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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, a weekly look how to make the most out of your savings and investments. In this episode, the topic is US tariffs. There, of course, have been no shortage of column inches devoted to US tariffs in 2025. In terms of financial markets, US tariffs were a big reason why there was the sell off early this year for both US and global stock markets. Over the past couple of months, we've seen a recovery play out.
Kyle Caldwell:The jury is now out regarding whether stock markets have become complacent to the risks of US tariffs and the threat that they pose for various industries and sectors. Joining me to give his expert views is Julian Bishop, who is full manager of the Brunner Investment Trust, which he describes as a global portfolio with a twist, and that twist is that it holds around 30% in UK shares. So, Julian, you were recently in The US and you attended a couple of conferences. You met around 50 different companies. What is the moo's music on the ground in terms of the impact that US tariffs are having on various companies?
Julian Bishop:I I think uncertainty is the name name of the game. A lot of Trump's pronouncements, they changed by the day. So in that context, it's very hard for for companies to to plan. So even if there are tariffs, it makes sense to reassure things. At the moment, people are still pretty reluctant to to do so, I think.
Julian Bishop:So you look at, PMIs, purchasing managers' indices, which is sort like a leading indicator surveys of of business people and what their plans are. The US generally has PMIs below 50, which means that sort of industrial activity is still actually contracting. So I I think, at at the moment and let's put AI to one side and data center construction to one side. That's an area that's booming. But apart from that, things are are are still pretty lackluster.
Julian Bishop:Tariffs part part of that. Trump's sort of style isn't really conducive to making long term investment decisions. And one one interesting thing I I read recently is the carmaker Hyundai Korean, and they've just opened a new car factory in The States, a huge, huge car factory down in Georgia, but that was greenlit. They made the decision to open that during Trump's first term. It takes years, you know, to to to to build large scale manufacturing plants, etcetera, takes takes years.
Julian Bishop:So to the extent that tariffs may induce businesses to make investments in The States in lieu of importing things, the lead time for doing so is is is is many, many years. So generally in The States, the mood is everything's a little bit flat on the industrial side. Big exception, AI and and and data centers where there's a vast amount of investment going in, leading some people to think, oh, there's a bit of a bubble because the returns on those investments are are very unclear. And then on the consumer side, you know, the consumer's gem generally pretty good. So you look at consumer expenditure, that's still pretty strong.
Julian Bishop:That's very skewed to sort of middle class, upper income consumers. You know, the beaming stock market helps them with a wealth effect. Lower income consumers, you know, struggling struggling a little bit. So, you know, if you look at Trump's policies generally, they're they're pretty regressive. You know, they they if you if you look at the impact of the one big beautiful bill, for example, that he introduced, which is his sort of key piece of legislation, that's sort of tax cuts for corporations, tax cuts for for middle classes, upper income consumers, but actually withdrawals got a lot of benefits for for for poor people.
Julian Bishop:So SNAP, which is the it's food stamps essentially. They're being cut. There's cuts to Medicaid, which is health care for the poor. So so by and large, you know, probably as ever, it's not a great time to be poor in America, but the the middle class is and the upranking consumer's spending. That's responsible for a lot of employment, so so far employment remains pretty good too.
Kyle Caldwell:So tariffs drive up the cost of imported goods. Yes. And in addition, there are measures from some of the effective nations. Yeah. And some commentators have attributed the tariffs are gonna be a driver of the sticky inflation outlook that we've got at the moment.
Kyle Caldwell:Do you agree that tariffs are proving inflationary? And are we already starting to see certain businesses push up the price of their costs and ultimately pass that on to the end consumer?
Julian Bishop:I think that will happen. I mean, government tariffs, but there are tax. Right? There there are tax on imported goods. And, generally, when you see taxes applied, ultimately, they tend to end up getting passed through to the consumer.
Julian Bishop:So I think the the the the simple maths of it is that at at the moment, tariffs are sort of leveling out about 16% on on imported goods. So that's the highest it's been since, like, 1930 or whatever. And importer, 10% of GDP, probably 15% of consumer expenditure. So if you do the sort of just the basic maths of it, it implies that prices should go up to two and a half percent if if those were fully passed through. So far, we've not we've not seen anything like that.
Julian Bishop:So so far, people have diverted their buying to lower tariff areas. They pre bought ahead of the tariffs being implemented. Exporting companies into The US have swallowed some. Importing companies have swallowed some. So most people think of that sort of two, two and a half percent that probably has to be passed through.
Julian Bishop:Probably only about half a percent has hit so far. And that's pushed up inflation to sort of high two. So, you know, inflation in The US sort of, you know, it it's in that sort of 2.7, 2.8% range. And, you know, if you assume that these tariffs are sort of generally passed through over, you know, the course of three, four years, you're talking about another sort of three or four years with inflation probably up in the high twos, which, of course, is considerably above target. So, you know, the the the Fed sort of generally likes to see inflation around 2% as the Bank of England does over here.
Julian Bishop:So you're talking about another three, possibly four years with inflation above target. And so you're right. We're talking about stickiness. I mean, we're already talking here about another well, we've already seen three or four years with inflation above target. So, you know, cumulative inflation over the last several years has been really, really high in The States.
Julian Bishop:And and and so bad minds the value of of currency and demands the value of the value of of bonds.
Julian Bishop:So it's it's it's quite sort of profound in in its in its impact. And the longer this happens, of course, it makes US monetary policy sort of less less credible. And so we've seen a bit
Julian Bishop:of a flight out of the dollar over the last year or so as people sort of look at
Julian Bishop:the finances of the of The United States and start to sort of question their sustainability because The US you know, we we talked here about tariffs and inflation,
Julian Bishop:but The US is a pretty indebted economy. Right? You know, it's got debt to GDP about a 100%. That's the highest since World War two. Very persistent budget deficit in The United States.
Julian Bishop:You know, it's
Julian Bishop:not just The UK thing, this. It's it's also The States. And I think people,
Julian Bishop:you know, are looking at the finances of The United States and thinking, oh, you know, they're in a they're in a
Julian Bishop:pickle here, persistent budget deficit, high
Julian Bishop:debt to GDP. And the temptation in those circumstances is to allow inflation to become a bit more pronounced because, unaffected, you monetize your debt. Know, the value of your debt in real terms comes down. But, generally, if you're fearful that the managers of an economy are content to that inflation creep in and the money's value of bonds, the value of currency, etcetera. Probably a good argument for equities, by the way, because equities exists, you know, in in in the nominal world.
Julian Bishop:So, you know, one of our holdings, for example, is Tesco. And if there's inflation, then Tesco's, you know, revenues go up because food is more more costly. So their their dividends, etcetera, are protected in real terms by that effect in a way that that assets aren't. So sorry. Yeah.
Julian Bishop:I've I've waffled there slightly and gone beyond your the wim of your question, but I was I was doing that.
Kyle Caldwell:And how as a full manager do you navigate the risk of US tariffs, and have you made any changes to the portfolio as a result of tariffs?
Julian Bishop:Not as substantial as as as you might think. I mean, a lot a lot of equities, if you if if think about it, a lot the sort of best quality equities, a lot of companies that we hold, they aren't really involved with the import in a in a significant way of of physical goods in The United States. So, you know, our biggest holding, for example, is Microsoft with, you know, software, so not really impacted. We have a big holding in Visa, which is, you know, payment network, so it's a good example of a company that is inflation protected in a way because they process payments, and if the value of the payments goes up 5%, their revenues go up 5% because they take a small percentage fee on everything that they process when you spend anything on a card. So, in reality, we haven't really done that much.
Julian Bishop:These sort of things tend to get digested by the market pretty quickly where they're obvious as well. And then we would tend to assume that where things are imported, those those taxes are sort of passed through to the consumer ultimately, therefore protecting the the company that that that is is impacted. We did we did buy one company. It was actually in in Korea. So I mentioned Hyundai earlier.
Julian Bishop:We, at the very much value end of our sort of portfolio, bought shares in Kia, which is the Korean carmaker. It's actually partly owned by Hyundai, part of the same group. But that that equity was decimated in the run up to these tariffs being announced, because they will be dramatically affected by tariffs on South Korean autos. So a lot of car companies operating in US will import from overseas, and Kia has a big market in The US. And you can do the massively pretty straightforwardly.
Julian Bishop:You know, if the tariff is this and their import price is this and their volumes are this, the impact will be x billion dollars. And so there's a lot of fear that Kia's profits would be down, which they will be because of tariffs, but we took that as an opportunity to buy what we think is in the scheme of when the context of a very tough industry, a very, very good carmaker, a really, really sort of knocked down knocked down valuations. So that was the one thing that we have done where I would say that tariffs were, you know, very partially responsible for the decision that we we made. So we, yeah, we bought some we bought some shares in Kiev, very down and out, knowing that the tariffs were coming, hoping that they would be negotiated down and hoping that with time, the price of cars in The United States will go up because about half of all cars in The United States are imported. So if everyone's gonna end up gradually passing those increases through, the price of cars will go up, and hopefully, of that tariff impact will be offset.
Kyle Caldwell:And, of course, Kia wasn't the only stock that was negatively impacted by the prospect of tariffs. Of course, early this year, there was a pickup in stock market volatility, and that was primarily due to concerns over US tariffs. Of course, now we've got the benefit of hindsight. We're five we're five months on from that. Yeah.
Kyle Caldwell:I mean, today is the October 16. I'm recording this podcast. Both global and US stock markets have made a strong recovery ever since liberation day. Is there a danger that markets are now becoming too complacent to to the risk of tariffs? I mean, that was a primary cause of the sell off earlier this year.
Kyle Caldwell:Yeah. Yeah. And I don't know. To me, it just appears that, you know, the have have markets recovered potentially too quickly?
Julian Bishop:Possibly. Always very, very hard to say sort of market level things like that. I mean,
Julian Bishop:I think that the tariffs have not caused a huge spike in inflation, And, actually, the consumer remains pretty strong in The United States. So those are the worst case scenarios that are being run around about time. I think it's hard to say that we have not come to fruition.
Julian Bishop:I'll say since those old liberation day tariffs were were announced just back in April, a lot of the stock market recovery has been related to tech, you know, and AI in particular. So there's this huge amount of excitement about the hundreds of billions of dollars that have
Julian Bishop:been spent on AI infrastructure, and that's been a sort of big a big driver of of markets since then. It's quite funny if you sort of look at the what's driving markets in the last six months is, you know, forms of tech on the one hand, but also things like banks, which have done really, really well. So very different types of investments, but both are cyclical. You know? So they've really driven markets.
Julian Bishop:There's been lots of things that haven't been working. You know? So it's it's it's not been a pretty multidimensional market. It's been quite narrowly driven. So I'd say if there is complacency or, you know, an area to worry about, it's probably more about AI, you know, what will the returns on those investments be because there's an awful lot of stock market wealth hanging on that on that story, on that narrative.
Kyle Caldwell:How much exposure does Brunner have to AI? I mean, know you have Microsoft as your top holding, and you've you've got some exposure to Alphabet and Amazon. Yeah. Do you have other AI exposure beyond those three names?
Julian Bishop:Yeah. I mean, it's it's hard to avoid in a way. So you mentioned three names there that, you know, to to a certain extent play into AI, but then I'll generally regard it as the the the huge beneficiaries. May maybe Microsoft because Microsoft can deploy Copilot. It's got a partial ownership of OpenAI, and it will host AI activities, and it says your cloud business.
Julian Bishop:So there's there's that part of it, but the the real excitement has been in sort of physical infrastructure. So, silicon, so, you know, semiconductors, plus all the electrical, equipment that's necessary to plug it all together. And our sort of big our big weights there are can be called Taiwan semi, which, you know, is trillion dollar market cap company now, and Taiwan Semi is what's called a semiconductor foundry. So effectively, it manufactures semiconductors on behalf of companies like NVIDIA, which makes GPUs for AI, and companies like Broadcom, which manufacture ASICs used in AI, and companies like AMD. So AMD is the sort of second player in GPUs.
Julian Bishop:It's had a bit of a second win recently. So we we sort of took a view reasonably early on that although NVIDIA is a sort of big beneficiary of AI expenditure because it makes most of the semiconductors that are used for AI applications, But if that market was to fragment slightly, if I if there were to be many producers of AI semiconductors, whatever happens, Taiwan Semi would be making them, and that's that's basically the been the been the case. So Taiwan Semi makes, to all intents and purposes, a 100% of NVIDIA's chips, 100% of Broadcom's, a 100% of AMD's. They're the only company on the planet that can manufacture logic chips of that sophistication, and, you know, they're ex you know, semiconductors are extraordinary. Mean, Taiwan Semi also make every chip that goes into your Apple iPhone, for example, and, you know, the chip in an iPhone now has, I think I think it's about 30,000,000,000 transistors, like, on and off switches and, you know, an area about an inch square.
Julian Bishop:So, you know, you're talking about, you know, wires, if you like, that are literally a few atoms across, and the the technology involved in manufacturing those is exceptional. So Taiwan Semi has been a big beneficiary of this huge boom in semiconductor production. And then there's a key supplier to Taiwan Semi, which is a Dutch company called ASML, which makes, lithography tools. So these are huge, huge machines. It costs a couple of $100,000,000 each that are, absolutely key in the manufacturing of the most advanced semiconductors.
Julian Bishop:So we've had those those two sort of big semiconductor plays, but then it it worms its way into other things. So there's a company called Amphenol. It's an American company that makes connectors that are used, when you plug in all these servers into a data center, they've seen a huge boom in demand. I've got a French company called Schneider Electric that makes electrical equipment that's used in data centers, so even though we haven't had shares in NVIDIA, we've had plenty of names that have benefited from, this big boom in AI expenditure. Now the question we're asking ourselves now is, you know, can this continue?
Julian Bishop:Because the amounts that are being spent, literally hundreds of billions of dollars a year, need to see a return. And there's a very active debate, which is a good thing, in markets about will the revenues be there, will the sales be there to justify this amount of expenditure? Because the key leading company in AI, which is OpenAI, the parent of ChatGPT, at the moment, they've only got revenues of about 13,000,000,000, which is a big number. But in the great scheme of things, that is not enough to justify the hundreds of billions that are being spent. So companies like OpenAI need to see a very, very rapid up rapid increase in their revenues to ensure that this boom in expenditure can can can can continue because otherwise otherwise, without revenues, without profits, you simply cannot be spending at the pace that companies are ex spending money at the moment to to to build AI infrastructure.
Kyle Caldwell:I know you've also got some concerns on how concentrated the S and P 500 index has become. Rather a rather recent comment in which you said that that index is now more akin to a high risk concentrated technology funds. I mean, obviously, while it's obviously pretty much impossible to predict the future direction of stock markets Yeah. Are you concerned over the next couple of years that for, you know, The US's premier stock market given how concentrated it has now become?
Julian Bishop:Yeah. I mean, I think, you know, it tends to try and think probabilistically, right, about the way the future might pan out rather than modeling single scenarios. And I it's it's absolutely possible. I think the S and P has a much tougher time over the next ten years. So the reason I said that it was more akin to a high risk concentrated tech fund is because, you know, it's S and P 500, so 500 companies, but they're weighted according to their market capitalization, so the value of the company.
Julian Bishop:And, you know, there are several companies now in The States with values of $3,000,000,000,000 plus. I think NVIDIA now is 4,000,000,000,000, you know, which is worth way more than The entire UK stock market, for example. And you just you just look at the numbers. The top 10 stocks in the S and P now are about 40% of its value. So if you're buying an index fund, you think, oh, you're getting a little bit of everything, sort of low low risk.
Julian Bishop:But, actually, you know, the the top 10 companies in the S and P and L, 40% of its value, they're almost all tech companies, a lot of which are sort of very tied into AI. So that's far more concentrated than the Brunner Investment Trust, for example. You know? And and, generally, we would prefer to invest, you know, with exposure to a lot of regions, themes, sectors, you know, a lot of uncorrelated risks because because we think that's a healthy way to invest. You want diversification.
Julian Bishop:And you could say that, yeah, the the S and P 500 no longer really has that. So you've got these top 10 companies, 40% of the value of the S and P 500, some incredible companies amongst them, but they're all, not all, but mostly fairly dependent on tech expenditure continuing to be really, really strong. And at the moment, certainly on the sort of more cyclical side, we're seeing this huge spike in expenditure, which not only has to be sustained, but has to grow further for those valuations to be to be justified. So, you know, time time will tell. You know, predicting the future is very hard, but it's implicitly in what we have to do.
Julian Bishop:If AI does not live up to the hype, I think personally the S and P will have a a tough time just because it is so weighted to those big tech and AI names. That's not to say there's lots of other businesses in the S and P that will continue to flourish, and I'm sure they will. But some of those larger ones, you know, could could struggle.
Kyle Caldwell:And in the global index, The US is a heavyweighting as well. I mean, to the to the MSCI World Index, it's around 72% to The US at the moment. In in terms of how Brunner invests, obviously, Brunner invests globally, I think you have around 40% to The US. And in terms of your benchmarks, I think you benchmark 70% to a global index and 30% to The U to a UK index. Yeah.
Kyle Caldwell:Does that 40% put you at an underweight to The US and has it been a long standing underweight?
Julian Bishop:So so numbers so yeah. So Brennan Investment Trust is a global fund with a a twist or global trust with a a twist, which is that it's a 70% global, but also 30% UK. So I think it's really good because in The US, you know, you have these sort high flying tech stocks, valuations tend to be quite high. It's sort of a jam tomorrow market, I would say, whereas The UK is sort of older economy, less glamorous, probably less growth, but loads and loads of cash flow, loads of dividends. So it's a bit more of a jam today market.
Julian Bishop:So that's a sort of source of diversification in itself. And the way it works out is in our benchmark with that seventy thirty split, about half is The United States. And at the moment, we're at about 45%, so a little bit underweight, but not not hugely so in the context of that that benchmark. I I I think, you know, The US is the place you have to go to for most tech investments. You know?
Julian Bishop:Just there is nothing like those of West Coast Silicon Valley companies anywhere else in the world. There's a there's a couple of global world class tech companies. We own two of them, Taiwan Semi and ASML. But by and large, the sort of best in quality, best in class, high quality tech names are to be found in in in The US. So we we have exposure there.
Julian Bishop:We have, yeah, Alphabet, which is the parent of Google. We have Microsoft, etcetera, etcetera. But then quite often, we find, you know, if you're looking at sectors that are more comparable globally, you have to pay a pretty big premium to be in The US. So a way that to Us doesn't quite make sense. So if you look at anything like consumer staples or utilities or banks or or or grocers or, you know, trying to think whatever whatever examples are energy names, you'll almost always pay more in The US than you would in The UK or in Europe.
Julian Bishop:So for all the sectors like that, when we're placing our when we're making our decisions, we tend to skew slightly towards the The UK or Europe over The US. So as as an example, for example, we we invest in Tesco at the moment, you know, leading grocer in The UK, really good competitive position now. Got about a 7% free cash flow yield, so 7% free cash flow yield. So it chucks off lots of cash that it returns to shareholders via dividends and buybacks. So that's a pretty nice financial algorithm we think.
Julian Bishop:You know, not cyclical, good market position, lots of cash flow. That's the sort thing that we would look for. But in The States, its closest proxy, which would probably be Walmart. It's a leading grocer over there, big sort of dominant retail player. That trades at a multiple in the high thirties compared to, you know, fifteen, sixteen for Tesco.
Julian Bishop:So to the extent that growth is comparable, their competitive position is comparable, you would have to pay sort of twice as much per dollar of profit for a stake in Walmart than you would in Tesco. So we just very simply just say, we think this one makes a lot more sense. We'll we'll we'll we'll pluck we'll we'll plump for this one. So quite often when we're looking around at businesses where you can compare across The Atlantic, it seems like the European variant is quite often cheaper and often for no real good reason that we can assassane, and we'll we'll plump for the European variant, which means on balance, we're a little bit underweight in The US.
Kyle Caldwell:I'd like to end where we began. So you were recently in The States, and you met lots of companies. Did that spark any new ideas? Have you initiated any new positions?
Julian Bishop:I mean, we our average holding period is five years, so we don't we don't actually, you know, change that most that often. I'd say one that would point to our most recent acquisition in The The States was a company called Federal Signal. So to the extent that AI is dominating headlines and people are wondering, you know, what the impact of AI will be on a whole raft of industries and uncertainty is rife, we plan for something very much rooted in the physical world. So Federal Signal, they make specialized industrial vehicles, which is effectively sort of collection of businesses that takes trucks, lorries, and adapts them for very specific uses. So for example, they make street sweepers, and they make sewage cleaners.
Julian Bishop:So if you have to blast out a fatberg, you know, you'd use one of their machines, and they they make the equipment that's used to paint lines on the roads. So very much rooted in the physical world. Great industrials business. Little niches, very profitable, good sort of innovation that makes life easier for municipalities and governments and so on and so forth. So we took a position in that.
Julian Bishop:So, yeah, you know, we we travel quite a bit. It was in The States in June as in Japan in September, and we're always of traveling, know, trying to find new ideas. We have quite high rejection rate on the trust, so we're always sort of looking at new things, seeing if they're better than anything we own already. So we turn over a lot of stones, kiss a lot of frogs, and I I I think the most recent investment we made, yeah, was was federal signal in The States. So the the very, unglamorous world of of sewage sewage vacuums and cleaners, which is slightly sort of different to the world of AI, which is dominating the headlines.
Kyle Caldwell:So that's it for our latest on the money podcast episode. Thank you for listening. And if you enjoyed it, please do follow the show in your podcast app. If you get a chance, please do leave a rating or a review in your preferred podcast app too. We love to hear from you.
Kyle Caldwell:You can get in touch by emailing otm@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the Interactive Investor website, which is ii.co.uk, and I'll hopefully see you again next week.