan Sweeney: So, Rory, what did happen in markets last week? How did they perform?

[00:00:28] Rory Dowie: Yeah, I mean look, if you haven't already seen, I'm sure you're aware from reading the news and seeing the headlines, yeah, it was a bit of a bloodbath last week. And as I say, that all really centered around Trump's so-called Liberation Day on Wednesday, where he announced a full suite of tariffs.

[00:00:42] Rory Dowie: And again, that was really to imposed tariffs on imports going into the US. And you know, his view was that, you know, the US had been losing out over the years and he really wanted to kind of reclaim some of that capital back to the US. So he implemented a full suite of tariffs across the board. Markets had been hoping for kind of 10 to 20% tariffs on US imports, but the reality is it was far worse than that.

[00:01:03] Rory Dowie: So in terms of market performance, US was naturally the epicenter of that pain. The S&P 500, those top 500 stocks in the US was down nearly 8% for the week. Again, with a tech heavy Nasdaq leading the way further down than the S&P. Europe was also off down about 8% as well. And really that was a story across the board.

[00:01:21] Rory Dowie: What I thought was interesting is that Hong Kong was marginally ahead of US and Europe down just 3%, and China was down 2%. I just wanna remind you, a few weeks ago we kinda spoke about why Trump might be doing this, and again, we sort of spoke about that $7 trillion of US debt maturing this year. And we were talking about how he may be artificially bringing that 10 year yield lower.

[00:01:41] Rory Dowie: That is essentially the cost of refinancing that debt. That 10 year yield has now fallen from 4.8% at the start of the year to 3.9% now. So if he's trying to do that, it's really working. And just to put it in perspective, every one basis point reduction in that 10 year yield saves the US about a billion dollars.

[00:01:58] Rory Dowie: So he's almost saved a hundred billion dollars so far by creating this uncertainty in terms of thinking about refinancing that debt. But yeah, just in summary, it was really about those tariffs that really drove markets lower, huge amounts of risk off across markets, and investors are getting a little bit concerned.

[00:02:13] Nathan Sweeney: Yeah. Okay. And I suppose the interesting thing that we were talking about this before we came on the show, we were just talking about the fact that. You know, it hasn't been a broad based sell off, so it looks like a big drop in the US but actually when you look under the hood, not everything was selling off.

[00:02:27] Rory Dowie: Yeah, absolutely. Look, I think in terms of what was selling off, it was primarily the most kind of cyclical parts of the market. We saw some of those. Sort of consumer discretionary, old consumer-oriented stocks leading the way downward the most. And then on the flip side of that, we had the more defensive parts of the market performing quite well.

[00:02:43] Rory Dowie: Actually, pharmaceuticals at the moment weren't subject to any tariffs, so we saw healthcare, you know, respond quite positively. And then also other defensive sectors like staples and utilities. So that was pretty good. Just to put, kind of put it in perspective in terms of why some of those consumer discretionary or kinda those sensitive stocks were selling off.

[00:03:00] Rory Dowie: I wanna highlight Nike as an example there. So to really bring that to life. Now, Vietnam was subject to huge tariffs from Trump at 46% on Vietnamese imports into the US. And really, if you look at Nike, the bulk of their supply chain is in Vietnam. So really that's gonna affect the cost of producing, you know, the trainers and the clothes that Nike make.

[00:03:19] Rory Dowie: Thinking about, how does Nike protect its own earnings? You know, either it brings all its production to the US, which is probably what Trump wants. So that helps the US economy. But obviously that will come at a higher cost. The other thing they could do is obviously pass that costing from the tariff on imports off to the consumer.

[00:03:35] Rory Dowie: But obviously that's gonna result in higher prices, you know, for Mr. And Mrs. Smith on the street in the US. So, as I say, it's very, very complex situation and it's affecting all these different sectors differently. But as I say, there are some opportunities arising, given the extremes of the market sell off.

[00:03:50] Nathan Sweeney: Yeah, you know, speaking about opportunities, because fundamentally what's happening here is we've had this announcement, markets are reacting, and I think countries will now have three different choices. So if you're a country and you've had these tariffs put in place, and basically that's all countries. Let's say you're the UK as an example, or Europe, you could retaliate and put your own tariffs on goods from the US coming into Europe as an example.

[00:04:19] Nathan Sweeney: Or you could choose to do nothing, which some countries will do. They'll say actually the tariff level you have and the tariff level we have are pretty broadly the same. So we're happy with that. Or you could choose to negotiate. So one of the things we feel that will happen as a result of this is lots of countries will decide, okay, we need to come to the negotiation table with the US to see, can we try to remove some of those tariffs?

[00:04:45] Nathan Sweeney: And one of the countries we think that'll actually benefit from this is actually the UK. So if you look at the UK, the tariff arrangement with the US is 10%. By the way. But before these tariffs were announced, the UK was actually in heavy discussions with the US to try and strike out a trade deal. So I wouldn't be surprised if the UK actually came out with a trade deal with the US in short order because it would provide a case study for the US to go to all of these other countries and say, actually, if you look to come to the table and do business, it works for both of us.

[00:05:20] Nathan Sweeney: So, you know, even though the initial reaction is bad in markets, we think that actually some of that is probably overdone at this point. And it's great that we have this out of the way because this was the big unknown. And, you know, having this in the market, having this news out there, it is part of this kind of cleansing process, giving markets that certainty as we move forward because we know what we're dealing with.

[00:05:44] Nathan Sweeney: And it is good to see that China's come out and retaliated because again, you just have that certainty there. We know what's happening, but I think that the real thing to focus on from here is actually. What would be the positive impact of this? So I suppose, you know, what should we be watching for?

[00:06:00] Nathan Sweeney: It should be, you know, another interesting week. Everybody will be looking at the market and you know, what will be the focus?

[00:06:05] Rory Dowie: Yeah, absolutely. And again, you mentioned it there, Nathan, really it's all about kind of the retaliatory measures from other countries. You know, is the news going to get incrementally more positive?

[00:06:14] Rory Dowie: So is this kind of, you know, the bottom of the barrel in terms of negative news? Obviously we had China announcing on Friday the 34% tariff and all US imports, you know, the hope is the news flow might start to improve. So you know, these negotiations ongoing behind closed doors, do we start to seeing these initial tariff rates start to come down potentially as these deals get announced?

[00:06:35] Rory Dowie: And we'll also be looking for any announcements from Congress, potential noise about fiscal stimulus to try and offset any of the negative impacts. You know, really think about it, they should have some wiggle room with that. You know, these tariffs should lower the budget deficit going forward. So, you know, we'll be watching closely to see if there are any announcements on that side of things.

[00:06:50] Rory Dowie: Wouldn't be surprised to see the US do something there. And also be watching the Fed. You know, does this force their hand to try and lower rates to stimulate the economy? But obviously gotta be careful of the inflationary pressures as well, that that may be around tariffs. And also worth mentioning Q1 earnings start next week.

[00:07:06] Rory Dowie: JP Morgan, I believe reports on Friday. So we watching very closely some of the commentary from companies thinking about how they're going to mitigate some of those impacts. I wouldn't. Would say that the bar for Q1 earnings is quite low, but what we are worried about is potentially those earnings expectations for the rest of the year, which are at quite high levels may start to come down.

[00:07:24] Rory Dowie: So that guidance might get down graded. But as I'll say, you know, really want to reiterate this, you know, markets always tend to overreact. You know, at the moment it's a bit of a broad brush sell off across the board. And so, as I say, it's about patience. It's about being selective, it's about remaining rational looking for opportunities and acting on them when they present themselves.

[00:07:43] Rory Dowie: So, you know, we'll be really trying to do that over the next few weeks. Be watching company earnings very, very closely. So, as I say, you know, lots to look at, lots to watch, lots to monitor. But hopefully from here, some of the news might get incrementally more positive.

[00:07:55] Nathan Sweeney: Yeah, and I think it's important to remind our listeners that, you know, we are here if you do have any questions on markets.

[00:08:01] Nathan Sweeney: So if you have anything you'd like us to talk about on the show, please do send it in. We will be more than happy to bring it up and discuss it in detail. Or if you have any questions you want us to kind of email back on again, as I said, you know, happy to help. Thank you for listening in and hope you have a great week.