100 Days Long

Hello it's Friday the 25th of April. We've had a couple of weeks off these videos with public holidays and bits and pieces, so I thought it's a good opportunity to really look back over the last few weeks, really thinking about April as a whole. It's interesting to reflect on the fact that President Trump has not yet been in office 100 days. We actually click over the 100-day mark next week, but it seems like there's been plenty going on in a very short period of time. So at the start of this month, we had 'Liberation Day', as it's known. We saw a big sell-off following that as the tariffs announced were digested and perceived to be much more aggressive than perhaps what was anticipated during the electoral cycle in the buildup to the election of Donald Trump last year. And that sell-off was pretty severe actually, we had double digit mark to market losses, something around sort of 13s in the US and more like the 10s or so in Europe. But then there was a decent recovery following on from that as the rhetoric was dialed down, the numbers got sort of re-crunched and essentially we got not all the way back to where we started the month, but we recovered most of the ground that was lost early on.

And then this week we had a new source of risk, again something that was very firmly telegraphed during the election, but something that perhaps wasn't put as much risk on it as we then saw at the start of this week, namely President Trump sort of focusing on the Federal Reserve, and most notably the chair, Jerome Powell, and referring to him as a 'LOSER' in capitals, and you know, that spooked the market. It was looking a bit like his Liz Truss moment in some ways, because the Federal Reserve very firmly sort of independent and had sort of decades of hard-won reputational strength for being fairly good at managing inflation and everything else. It seemed as though at the start of this week at least, there was a risk of some of that, if not all of that being undermined. There's been a subsequent stepping back from that, and markets have responded to that fairly well, but again, it just demonstrates how news flow related markets are at the moment. There was a perception during the election process in the US that as much as Donald Trump was focusing on 'making America great again', 'America first', and this sort of industrial focus and reshoring and everything else, there was still an understanding or belief that he would be market friendly in the way he's acting. And so far in the presidency, that hasn't been quite as clear-cut as perhaps we would have presumed. And in fact, in many ways, some of the things that have been announced and then retrenched from look pretty unfriendly to markets. So there's a lot more nervousness, a lot more jitters out there perhaps than we might have expected.

My colleague, Phil Milburn, is doing a deep dive into the Federal Reserve and the importance of independence and why it should remain so in his written piece this week. If you'd like to get a hold of that, please do speak to your Liontrust representative.

The other thing we should really focus on is performance year-to-date and the impact of sentiment on that. We've spoken previously about how fickle sentiment can be and how quickly it can change. And to give you a flavour for that, you can look at decomposition of returns in different markets, what's made up the returns. You've got profitability, or earnings as we refer to it as the sort of fundamental results of businesses. You have income in the form of dividends and bits and pieces. And then on top of that, you have what we call the multiple movement, the ratio between price and earnings that can stretch upwards. If you're feeling more optimistic about the prospects of a business or an index. Or it can compress and stretch downwards, if you're feeling less optimistic about the probabilities of these earnings growing in the future. And over the last five years the US has generated decent profitability, but not exceptional compared to peers in Europe and Japan and the like. The big difference in terms of the five-year returns have been getting a bump from expansion increase in this price earnings ratio over the last five years. Essentially people paying up for what they perceive to be better prospects for the index and its constituent parts when compared to other markets out there. And it leads to this story of US exceptionalism or perhaps caused by this US exceptionalism that we've been talking about quite a lot in these videos. Europe on the other hand, over the last five years, had a small detraction from price earnings multiple moving downwards, essentially saying that regardless of the revenue and the profitability that you're getting from these stocks, people wanted to pay less of a high multiple for them on a progressive basis, so you're getting a couple of percentage points impact from price earnings contraction over five years to the end of last year, whereas in the US you're getting a 5% bump going the other way. Now year-to-date has been very much the opposite. Again the fundamental results in terms of profitability and everything else are actually looking fairly reasonable in the US and fairly reasonable elsewhere. There's no big impact in terms of the impact in consumer confidence and the rest of it that we might see come through later on. The difference really has come through in terms of the price earnings multiple contraction in the US year-to-date, whereas elsewhere it's been relatively stable. So over the last five years, on an annualised basis, you're getting between 4% and 5% positive impact from price earnings, multiple expansion in the US. So far this year, you've had the opposite, something between 15% and 20% detraction from price earnings multiples unwinding in the US over this period. It's interesting to see how quickly you can unwind some substantial price earnings multiples compounding in relatively short order. The US is not by any means looking cheap yet, but it's certainly cheapened up substantially compared to other markets. Where the question mark comes in now, whether it be US or anywhere else for that matter, is the prospects for earnings for businesses given how cautious consumers and indeed businesses are now. They've been spooked by tariffs, they've been spooked by the uncertainty that's all coming along with it. And one of the rational responses to that uncertainty is to tighten belts, sit on your hands and spend less, which if that comes to fruition, and there is a chance it does of course in the tail end of this year, we'll see it come through in the data. Obviously, that would impinge revenues and potentially profitability. And then we'll have to see what impact that has on ratios and everything else. But the interesting point of all of this, I suppose is if you did a blind tasting of these different regional indices, if you took the labels off, and just looked at the profitability flowing back to investors, you wouldn't necessarily see a massive differential between the US and the rest of the world, either positively or negatively. But over the last five years, you saw a big impact from sentiment on the positive side when it came to US versus the rest the world. And year-to-date, you've seen the exact opposite come to bear. What that really suggests to us as ever of course, is the importance of diversification even within equity markets which you may look at as one holistic group, there's big differentials out there between regions, between styles, between sectors, between manager types as well. And so, you know, clearly when you're thinking about building a multi-asset portfolio, you want diversification between different asset classes that have a different response to market environment, but also within those asset classes, there's plenty of scope for diversification as well. That's it from me. Have a good weekend when you get there, and we'll see you next time.