Subscribe
Share
Share
Embed
Our experts dive into the topic that is currently on everyone’s mind – Trump’s tariffs – and consider the aftermath of the global market reaction which we saw in April (02:10). James and Giles discuss US currency reaction (07:16) to the announcements and the potential impact on global economic growth we may see into the future.
Roohi and James (14:20) explore recent consumer trends in sectors like the luxury goods market (17:49) against a market backdrop dominated by the uncertainty of US tariff announcements. We also look at changing consumption trends we are seeing in the beverage alcohol industry (19:42) and the impact this might have on beverage alcohol companies into the future.
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities and special guest, Head of Equity Research, Roohi Siddiqui.
We’ve created this podcast to set out possible approaches. Please do not view it as financial advice, or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past, does not mean it will continue to do so. Our predictions are based on information that is currently available, however events and markets can and do change rapidly.
Creators and Guests
What is Insight Talks?
Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.
We've created this podcast to set out possible approaches. Please do not view it as financial advice or its content as investment recommendations. Just because an investment or investment strategy has performed well in the past does not mean that it will continue to do so. Our predictions are based on information that is currently available. However, events and markets can and do change rapidly.
James Tulloch:Hello, and a very warm welcome to the May edition of the Insight Talks podcast with me, James Tulloch, joined as usual by our Head of Equities Giles Parkinson. Hello Giles. Hey James. And this month it's a real pleasure to also be joined by our Head of Equity Research here at Trantybridge Rui Sadiki. Welcome Rui.
Roohi Siddiqui:Thanks James.
James Tulloch:Great to see you both, thanks as ever for your time. Okay, loads to cover over the next twenty minutes or so as there ever is. Rui will explore some key themes within your specialist area of consumer stocks and get your general thoughts shortly. But first, we'll we'll dive right into events over April where, of course, the market backdrop was dominated by the trade tariffs announced by the US administration at the start of the month. Now last month's podcast was recorded just after Donald Trump's self proclaimed Liberation Day at the April.
James Tulloch:So Sir Charles, Ewan and Tony last month covered our reading of of the tariffs and the initial market reaction then. I would flag that we've also released two ad hoc written pieces on tariffs and the market volatility over recent weeks, so please do give those a read if of interest or if you'd like to know more detail. They're available as usual on the Insight section of our website. I'd also flag the spring edition of our Insight Matters publication, also due for release shortly, that will include video pieces and as well as a written piece, so lots of further info available. But Giles, after equity markets sold off after the announcement and the VIX measure of implied market volatility spiked at the highest levels we've seen since the since the pandemic, stocks have actually since recovered at least a decent proportion of their losses after Trump rolled back somewhat, at least for now, by announcing a ninety day pause in the implementation of tariffs for many countries, didn't they?
Giles Parkinson:Yes, James. So most countries did get that ninety day grace period, and that frankly was designed to give them time that there's scope for further trade negotiations, opportunity to cut a deal. We know how much Trump loves one of those. We also saw the removal of tariffs on a range of products such as electronics, cars, auto parts. Yeah.
Giles Parkinson:Now, importantly, most importantly, US China trade tensions also eased somewhat. The US, that really came from their side, taking a less confrontational tone. Mhmm. So markets found room to breathe. The uncertainty surrounding the evolution of US trade policy does remain high.
Giles Parkinson:It's likely to continue to feed market volatility. You mentioned that VIX just now. Yeah. But for the time being, it seems that the market believes that we're past peak uncertainty on this issue, and it and it has followed accordingly. And look, this is how markets work, James.
Giles Parkinson:I mean, they're very much expectations machines. So a case where you get a less bad outcome compared to what might have been can actually lead to a positive response in asset prices.
James Tulloch:Yeah, indeed. And at the time we're recording, we've just seen The US S And P Five Hundred record its second consecutive weekly gain. It closed last week on a nine day winning streak. The FTSE one hundred here in The UK is currently on a a sixteen day winning streak at the at the time of recording. But, of course, the focus, I think, now shifts to to corporate earnings, Giles, with nearly 40% of S and P 500 companies reporting Q1 results around this time, and it's been notable I think to see the tech heavy Nasdaq rebounding pretty strongly as well.
James Tulloch:Are there perhaps signs that the caution over the valuations of AI related stocks have been perhaps a little bit overdone? What's been the driving factor here?
Giles Parkinson:Yeah. There's two things going on. So the first really is those share price reactions have been driven by better than expected results from the tech giants. Key one here would be Microsoft. So those shares jumped Thursday last week after beating expectations, fueled by strong cloud computing growth really related to AI demand that was just much better than market expectations.
Giles Parkinson:Okay. It hasn't been a clean sheet though. Apple, despite posting solid results for the quarter just gone, the share price did actually fall because it was warning about tariff related cost exposure that was actually greater than the market was concerned about.
James Tulloch:Mhmm.
Giles Parkinson:Stepping back, S and P earnings as a whole, there haven't been big changes in the analysts' estimates except for when it comes to the oil and gas producers. So those companies, because of the fall in the oil price recently, are seeing downward estimates and revisions. But excluding that, overall, the S and P 500 for The US large corporate economy, so far their earnings are holding in.
James Tulloch:Okay, and you mentioned the oil and gas producers there in the fall in the oil price. That has been one area of the market where we perhaps haven't seen such optimism or a comparable recovery in the energy sector, Giles. So that's got quite a lot to do with major oil producing nations increasing supply, hasn't it?
Giles Parkinson:Yes, it has. So the news we've had in the last month was that OPEC, the cartel that is formed to manage the oil price, that they agreed to raise their combined output by over 400,000 barrels a day starting in May. That was much bigger increase than market expectations. As much as we have a consensus for this, people may be looking for something like a 40,000 barrels a day. Those barrels were expected to return, but it's just the pace of those barrels, that spare capacity coming back online, returning to the market has surprised investors somewhat.
Giles Parkinson:And just gently in the background, this does come at a time where there's some softening of demand for some of the economic growth issues that we're touching on now. So the cartel put out a statement. They said its members believe oil demand will significantly increase later in the year. I think we've put a bit of question mark over that. And so therefore, this decision they were presenting it can be easily paused or reversed depending on evolving market conditions.
Giles Parkinson:But really, in our opinion, it's much more about trying to preserve the discipline within the group into a softening demand backdrop. They've got a lot of spare capacity. They're looking to return to the market, but they don't want anyone to break ranks. So it's almost like within themselves, the discipline inside that group is slightly falling away. Now oil prices declined by 16% over the month of April.
Giles Parkinson:Mhmm. We're currently sitting at four year lows of around $60 a barrel. Now this actually is good news because all else equal, lower oil prices should be stimulatory, should be supportive for the global economy and if because it kind of acts as an effective tax cut on consumption. Zooming out a little bit elsewhere in the commodity space, we've seen other commodities also shed some of their year to date gains over April. This is largely on growth fears.
Giles Parkinson:Yep. Gold in the precious metal bucket has continued to march higher, so this frankly is just a big beneficiary of all the uncertainty during the month. And indeed, at one point in April, it did breach the 3 and a half thousand dollar an ounce level.
James Tulloch:Yes. Indeed. Indeed. And as ever, Giles, particularly around commodities, but but markets in general, the the strength of the US dollar is is always key. And it's perhaps worth touching on I think we touched on it last month as well but the fact that The US currency hasn't quite reacted to to tariffs in the way that that one might might expect, has it?
Giles Parkinson:No, quite. So usually, I mean textbook economics would say that when a country invokes tariffs, its currency strengthens and that makes it cheaper for that nation to buy the more heavily taxed goods from overseas and it offsets some of the friction from classical economics. Yeah. However, in the last couple of months, the dollar has actually been weakening. So, you know, let's let's dig into that for a second.
Giles Parkinson:So it's not just a period of dollar weakness, it's also, James, been associated by weaker US Treasury bond prices. And so look, this does raise some longer term questions around how The US is being perceived. Now, this is a massive topic, you know, the dollar's role as a reserve currency, confidence in or predictability of policy, international relations and so on. But for now, we're taking the less expansive view and more just focusing on the fact that look, the weaker dollar is probably just due to investors selling more US assets and then having to convert the proceeds back into sterling, euro, yen or what have you.
James Tulloch:Okay.
Giles Parkinson:So it is possible that this dollar weakness that we're seeing does offset some of the increased cost of tariffs in the shorter term. But in the longer run, currency moves do tend to wash out and are frankly just dwarfed by the overall return offered by getting your security selection right. Here on Talking Equities, James, when it comes to bonds and fixed income, we choose to eliminate the currency risk entirely for very low cost through hedging the currency exposure.
James Tulloch:Yeah. Okay. Okay. If we pivot a little now, Jas, to think about the impact on economic growth. There have been a number of data points released throughout the month, as there always are, but I guess it's just a little too early at the moment to know what the impacts tariffs or just policy uncertainty might have on US economic growth and therefore global economic growth.
Giles Parkinson:Yeah. So if you take just one forecasting group, the IMF, the International Monetary Fund, they released periodic economic outlooks last these came in April. And in it, the commentary that warned that the escalation of trade tensions, elevated levels of policy uncertainty are expected to significantly impact global growth. The report also highlighted that the latest US tariff measures along with the, of course, the retaliatory actions by trading partners are no surprise they're likely to dampen global growth. So the IMF now anticipates global expansion of 2.8% in 2025 and three percent in 2026, and this is down from 3.3 that was projected at their forecast at the beginning of the year.
Giles Parkinson:Yeah. The US economy is at the centre of that slowdown. It's now projected to slow to growth of just 1.8% this year. That was significantly below the 2.7 forecast made in January. What's been what's been going on elsewhere?
Giles Parkinson:Later in the month, terms of more real time, we've actually had the news that The US economy in fact contracted over the first quarter of the year. Yes. Marking the first quarterly decline in three years. Now Donald Trump was quick to lay the blame at the door of the previous administration. Mhmm.
Giles Parkinson:So according to US Commerce Department, the US economy contracted an annual rate of minus 0.3%, and this represents a notable slowdown. I mean, we've been almost become accustomed to many years of The US economy surging and powering through. And in the last quarter of last year, that was 2.4%. So this minus 0.3, you know, is is a contraction. Mhmm.
Giles Parkinson:That said, before we get too excited, this shrinking GDP is mostly technical. It comes amidst falling government spending and but but most notably a surge in imports in the first quarter of the year as businesses braced for the introduction of tariffs. So we would expect some reversal from that mechanistic aspect flipping in the second quarter of this year.
James Tulloch:Okay, yeah quite. And the labour market data that we've had over April has really only served to underline the level of underlying resilience within The US economy, hasn't it?
Giles Parkinson:Yes, quite. So I've been slightly sort of saying, look, let's not pay too much attention on that negative GDP print, though it does capture some headlines. For us, the most recent interesting data point has been the monthly jobs number, and according to those figures, The US economy added a 77,000 jobs in April, so that's more than the overall workforce growth, more than expected. Meanwhile, the unemployment rate remained relatively low at 4.2. So ticking the box there.
Giles Parkinson:Now, one slight clout over that report will be that the earlier months jobs data were revised down by a decent number, by 58,000, but net net, in our opinion, The US economy still looks fundamentally strong. Now, monetary policy. This means that the US Federal Reserve is unlikely to be in a hurry to cut interest rates to support growth, and this potentially places chairman Jerome Powell further at log heads with President Trump, who's repeatedly called for lower interest rates. Yeah. But at the time that we're talking now, James, we are due to hear from the Fed later this week.
Giles Parkinson:Mhmm. Finally, what else is going on on the inflation front? Well, inflation is coming in ice cold. So The US CPI Consumer Price Index prints released in April showed inflation cooling below expectations, cooling faster to an annualized 2.4% in March Mhmm. Down from 2.8 in February.
Giles Parkinson:Mhmm. It was the first month on month decline in CPI prices in nearly five years. However, due to tariffs it's quite possible that this marks the trough for US inflation this year, again placing the Fed in a difficult growth versus inflation trade off.
James Tulloch:Okay and finally Giles, what about the situation here in The UK? The latest growth figures were positive although they came right at the beginning of the month and The UK should be relatively well insulated from the impact of US trade tariffs, shouldn't it? But we probably shouldn't get too excited just just yet.
Giles Parkinson:I think that's fair to say James. So The US economy grew by better than expected 0.5% month on month in February. It's the service sector called that out as being particularly strong. The print was released around the impacts of these tariffs and the discussions and the on again off again was looming large. But of course, it is somewhat backward looking, the nature of these all of these GDP prints.
Giles Parkinson:However, that said, The UK should be relatively insulated from the impact of US trade because frankly here in in Britain there's just a comparatively small quantity of goods are US UK exports to The US and we have a relatively small manufacturing sector. So net net, those figures should make welcome reading to The UK Chancellor Rachel Reeves, you know, all else equal, better economic growth is better tax receipts. However, these monthly growth figures are notoriously volatile, very often subject to notable revisions, and the wider context I think still involves a backdrop of frustratingly slow growth. Furthermore, of course, that was a February print, comes before ahead many of the tax hikes on businesses announced at the last budget, and households are bracing for the impact of rising utility bills. All these factors are still to come.
Giles Parkinson:Indeed, indeed. Okay, Giles, for the
James Tulloch:time being, thank you very much indeed. Really, if I could bring you in here at this point, sentiment has certainly taken a bit of a hit over the past month and more. Companies are having to navigate a pretty challenging period at the moment, very difficult for them to know what the lay of the land will look like going forwards. Historically, what can what can investors look for in such crises?
Roohi Siddiqui:Well James, I think it really involves going back to fundamentals, right? Investing in sound business models with proven management teams and robust balance sheets and sectors that potentially could be more defensive or let's say less tariff sensitive at at the least. Mhmm. Now it all comes back to valuation as well. So uncertainty and and and the volatility that's been created reveals quite interesting buying opportunities.
Roohi Siddiqui:And just building on what Giles has said, it really allows us to upgrade a portfolio's current holdings.
James Tulloch:Look,
Roohi Siddiqui:so we're gonna have to deal with macro uncertainty. And clearly, the macro picture is perhaps a bit less rosy than it was at the start of the year for all the points that, you know, you and Giles have already been talking about. But there's a decent chance that we can muddle through the next few months and perhaps get more visibility about what's ahead as we move into the second half of the year.
James Tulloch:Okay. And what can company management teams do to navigate this period? What will CEOs be thinking about doing right now?
Roohi Siddiqui:Well, that's a really great question, James. And I think it's a really tough time for CEOs, right? So I think the first thing they're going to be doing is really shoring up supply chains, making sure that their businesses are resilient. And remember, COVID, not that long ago, was a real test of both. But fundamentally, when it comes to tariffs, CEOs don't know the duration, the magnitude, or whether the tariffs may, in actual fact, be reversed over time.
Roohi Siddiqui:So that makes business planning particularly difficult. So look, there's a few things they can be they they can be doing, and I believe sensible management teams should be should be doing this right now. And indeed, we'll have been planning for this in in the in the months prior. So firstly, for those companies that are are more sensitive to tariffs, the idea would be that you bring more bring more product into The US market ahead of the tariffs coming into play. But of course, that's only a short term fix, because eventually the inventory at the lower prices will run out.
Roohi Siddiqui:So then it really comes down to sort of three other things. So firstly, it comes down to those companies that have potentially pricing power, and that will perhaps allow them to put up prices, and we can talk about that a little bit later, on those goods that are subject to tariffs. The second thing that I think companies will come back to, and we're hearing more and more companies talking about that now, is going back to productivity savings. It's just going back to the cost base and seeing what can be right sized, etcetera, in the new environment. And then finally, and this is sort of more long term, looking to perhaps onshore some operations, but that takes time, right?
James Tulloch:Yeah. Okay. Okay, as you suggest, there's usually a path through these periods and quality companies are usually quite adept at navigating those paths. In your specialism of consumer stocks, there are companies and brands with a level of pricing power, as suggest, aren't there? I'm thinking perhaps specifically about the luxury goods space in particular.
Roohi Siddiqui:Yeah. So, you know, to your point, James, you know, how the consumer feels matters. And one of the interesting data points that we've seen this year, particularly when looking at The US market, is there has been a deterioration in US consumer sentiment since the start of the year and certainly since the sort of the data we saw post the US election at the end of last year. So it's interesting just in terms of, you know, how the consumer is feeling. Uncertainty will hit different sectors in different ways.
Roohi Siddiqui:But to your point around, let's say, the luxury goods space, yes, luxury has pricing power, and it's quite difficult to trade up to, you know, other sort of or down to comparable products and brands given given the degree of pricing power power. What we have seen from luxury companies and brands very recently is an increase in pricing. So, again, seeing that across the board for a number of brands. And, again, it'll be interesting to see what the pricing strategy is because, remember, a lot of these products are global, So they have to also keep an eye on the relative pricing differentials between markets. So it can't just be necessarily The US consumer feeling all the brunt of the price increases.
Roohi Siddiqui:We might see pricing elsewhere as Okay. But also, I think sort of taking a step back, just thinking about sectors in general, I think certainly pockets of resilience. So to my earlier point, for example, consumer staple stocks can be quite durable. And within the consumer staple space, for example, brewers have local production and local sales and would be therefore potentially more sort of tariff resistant.
James Tulloch:Okay. Really one area I wanted to explore a little with you, if we can, is that of changing consumption trends, specifically the theme of moderation amongst younger consumers. There is a perception at least that younger generations are consuming somewhat less in the way of alcohol. Is this indeed the case?
Roohi Siddiqui:So again, a great question, James. So look, the popular conception is that young people are drinking less than prior generations used to at the same age. And certainly we're seeing more and more press articles talking about, well, young people drinking less and the rise of moderation. So let's look at the data. So survey data from The US suggests that there has been a decline in regular drinking amongst younger adults over the past two decades.
Roohi Siddiqui:But if we disaggregate the data into underage consumers and then those that are over the legal drinking age and remember that the legal drinking age in The US Twenty One, not 18. What's been on the decline over the long term is really alcohol prevalence amongst underage consumers.
James Tulloch:So
Roohi Siddiqui:actually, that's quite a good thing for society and also for beverage alcohol companies, because it really ties into the idea of responsible drinking that they're keen to promote. The analysis also shows that alcohol prevalence in the, let's say, 23 to 30 year old age group has been broadly stable. So what what looks to be happening is as younger consumers enter full working adulthood, let's say they get a job, they move out of the parents' basement in in some cases, they appear to revert to historical consumption trends. I think it's about having a little bit more money in your pocket, a bit of independence, and also perhaps being exposed to the, you know, after work social occasions that come up that that promote these things.
James Tulloch:Okay.
Roohi Siddiqui:What's what's also really interesting from the data is that Gen Zs in The US certainly look to be spending, let's say, a similar percentage of their post tax income on alcohol as as have millennials and boomers. But, of course, in absolute terms, they earn a lot less than older generations.
James Tulloch:Mhmm.
Roohi Siddiqui:So their absolute level of spend is, of course, lower at present. And then the other thing to just note about all this, James, is that, you know, we've gotta remember the oldest Gen Zs only came of age really during COVID. Sure. So there isn't a lot of data available on Gen Z behavior at present. The last few years include two significant factors.
Roohi Siddiqui:Look, we've had COVID Mhmm. Certainly reducing opportunities for socialization, and then the unprecedented levels of inflation seen across the board, but especially when it comes to grocery baskets, frankly, also services. So these days, you do tend to see more young, young people living at home with their parents, which are largely for financial reasons.
James Tulloch:Yep. Sure.
Roohi Siddiqui:And then all, you know, to just to top it all off, what we don't know is how Gen Z behavior is going to change over time as they age, especially around key life events, you know, having children, etcetera. So look, it's a big generation. It's gonna have sizable spending power over time. And again, I think studies show that Gen Z is set to make up a quarter of alcohol spending growth on average over the next decade in key markets such as The US, The UK, India and China, that's not small.
James Tulloch:No, no. Okay. And so do you think these are trends which can be extrapolated forward just yet? And if so, what impact might it have or already be having on the the beverage alcohol industry?
Roohi Siddiqui:So most generational trends take a long time to unfold. Things don't happen overnight. The slow moderation trend is really interesting one. That's been in place for a long, long time. I I would say over the last fifty to sixty years in developed markets like The US.
Roohi Siddiqui:And some of that has been linked to increases in the minimum drinking age of alcohol in the in the nineteen eighties. But there's also fundamentally a link to increased focus on health and well-being, which is a positive for society. I'll just sort of talk you through the sort of recent trend of zebra striping that is becoming increasingly popular.
James Tulloch:Right.
Roohi Siddiqui:So that's basically alternating an alcoholic drink with a non alc drink when you're out and about and socializing. And the benefit of this is that you can stay out longer and will likely also feel better the next day and can hit the gym. So all of this zero out stuff is creating a significant growth opportunity the no and low alcohol market, for the for the beverage alcohol companies. And and we see many zero zero variants of popular alcohol brands, just, you know, Guinness zero zero, Heineken Zero Zero, Tanker Zero Zero, so on. This list goes on and on.
Roohi Siddiqui:But also entirely new brands that are targeting the non alcohol adult beverage occasion, brands such as Seedlip. And the alcohol free market is still small today in a global context.
James Tulloch:Very good.
Roohi Siddiqui:But it's growing very rapidly in recent years, especially in markets like The UK and parts of Europe. So of course, I'd say that the trend of growth in zero alcohol and low alcohol is very long term and is going to be that state. Now beverage alcohol companies have all been investing strongly into the no and low alcohol segment, which makes again good sense, right? It's incremental to the core business. It tends to be quite profitable and helps to protect companies licensed to trade by offering choice to consumers.
Roohi Siddiqui:And it goes back to that trend of sort of zebra striping, just making sure you're showing up for the consumer Sure. As as is needed. Mhmm. And oftentimes, the no al category is targeting a different incremental occasion, such as lunchtime, is taking from soft drinks, and is meeting the health and wellness needs of consumers that are seeking an adult alternative to alcohol that is not necessarily a soft drink. Mhmm.
Roohi Siddiqui:And fundamentally, look, James, it comes down to this, that moderation is linked to the key message that beverage alcohol companies are keen to promote. The idea of drinking less but better, which forms the basis of long term premiumisation trends, which we see happening pretty much across the world.
James Tulloch:Okay. Okay. Fascinating stuff. Thank you very much indeed, Rui. We shall watch with interest.
James Tulloch:But thank you for your time. Wonderful to be able to get your insights. Giles, thank you to you as ever. Great to get your thoughts as always. And thank you very much indeed to everyone for listening.
James Tulloch:I hope you found this edition of Insight Talks informative and interesting. We shall reconvene to record another podcast next month, but for the time being, thank you and goodbye. Thanks very much.
Roohi Siddiqui:Thank you James.