Global Markets Unraveled: Tariffs, Stagflation, and Strategic Investing

Global Markets Unraveled: Tariffs, Stagflation, and Strategic Investing

Transcript

Hello, this is Heather Peirce from Black Creek Investment Management. 

I'm one of the team members here on the Investment Team and Co-Manager of our global strategy. 

I'm greeting you today from London and it is actually a lovely unusually sunny day here. Heading back to Toronto after spending four days here for various investment meetings and Kuehne + Nagel Capital Markets Day with all of their senior management which follow our strategy and is a significant holding. 

I wanted to give you a few minutes of market updates, portfolio comments and then outlook.  

Obviously for those that read the paper or Twitter on any given day we know volatility in the environment remains very uncertain particularly with respect to tariffs and immigration. 

This morning Trump had announced 25% tariffs on all autos, that are not manufacturing in the US.

This will have, if enforced, have a literally crippling, effect on our economy in Ontario and general economies around the world, particularly the EU as well. 

These are extremely uncertain times and markets generally do not like uncertainty. 

This has become an environment where sticky inflation is sticker than anticipated and generally our concerns remain around, stagflation, which is an environment of higher prolonged inflationary pressures. In many cases brought about by the service industry, which will only be magnified as we see immigration policies become front and center for the new administration.

Stagflation also coincides with much slower growth because of, in many ways, paralysis of investment decisions because of the uncertainty out there, many management teams are unwilling to invest and will delay mid- and long-term capital investment decisions until they see what the impact of global geopolitical situations are.

We are seeing a rapid retrenchment of government in the US. We see daily announcements of layoffs and front and center institute such as National Institute of Health, Education, IRS, a rapid reduction in fiscal spending, huge retrenchment of the federal government footprint, coinciding with what will be potentially positive and that is a reduced regulation.

Generally, speaking, less government tends to be positive, but the uncertainty around this and the impact on pre-privatizing many of these businesses will have dramatic short-term impacts on many companies that depend on funding, that depend on decision-making in these environments. 

We do have what seems to be an environment, where many are reinvesting heavily in their own economy around the world, so you've seen Germany pass very strong fiscal stimulus, which is highly unusual for that economy which will benefit the EU.

We're seeing announcements of peace in certain regions that have been fraught with unrest for a significant period of time, but ultimately, very uncertain times and anticipation is that this will continue.

Volatility and uncertainty is never an ideal environment and last, but not least, we have pretty significant concerns around the exposure that investors have to the US marketplace.

 If you look at the world MSCI world index today it’s well over 70% exposed to the US. This is highly unusual, it’s more than doubled their global GDP and obviously we know there's an outsize exposure to the significant US type companies particularly MAG7.

We've seen a bit of unravelling of that in the most recent month. 

Our anticipation is this could potentially continue, as particularly large, global investors outside of the US have outsized exposure and the highest rating in US equities they've had in history. 

So large sovereign wealth funds, large investors around the world that have substantially less exposure, maybe more than willing in an environment where they feel as though they're being bullied or unfairly treated from a tariff perspective. You may see some of these unwinds take place and last longer than anticipated.  

As for the portfolio, as you know, our strategy is that we focus on the businesses, the underlying businesses and we do 10-year discounted cash flows and solve for IRR.

We believe our companies today are extremely well positioned. The IRRs are very attractive. The free cash flow these businesses are throwing off is very strong.  So from a business perspective, we remain in the portfolio and the advent is that we have identified for the portfolio at this point in time.

We've had a little turnover in the last six months, but in addition to that, we've actually had the opportunity to add to significant names that we’ve held for -many-many years, so one of those I will focus on, that has not been a very good performer over the short term, is Booz Allen Hamilton. 

Obviously, this is one of the businesses that has been front and center from a government spending perspective and DOGE. Our belief is that Booz Allen is a very strong solution to government spending, and we have added significantly to this position, as it has gone from 190 down to the low 100’s.

So you’ll see this having returned back to one of our top 10 holdings, and we have a strong conviction in our abilities to solve their winning businesses - in this environment - solve problems, create solutions for cyber security and artificial intelligence, which ultimately will achieve that retrenchment of government footprint from the standpoint of human capital into what will be much more software and services.

On the flipside of that, we've had positions that we feel have done extremely well in this environment where we are slightly concerned about the consumer, particularly the US consumer. Many have stretched balance sheets, so we've trimmed positions like Amadeus, which is a global leader in hospitality, air travel, hotel and software. A very strong company, excellent footprint, long-term success, a winning business. But for us, valuation just had that business approaching the bottom of our list.

So, minimal changes, confidence in the portfolio, we thank you for intrusting us with your savings, remain confident in the 28 holdings in the portfolio diversified businesses, with strong competent management teams, that are position to really take share against weaker competition, competition that can’t invest in technology and AI involved in volatile times.

 So, thanks again and look forward to speaking to you again soon.