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In this episode, James and Giles discuss global equity markets, the uncertain path of tax, spending and tariff policies in the US, and the inflation and growth implications of these. They also consider the Trump Administration’s recent budget plan for tax cuts and spending that we saw towards the end of February.
Our experts also explore the apparent trends of protectionism and economic nationalism, and how they might be affecting growth forecasts.
James and special guest Matthew discuss and the current the landscape for income investing, and how it may be affected by cyclical interest rate trends.
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 Collectives, Matthew Stanesby.
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 welcome to the March edition of Insight Talks with me, James Tulloch. I'm I'm joined as usual by our Head of Equities, Giles Parkinson. Hello Giles. Hey James. And this month it's a pleasure to also be joined by our Head of Collectives Matt Stainsby.
James Tulloch:Hello Matt. Hi. Great to see you both and thanks very much indeed both for your time this month. Giles, we'll we'll dive straight in because as ever, there's there's plenty to get through. We're certainly not short of potential topics and material when it comes to these monthly discussions.
James Tulloch:I think we'll park the geopolitical drama and the machinations around the war in Ukraine for the time being to focus on markets. And after a strong start to 2025, February brought a slightly more challenged backdrop, didn't it? I mean, it seems investors are continuing to focus ever more on the potential growth risks in the in The US particular. We spoke about Chinese AI powered chatbot deep seek last month. And whether it was a catalyst or not, investors have perhaps awoken to opportunities outside of The US, or at least perhaps that the tech and AI story isn't necessarily just the domain of the the Magnificent Seven, haven't they?
Giles Parkinson:Yes, James, I think so. So definitely, it's been the case that The US exceptionalism story, I think, which is very much the narrative of 2024 last year, has now been challenged to a greater extent. And there's there's a couple of reasons for that. I mean, look, there remains notable uncertainty about the new administration's policies.
Matthew Stanesby:Mhmm.
Giles Parkinson:And therefore, the impact that they may have, positive or negative, companies and consumers, I think, are just finding it hard to plan. And and we're seeing that weigh on both corporate and consumer sentiment data over the course of of the month. That's really been borne out there. Yeah. This in turn is, I think, stoking concerns about growth, and that then has impacted some share prices.
Giles Parkinson:We've had two things going on, James. We've had slower growth in The United States, but we've also had a bit of a question mark, as we touched on with DeepSeek as well. There's been more news around data center spending and so on. So just a few question marks have appeared over the sustainability of this US mega cap tech sector earnings Mhmm. Combine that with valuations.
Giles Parkinson:So positive for global multi asset investors such as ourselves is that other regions have fared somewhat better over the last month. Both UK and equity indices have posted strong returns. And in other asset classes, global bond markets have demonstrated their value as diversifies within portfolios as investors have sought safer assets.
James Tulloch:Yeah. So now European equities may have been strong as investors increasingly factored in the likelihood of a of a ceasefire in in Ukraine, but even that narrative of has, of course, been challenged in in recent days. But as far as The US is concerned, Giles, after an initially strong surge on president Trump's reelection in November, pullback recently means that as as we enter March, the S and P 500 has has erased its its post election gain, and it's perhaps possible that market consensus on some issues like like tariffs has been a little bit too too sanguine, seeing them as a foreign policy tool or fairly peripheral, like steel and aluminium for example, or not as bad as was initially threatened, sort of 10% on Chinese imports rather than the 60% mooted on the campaign trail. Now we've seen tariffs imposed on or suggested for Mexico and Canada, then delayed, then imposed, and now already taught that they may be cut fairly quickly.
James Tulloch:So seeing them as a foreign policy tool clearly isn't entirely incorrect, but and perhaps investors have been a little
Giles Parkinson:bit complacent in this area, perhaps? Yeah, possibly James, I think. So there's the other way or the other aspect that gets bundled up with the topic of tariffs is outside of foreign policy, is really economic policy. And here, in terms of the Trump administration, in their minds it's used to correct some sort of using air quotes there correct, in Trump's view, American trade deficits and potentially even reshor manufacturing jobs. Yeah.
Giles Parkinson:Now the jargon for this that they've come out with is reciprocal tariffs, but the punchline here is that that will incorporate VAT rates in those domestic economies, and that's gonna be particularly meaningful for for countries, for economic blocs that have VAT as a big portion of their government income, such as the EU, UK. And so, definitely think that there is a chance that this maybe somewhat cosy consensus has become misplaced in the last few months because it's been seeing tariffs as just a foreign policy tool. Now, there's other things to think about, of course. We've got the eventual path of US tax spending and tariff policies, and then the inflation and growth implications of those. It's all still very uncertain, James, and I think investors should remain vigilant in our opinion.
Giles Parkinson:Yep. Now, just to pick on one of those, the tax policies. The House of Representatives have agreed Trump administration's budget plan for tax cuts and spending. This happened towards the February. Now that bill still needs to pass through the Senate.
Giles Parkinson:If approved, it should set in train a lower period of federal spending, more tax cuts, and potentially more debt. Yep. Now look, James, these numbers are fairly mind boggling. Net tax cuts around 4,000,000,000,000, federal spending cuts around 2,000,000,000,000 Yeah. And raising The US debt ceiling to sort of make up the difference by around 4,000,000,000,000, which would net net require The US to issue another 2,000,000,000,000 of treasuries to balance the books.
Giles Parkinson:Mhmm. Look, all this is gonna be a a political negotiating point, I think, at this stage. But perhaps most significantly, it doesn't suggest that additional fiscal stimulus which might aid growth. This is all government cuts and on the tax side. Yeah.
Giles Parkinson:So faced with such uncertainty, the Federal Reserve is likely to hold interest rates steady until early summer at least, which we think is rational given its data dependent approach requires more data to analyse. Sure. But the longer this uncertainty prevails, the greater the likelihood of a US growth scare.
James Tulloch:Yeah. Okay. Is perhaps an issue I wanted to explore with you a little bit more, Giles. Think we actually touched on it on a podcast a couple of months ago, and it may yet prove to be quite prescient, and that's around the apparent trends of protectionism, even economic nationalism, which are perhaps crimping growth forecasts and adding to the perception that the disinflationary processes stalled across many developed markets. Yet you mentioned the Fed there firmly in wait and see mode at the moment, and ultimately if rates do remain elevated for longer, there is of course possibility that continually higher bond yields will begin to pressure that benign soft landing narrative for both The US and global economy, isn't it?
Giles Parkinson:Yeah, indeed, James. I mean, the concern we have is it is questionable whether The US economy can sustain current levels of activity and employment with these persistently high borrowing costs. Appreciate yields have come down a little bit, those interest costs have fallen a little bit. But all else equal, these higher for longer interest rates make the cost of debt and capital expenditures more expensive. Yeah.
Giles Parkinson:And my concern has been that it's not clear that The US economy can survive with mortgage rates over seven. Rates, bear in mind, that should be below six by now with the Fed having started to cut rates in September of last year. But instead, the yield curve so this is the interest cost on bonds that are further out, and a lot of The US economy borrows thirty year mortgages. So instead the yield curve has steepened even as interest rates are falling from the Federal Reserve. Those long bond yields have actually risen, and we're only gonna get lower rates.
Giles Parkinson:We're only gonna drag down those long end yields if the Fed cuts even more than the market expects. What might cause them to do it? On the one hand, it will be continued disinflation back on that data dependency, But the other bit, frankly, will be evidence of a stalling global or or particularly stalling US economy. That would be the catalyst which probably triggers a dovish central bank action. However, it will probably also involve an equity market correction at the same time.
Giles Parkinson:Yeah. So James, look, all of this I think has led us to reassess the merits of a sizeable equity overweight in portfolios. It's important to reiterate that soft landing remains our base case scenario. We're expecting a recession, although we have adopted a slightly more defensive positions in portfolios at this time. That soft landing narrative, it has become more challenged of late, and we
James Tulloch:do think some caution is prudent. Okay. Wonderful. Thank you very much for the moment, Giles. Great to get your thoughts as ever.
James Tulloch:But I'd like to bring Matt in here. Now, on the podcast each month, we often talk about the evolving market backdrop on a month to month basis, but what I wanted to get into with you is is the slightly longer term evolution of the the market backdrop. Now, as head of collectives, you manage the the managed fund range. Now there's a conservative balanced and growth iteration of those funds. There's a fourth fund as well, obviously all multi asset funds populated by third party collectives.
James Tulloch:And the fourth fund is, of course, the managed income fund. Income investing in general and multi asset investing for for income is is certainly garnering a bit more attention again of of late, and I think perhaps essentially after a very challenging period for for those investors looking to generate income, the landscape for income investing has has transformed in recent years, hasn't it?
Matthew Stanesby:That's probably true. Yeah. I mean, I would say, really, the change has been to do with interest rate policy. And if you sort of wind the clock back to financial crisis and post financial crisis, we went into a world where we had ultra low interest rates Yeah. And ultra low ultra loose monetary policy.
Matthew Stanesby:So what that really meant was, for a low risk investor, if, you know, if your starting point is you want to put money into cash to generate income or even into some sort of, you know, high quality bonds, you couldn't really generate enough income from that. So what you had to do as as an income investor was to either go up the risk spectrum, so try to put some money into some more risky bonds, or indeed, as was often the case, you'd move into into equities or into alternatives.
James Tulloch:Yeah.
Matthew Stanesby:So if we think about bonds, say in the past, they've historically been a very good, very good foil for equities, so when equities were having a tough time, bonds would step in and and provide a little bit of a of a cushion, and that wasn't the case anymore. So again, us along with many, what we tended to do was we tended to put some money towards the the alternatives. In this case, what we're really talking about, we're talking about real assets that are trying to generate some level of income with some level of government backing where possible, and some sort of inflation protection, hopefully steps in and does the hard work that the bonds used to be doing. Now that's all changed, right? So the change, as we said, is interest rates are now a whole lot higher, and we get back to a world where actually we can again start to think about bonds as being the bedrock of an income portfolio.
James Tulloch:Yeah, yeah, sure. I think all investors became well aware of the acronym TINA, there is no alternative, which of course was the notion that with interest rates at very, very low levels, investors would have to look to equities, as you say, to generate their required returns, and those investors who required a certain level of income might have to start taking some of their distributions from capital as well, so capital gains took a precedence as well. And that all meant that the sort of well established and previously very popular strategy of equity income became perhaps somewhat sidelined or at least overshadowed by the focus on total returns and capital growth. Would that be fair?
Matthew Stanesby:Yeah, absolutely true, yeah. And I guess what we're seeing is a lot of those sort of growth companies, they pay little or sometimes no dividend at all. They've performed really strongly. And again, there's more acronyms, right? So we've all heard of the FANGs, it's now become the Magnificent Seven.
Matthew Stanesby:And that's really been those companies that are at the height of growth. Essentially, it's it's a sort of a jam tomorrow story. You're waiting, because interest rates were low, you could wait for for the big payouts in the future, which meant that investors would flock to those sort of growthier names. Now, some of that, I guess, and in recent moves have been people thinking, well, actually I need to have some of that. As I say, we think now that the sort of interest rates of the environment has gone back up to sort of close to normal, maybe some of that's going to start to unwind.
Matthew Stanesby:We can now find, you know, equities that give you a sustainable level of income and they're pretty safe and secure, and maybe were thought of as boring in the past. Yeah. But again, maybe as Giles mentioned, right, these turbulent times, maybe boring's good. Yeah. So maybe, know, it's a bit more interesting in those safe, reliable sources of income.
James Tulloch:Yeah, yeah, absolutely. Absolutely. And I guess we think about the sort of timeline of events over recent years, Of course, along came the pandemic and the lockdowns associated with that, and despite the sort of sudden and significant slowdown in economic activity that brought about, it actually sort of further turbocharged the enthusiasm for tech and growth stocks. But as is often the case with these trends, they can move in cycles, as we alluded to value stocks, dividends and equity income strategies have been in vogue before, and as we suggested, there are signs and reasons to believe that that popularity might not just return, but perhaps even continue to grow.
Matthew Stanesby:Yeah, we believe there are, right? So after a number of years in the wilderness, equity income and bond income, for that matter, started to re emerge as a more viable and attractive investment solution. And again, not just for those investors who require regular cash distributions from the portfolio. In a world where we've got rapidly rising inflation or we had rapidly rising inflation, that led to interest rates going up in 2022. Yep.
Matthew Stanesby:That 2022 period was a pretty tough period. It impacted bonds and equities both negatively. Yeah. But the end result, where we end up today, is a market where actually forward looking returns from compounding of income streams might be attractive again. That could be bonds, as I said before, or that could be dividends from an equity strategy.
Matthew Stanesby:Mhmm. So again, if we think from a fixed income perspective, higher interest rates, what does that really mean? It means starting yields start to look attractive. I can now go out and invest in really secure government bonds getting a four to 5% income level. Mhmm.
Matthew Stanesby:I can go a little bit down the risk spectrum, you know, lend me money to some of those very large corporates that we all know and love, and I can get five or 6% for that. And that's just on the bond side. If we look at the equity side, what's higher interest rates done for equities? Well, actually what it's meant is it's a little bit more challenging for growth. So as we said, growth companies, essentially, when you value it, you pay far more attention to what's in the future, so again, clamour for the high growth, high stocks that are going to deliver that in the future.
Matthew Stanesby:If we wind it forward and now we're going to discount those rates at a slightly higher level, it's actually now more appealing to get something upfront, I. E. Income paying safer securities with less of a terminal value. Sure. So again, fixed income looking attractive, equities looking attractive.
Matthew Stanesby:We're at a level where we think interest rates are probably historically sensible. They're not necessarily going to go much higher or much lower. So we don't think this is about to change anytime soon. And what that's really meant is, I guess, is investors start to rethink about how they want to position a portfolio. Do they think that actually now income is an alternative?
Matthew Stanesby:So this is rather not that there is no alternative, or now I guess there
James Tulloch:is an Sure. So, yeah, guess we find ourselves at a different stage of the cycle, maybe even a new paradigm given how long interest rates remained at extremely low levels across most of the developed world. But we are a few years on from that major shift in the market backdrop really occurred in 2022, and growth in big tech have certainly not faded from investors' consciousness at all, with artificial intelligence obviously emerging as a major new theme and growth driver of course. So how are you tackling the situation as the manager of a multi asset income fund at the moment?
Matthew Stanesby:Yeah, mean, as you said at the start, I don't just manage an income fund. All of the funds I manage are multi asset, one of them just happens to be income. But across all of those strategies, you know, I guess our mantra is we want to be diversified across asset classes. That just means that if something goes wrong in one area, we've got other areas that can pick up the slack. And that's true, you know, and some within the income space.
Matthew Stanesby:So within the income space, not only do we try to diversify by assets class, but we also try to diversify within asset class. And so we're looking for all the income sources to deliver something positive. We don't want to have any one area particularly, you know, so I don't want to have all my bets in, say, UK equity income, because if that doesn't work in a period like COVID, we've got other things that can kick in and take up the slack. So as as we said before, right, yeah, people are trying to diversify their sources of income. If we get back to your question around the market backdrop for equities, as I said, you know, we've had the we've the so called Mag seven and large tech, and that's a bit of a headwind for my income strategy.
Matthew Stanesby:So if you look at it over the last couple of years, it's it's lagged my equivalent conservative strategy. That has started to turn. And then again, we round the clock back to say 2022, my income strategy actually outperformed my conservative strategy. So it's the same risk band, but again, different emphasis on income. It is.
Matthew Stanesby:So, okay, so what's changed in that AI world? And as I said, we mentioned what discount rates is going to do to that. I also think there's some volatility coming from the Trump administration. Yeah. Mentioned some of that before.
Matthew Stanesby:And again, if we think that there is some volatility, then maybe people are happier to pay out for a bit of security. Income today is definitely something that would be a positive in that space. You know, and actually, as we've said, it's broadened out to not just The US, you know, it was just about US large tech. Year to date, actually, the best place to be would have been European, and again, many of those sort of staple names paying a healthy dividend. Yeah.
Matthew Stanesby:So we're saying don't own big tech, and we, you know, even within my own company portfolio, I can own tech. Sure. We just say that there is now an alternative again. The market's broadened and for us that's a positive. So again, if we think about my managed income fund, just as a sort of a real, you know, rough and ready numbers, it yields about 4%.
Matthew Stanesby:I'm getting about a 4% income off of my equity portion. I'm getting just under 5% from my bond portion, and I'm getting somewhere in between for my alternatives. So I'm not not any one of those is dominating, and we're getting a pretty smooth return across all three, and we're hoping that, you know, if there is a hiccup in any one of them, the other areas can kick in.
James Tulloch:Kick in, yeah. Fascinating. There's obviously a really interesting theme at play. And I guess if we think domestically, there are perhaps also some structural reasons as to why income strategies might be more in demand going forwards due to some of the proposed tax changes and demographics, aren't there?
Matthew Stanesby:Yeah, I think that's right. Obviously in the recent budget there was a proposal that from April 2027, a proposal that inherited pensions are going to form part of the estate and as such is going to be subject to inheritance tax. What that's likely to mean is that many more people are going get caught in that trap, so financial advisers talking to their clients have got to decide how they're going to now think about income. What's a pension going to be used for? Is it just back to be more about income, when in the past maybe it was about a vehicle that they could pass down assets without suffering tax?
Matthew Stanesby:So, yeah, so we think there's going to be people thinking about it. What might happen is they might actually want to take out more income sooner on and then they can distribute that as gifting over time using, you know, the annual allowances. And we also think that that there might be a there might be a space, if you think about what's happening, say, go back to thinking about interest rates, again, it feels like that's all I've spoken about. Bank of England interest rate cycle, we think has probably topped. We think, you know, there may be even a sort of starting to cut.
Matthew Stanesby:So again, many clients now are thinking about, okay, well, I've got money sitting on the bank earning me 4% in income, that's probably not going to go any higher and in fact it's going go lower, so maybe there's another impetus to think about, well, what am I going do with that money? And then you've got to also think about, you've got to start to think about inflation and what's that going to do to your pot. So, you know, flexibility, pension drawdown, what they're going to do with it, don't really know. Yeah. But thinking about an income solution, we think, is going to be something that's got to be in everyone's plan.
James Tulloch:Everyone's mind, yeah, sure. And I guess on the subject of retirees, you know, those in the the decumulation phase of their investment life cycle, you know, that's simply going to become an ever increasing cohort within the range of market participants, isn't it? And presumably that means a likely greater demand for investment strategies which are suitable for them.
Matthew Stanesby:Absolutely, yeah. Mean, guess we all know that the retirees are the people who hold all the assets, and they've got to think about how they invest them. Again, if you think about what they're going to do with their money, if you look at, say, annuity rates, they're going to become less attractive, so people aren't going to want to buy annuities. They're going to probably live longer, so that's what we're talking about with demographics. Sure.
Matthew Stanesby:So they've got to then start to think about, okay, the money I'm getting today, I need to be able to grow that into the future with inflation because otherwise I'm gonna be poorer off, you know, in a real sense. So they have to try to think about, okay, what can I do? Do I do I stick all my money in a fixed income investment where that money stays the same? Or do I try to build something where I'm getting some protection? And hopefully, in the case of a fund like the managed income fund that we're running, we get some we get a decent starting level of income, we get an income that can grow in line with inflation, and we do all of that without actually touching the capital.
Matthew Stanesby:So we're hoping to grow the capital slightly over time as well. So hopefully you keep your pot of assets and you can live on the income that grows and keeps you protected against the cost of living increases. Yeah, yeah, absolutely. Thank you
James Tulloch:very much, Matt. Fascinating to get to your insight. Thanks very much indeed for joining us this month, and thanks to Zevo Jars for your thoughts, and thank you to everyone for listening. Hopefully that was informative this latest edition of Insight Talks and we'll be back to do it all again next month. But for now, goodbye.
James Tulloch:Cheers, James. Thanks very much. Thanks a lot. Thanks.