Q1 2025 Investment and tariffs update

Transcript

Jordan Gillies:

Hello and welcome to our Q1 investment update for 2025. My name is Jordan Gillies, I’m one of the Partners here at Saltus, and I’m joined today by our co-Chief Investment Officer, David Cooke. And what a quarter it’s been, it’s been a real rollercoaster ride and quite disconcerting, I imagine, for a number of our clients. We really wanted to make sure that we got communication out quickly. So we’re going to kick straight off. Cookie, could you give us an overview as of really what has happened in the quarter and what’s led to this market turmoil and all the headlines that everyone’s been seeing?

David Cooke:

Okay. Hi Jordan. Hello everybody. It’s not that often you could say that in a quarter, the world has changed, but this is one of those rare occasions. So let’s take it chronologically, and I’ll run it up to the end of March but also into the early part of April. What happened shortly after the inauguration of President Trump was the first bit of significant news, was a challenge to the artificial intelligence theme. A Chinese company called DeepSeek basically announced that it could deliver as good a product at a much cheaper price than the big American technology giants were delivering and spending hundreds of billions of dollars on delivering. And this is important because for the last couple of years most of the global equity market returns have been driven by this AI theme, and then we’re in late January and suddenly there’s a significant challenge to that.

So the equity market was scratching its head thinking about leadership, who’s going to lead forward? When the next thing happened, which is more understandable and familiar, which is the global economy in inflation and the economic growth terms was having one of its periodic periods of self-doubt. We were wondering if the economy was slowing and if inflation was starting to tick up again and starting to wrestle with that, and some of the data was really quite conflicting, so equity investors were already unsettled and then the backdrop was getting harder to read.

And then we skip forward towards the tariff changes that the new American administration was signalling to arrive on Liberation Day in early April. And as the market got its head around this, it started to worry about that because the noise is emanating from the White House, where they’re very serious about it. So an expectation was built up that they were going to deliver something which in effect would be a tax on growth at a point when you weren’t sure what’s happening with growth. And then when we actually got to that day, the tax was much bigger than people had thought, and so stock markets that had started to peak in about the middle of February and started to weaken through March really started to weaken very, very sharply in April, and that is where we have ended up today. So I completely understand why people feel that something has been going on. The Americans are trying to rewire the global security infrastructure and the global trade infrastructure at the same time, that one of the leadership themes in stock markets is being challenged, so there’s a lot of turmoil.

Jordan Gillies:

I suppose the biggest question that clients will have at the moment is really how worried should they be? What we’re seeing a lot in the headlines at the moment is that tariffs levels were twice what they were expected, at least to be, and that we’ve not seen tariffs as high since the 1930s, which coincided with The Great Depression and the US economy fell off a cliff. Is this a major systemic issue here or is this a blip? How worried should clients be?

David Cooke:

Well, it is a real thing, and I understand it is perfectly normal in the media for scary comparisons to be made with bad times in the past. There are parallels of the 1930s on tariffs, but I would say that thinking about the question behind the question, how worried we should be about this, I draw people’s attention back to 2022, which in terms is when we’re dealing with the inflation from Covid and interest rates were going from 0% to 5%. That was a period when pretty much everything everywhere started to sell off, stocks and bonds, it was like an omni crash. And that’s a period that we lived through intact just as we lived through Brexit, and the great financial crash, and the disappearance of large systemic banks like Credit Suisse, which everybody’s forgotten about.

So we’ve been through lots of challenges in the last three to 10, 15 years and, in a way, the uncertainty and the environment’s nothing new and the principles after how you construct a portfolio that performs in this environment are not new. And as we write, just as it was in 2022 or other periods of success, every portfolio will be performing in line with what its risk budget, and there’s nothing unusual or strange that’s happened in underlying portfolios because in many ways we position for a lot of this bad news, but also we’re there to ride out the bumps. And as I’m sure you know, and our clients will know, that many times the periods of stress are also the biggest periods of opportunity as well.

Jordan Gillies:

And so at the moment you are seeing it as a pretty big bump rather than as something majorly systemic?

David Cooke:

It is definitely a significant change. I chose the words carefully to say that the world has changed, that’s quite a serious statement to make, but it has. But that doesn’t necessarily mean it’s bad for portfolios at all, because the flip side of that is that prices tend to overreact and underreact, and I would say a lot of what you’re seeing in the recent headlines to the downside is concentrated in the equity market. Other asset classes are available, fixed income markets are going up, currency markets, alternatives markets, all with different performance characteristics.

Jordan Gillies:

So on that, and you touched on it briefly as well, so what has been happening in our portfolios? How have they held up and how were we positioned coming into this period?

David Cooke:

Yeah, at the back end of last year, we had started to move away from American equity assets in general because they were rich. They’d done very, very well. A great thing to hold for the last two years prior to that, but they’re getting very expensive. And in general, starting to put the equity money at the margin into rest of world assets, which are very cheap and had much lower expectations. So that’s the first thing that we did in aggregate. Within the United States, we also moved away from exposure to those big Magnificent Seven stocks into much more of an even equal weight exposure to the US economy, because it is still and was several months ago growing at 10 times the speed of everywhere else, so it’s still a good story. But we’ve seen a lot of this good news get into the price over the course of the preceding 18 months and we’ve been moving away.

We also, where it’s appropriate for portfolios at Saltus, have the so-called “third leg” which is the alternatives arena where we have long experience. So we have been moving some of that risk capital into alternatives, and that could be everything from simple stuff like gold and copper to more complicated, long, short or classic hedge fund strategies. And we did that in November and we did a little bit more in January, so that ahead of this event, which was telegraphed, even though it turned out to be worse than expected, you put a lot of the preparations in place to be able to ride the bump.

Jordan Gillies:

Okay, so that’s a helpful thing, we saw it coming, but perhaps not to the extent that it’s happened. And so how have portfolios held up? I know that’s quite a broad question, but in terms of what it looks like for clients, that’d be really useful?

David Cooke:

Yeah, yeah, yeah, we have a lot of portfolios, a lot of different mandates and so I’m going to say this in the run. So let’s say that if you are a Cautious client at this risk band, one out of five, you’ll be up year to date because you hold most of the assets that are going up rather than down. If you’re really, really aggressive clients with long-term time horizons and you’re in risk band five, in the context of global stocks being down about 13%, you are down about 7% or 8%. This is year to date, which I’d say is well within the normal 10%ish type movements that stocks do. If you’re in the middle, which is where most clients are, you may be down 4% or 5% to yesterday, but then again, as I speak, markets are rallying, and that’s just year to date.

Obviously 2024 was a very, very good year, so that’s probably a lot less dramatic if you’re the middle client being down let’s say 5% to be conservative in the context of global stocks falling 13%. That’s taking a hit, one is still down, but 5% we can recover and grow again. So we very much have the mindset that we approach this point in time with an open mind looking just as much as opportunities as we do at threats. And as I said, it’s usually at this point that the opportunities really start putting their hands up and if you’ve got the investment horizons that all our clients have, you can quickly start to find some really good bargains that recover those losses and that you grow again.

Jordan Gillies:

That’s great. I think we’ll touch on some of those opportunities in a second, that’d be helpful. One other thing that would be good to understand is I know some people that, for example, moved to cash in 2008 and didn’t go back into the markets for some time and probably the worst financial decision that they made. So in scenarios like this, what should clients not do?

David Cooke:

Our clients are intermediated with the vast majority. So you have a really skilled planner that’s in there that’s basically done the work for you. The cash you need will have already been planned and your investment portfolios, the money that you have left over, will be put in different parts with different time horizons and different risk appetites to match your circumstances. So unless your circumstances have changed, don’t change your portfolio. It is true, people get sick or they lose their jobs, then fine, totally change your plan. But otherwise the work has been done in advance and your circumstances are matched to the type of portfolio that you have, and the types of portfolios that you have are behaving normally, there’s nothing.

Jordan Gilles:

And so as well as not moving to cash and staying the course, the other thing you often hear is if you are about to invest in the markets, should I now drip money in? What are your views on that?

David Cooke:

Let’s say you say I want to put half my money in and keep half my money on the sidelines and put it in later. That’s effectively saying that the asset allocation should be 50% cash, and we don’t think that’s the best asset allocation. If it was all our clients, our thousands of clients, would have 50% cash. That is not the best asset allocation for periods of stress typically. We are here to do the dynamic asset allocation every day, which we do do every day, and as I alluded to before, it’s looking back in history. It’s exactly this moment that you should be bargain hunting rather than keeping your money on the side because your time horizons are beyond the immediate and you’re talking three years plus, and this is the point where you pick up the assets at the right price to give you the returns down the line.

Jordan Gillies:

And so to finish on a slightly more positive note then, is there any opportunity that you are seeing yet and are you finding some things at the margins that you think could be quite interesting for clients?

David Cooke:

Yeah, let’s take the obvious stuff. We haven’t talked much about the security changes that the Americans are trying to do, but that has prompted the Germans to basically unleash their balance sheet, and they have one of the strongest balance sheets on the planet and they’re a big economy. So we are talking potentially trillions of Euros of spending coming out of Germany, which we’re not thinking too hard about it, it’s going to help infrastructure as well as defence projects. Let’s just concentrate on the infrastructure. There are a lot of infrastructure companies with European exposure that don’t cost a lot and we don’t have very many in our portfolios, so maybe that’s an idea that we could have in there. And then there’s also just staying on the American theme. If you go back to let’s say American small or medium-sized companies, which we don’t have a lot of exposure, particularly at the smaller company end, they’re down 30%, 40% in the last couple of weeks, and it’s similar also for small caps elsewhere. From not having a lot of exposure, maybe if we get our longer term horizons on that the prices now are just too attractive to ignore.

So it’s things like that that we’re looking on, but I’d also say that if we arrive at this point intact, it’s not that we feel any urgency to do something on a Wednesday just because Thursday and Friday they’ve been weak in markets. We have time, this uncertainty will probably persist for at least a summer or period of months before we get more news and who’s negotiating what on trade tariffs. So we think we’re in a position of strength, there are lots of opportunities out there like the couple of examples I gave, which I think we will take advantage of, but we don’t feel under any pressure to do it straight away either.

Jordan Gillies:

Okay. So there is some opportunity there, but definitely don’t rush into things and make sensible strategic decisions in these moments. Fantastic. Well look, David, thank you so much for your time, we really appreciate it. To all of our clients, if you have any concerns, please do just speak to your adviser. We’re always at the end of the phone if you haven’t spoken to them already and we hope you have a good remainder of the week and can join us for our next investment update.