Bassline by Cavendish Ware
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Bassline by Cavendish Ware
Episode 21 - Late summer Investment Outlook 2025
In this episode, Dave is joined by Rory Maguire from Fundhouse and our very own Lance Peltz for a candid discussion on the state of the economy in the wake of “Liberation Day.”
They unpack the real impacts of US tariffs, shifting market sentiment, and the delicate balance between economic forecasts and investment decisions.
From the dominance of mega-cap tech stocks to the volatility of crypto, the conversation explores how uncertainty, valuations, and investor behaviour are shaping portfolios — and what AI, jobs data, and global politics might mean for the future.
Welcome to today's episode and today I'm delighted to have Rory Maguire and Lance join us to talk about the state of the economy. So here we are in August and the last time Lance and I spoke it was just before Liberation Day and I think there was a deep, deep, deep sense of unease about what was going to happen on Liberation Day. And I think the world may be slightly different from the kind of one we imagine. So, Lance, why don't you kind of start? Because I think, you know, it was the conversation that we had around that. There was a lot of uncertainty, but sort of things have panned out slightly differently maybe than we thought they might.
SPEAKER_01:Yeah. And I think Rory and I would agree that we can talk about for ages about the economy and economic outlook, but must always reference that it's actually valuations and earnings growth that really drive how we position portfolios. Because as we've seen, making economic predictions is pretty much a mugs game. And even when you get it right, markets don't actually behave should we say rationally from that? And a very good example is if I'd said a year ago that the US would now be imposing weighted average tariffs of about 18% and that the US budget deficit would be forecast to expand a tremendous amount and US inflation is bubbling away above the US Federal Reserve target, you would say, oh my God, and head for the hills. And clearly that wasn't the right policy. So I'm very happy to talk about economics, very happy to opine on future direction, but always take it with a pinch of salt. So what do we know? Post-liberation day. The acronym is TACO. Trump always chickens out. But actually... A lot of the US trade partners have also chickened out. And the reality is that UK, Europe, a lot of South America, Canada have basically had to come to agreements where they will suffer tariffs of various levels to export goods to the US. One thing that is a good thing for the UK is relatively we've done okay, but tariffs don't encompass services and the UK is much more of an exporter of services to the US. So for the UK situation, that's actually quite relatively good or let's say relative escape. However, China is a holdout and China is too big to be bullied. They've got leverage, things like rare earth minerals and companies like Apple, however much they are trying to move manufacturer away from China, still rely upon Chinese manufacturer. And so that one is, let's say being continuously kicked down The can has been continuously kicked down the road. The last deadline was August 1st and it got extended again. But the big picture is there are now tariffs on US imports. A weighted average level of about 18%. But probably worse is what remains, policy volatility and opaqueness. And the fact that even when you have an agreement, as the Canadians found out, or the Brazilians found out, that actually that can change on a whim. And it's also now being used as an instrument of political pressure, as the Brazilians are finding out about Trump... trying to interfere in the Brazilian judicial system and their prosecution of the former president Bolsonaro. So it's not a good backdrop. But in the meantime, markets have recovered their poise and are making new all-time highs. And that's where the disconnect between talking about economics and focusing on that and what's actually happening in markets can can really lead you astray um
SPEAKER_02:i mean i it's it's really interesting because i guess you know there's what i've seen is that there was a lot of volatility in the markets post liberal liberation day but it sort of seems like the world's almost got used to well the markets have got used to uh trump sort of uh tacker uh strategy and i i just wonder if that's true or not and you know i guess rory when you're sort of trying to make sense of what's going on are you sort of factoring in the fact that you know something may come out of the blue because i guess you know what what trump seems to be very good at is just sort of like pulling a a rabbit or something else out the hat. And, you know, it's often quite counterintuitive. So do you sort of think markets have got use? And, you know, I guess, as I say, Rory, how do you kind of manage that when you're sort of looking at, you know, what you have to look at?
SPEAKER_00:Yeah, that's a difficult question to answer because... We try to, as Lance does actually, which is why I think the fit is so good with us, we try to look at what's knowable, okay? And that might sound obvious, but as Lance was saying, if you try to map out what the implications are going to be of things like tariffs, whether it's on economies or businesses or sectors, that's incredibly hard to do because it's a moving feast the whole time. And the facts that we know As Lance was saying, we've got an average of 18% tariff. So if you're exporting into the US, of course, the importer pays that. The US business pays that. But whether that gets passed on to the export, the importer is, I guess, up for debate. That was around 2%, I think, at the beginning of the year, a little bit over 2%. So it's a significant increase from where it was. And so like all of us running businesses, if you could imagine a cost of doing business that is that substantial, it impacts your earnings, impacts your cash flows, impacts your planning, impacts how you think about logistics, suppliers. So there's this really big impact on you. And so what we know as a fact is that before tariffs were imposed, things were better than they are now because of what I've just described. And so therefore, what we sit down and think about is, has the market priced that in? In other words, the market did have a lot of anxiety. um with that anxiety came a significant sell-off and and usually but not always the market overreacts in situations like this in other words the sellers get a little bit too pessimistic and they push prices down too far and usually uh not always that leads to a buying opportunity but in in our um estimation there wasn't such a buying opportunity it didn't it didn't fall uh enough um and it has gone back above the levels that we saw at the beginning of the year and yet uncertainty has increased of course markets what they what are markets they are for equity markets there are an aggregate of underlying companies valuations based typically on what earnings expectations are and earnings expectations we think should be impeded. That's obvious that with tariffs, things will be more difficult for reasons I've described. So our view, we are somewhat nervous of equity valuations, particularly in the US. And we were nervous before tariffs. And with tariffs, we've seen uncertainty climb and prices have gone up, which is making us I guess think that the view is probably even more important now. As uncertainty climbs, you really want to be paid for that uncertainty by getting assets at cheaper prices and not overpaying for them, not getting in when the prices have actually gone up a lot. So yeah, we look at that relationship, the relationship between the price you pay, what the expected earnings are, and whether that relationship is good enough. In other words, whether you pay today to invest in companies at the right price and not overpay for those earnings. So yeah, that's kind of how we think about it. It's a lot of complexity, and I think to try and distill that complexity into a couple of knowable facts I think is we think is the prudent way of looking at it
SPEAKER_01:I'm going to add a bit of depth to what Rory was saying we can look at the return of an equity market and disaggregate it into broadly three components that explain most of that movement one is earnings growth both the known earnings growth and the expectations expectations being really the aggregate of all the analysts that are looking at these companies, the dividends that you receive as a shareholder, and then the multiple that investors are prepared to pay for that future earnings growth. And the US in aggregate, if we talk about the S&P 500, which represents the top 500 companies in the US, has delivered So far, quite decent earnings growth. When you dig into the numbers, that earnings growth is really concentrated, though, in a handful of the mega cap technology companies that are benefiting from what is a massive capital expenditure boot relating to AI. The rest of the U.S., quoted sector is there's always specific exceptions, but the earnings growth is actually quite mundane. What's really noticeable is that investors are now prepared to pay a much greater multiple for that future earnings growth. So I know this is a contentious ratio, but it's something that I like looking at, which is called the PEG ratio. And it's the price earnings ratio growth to price earnings growth multiple. In other words, what are you paying for 1% of earnings growth? or 5% or 10% earnings growth. And you can compare that across markets. You just ignore the companies and you look at what you're paying for a multiple of growth. And in the US, that has just continuously expanded. And the US valuations relative to history and relative to other markets is so much more expensive that it just gets really difficult to have a lot of confidence that you earn a decent return over the next five or 10 years. Or in other words, we can get the same level of earnings growth, let's say in Asia, where we recently added money for a lower cost. And that's how we weigh out those relative differentials. I could then talk about how that earnings growth is in the US is in just a narrow set of companies. So if one of those companies trips up or is quite likely has over-invested in the AI theme, and there's a great article in the FT today about the aggregate investment in data centers of, this isn't wrong, 3 trillion US dollars, you get the feeling that there's gonna be over-investment and the return on capital and therefore the profits is going to probably fall. When, that's a harder question, but it gets a feel of inevitability about it.
SPEAKER_02:I mean, I really, I love what you're both saying. It was a huge comfort, actually, to me in knowing that actually what you're doing is using the ratios that you were taught way back when in terms of sort of valuing businesses, doing it very calmly and systematically. One of the questions I had, though, was, you know, you've also had Trump talking about the liberalization of crypto in the U.S. And I mean, in terms of like what you both look at, has that had any impact at all? I mean, certainly what we can see is Bitcoin and Ethereum and the other coins kind of growing in value. But I just wondered if that sort of had any impact. I mean, when you're looking at sort of the sort of various funds and equities that you're looking at, has that sort of crypto thing come into play at all?
SPEAKER_00:It is front of mind, as are most investments that have gone up a lot. I don't know what the answer to this is, but I suspect if you Googled Bitcoin or gold, NVIDIA, Things that have gone up a lot, they would be the most popular names out there from an investment perspective. And so, yes, it is front of mind. It is a conversation that clients are asking us a lot about. The great difficulty with investments like Bitcoin or gold or currency or a commodity of any sort is it doesn't give you a cash flow. So Lance spoke about how investing in equities delivers dividends, delivers earnings. And that makes it quite... Well, it makes it easier. It doesn't make it easy, but it makes it easier to understand what the value of an investment is. It's the value today of those future cash flows. And when you are looking at an investment that doesn't have cash flows, it comes down to... that very tricky thing to understand, which is sentiment. That little emotional package that is driven by fear and greed that talks to whether there are more buyers than sellers or sellers than buyers. Of course, the price is going up when there's more buyers than sellers, which is the case with crypto at the moment, and vice versa. And I think when building portfolios on behalf of your clients, when we work with Lance and the team, I think the imperative sits with all of us to make sure that we are allocating, I guess, their hard-earned savings to investments that we have a good understanding of how they're going to behave given certain market conditions. And while investing in Bitcoin or other investments like that turn out to be very good and you've earned gold, they become quite difficult to understand. But Bitcoin especially, because it's a fairly new innovation. I know it's been going around for quite some time, but we haven't seen it through many cycles. And the upshot of that, I think, is that it becomes an investment that if you do allocate to it, you thinking more about hope than facts when it comes to outcome. And that's quite a difficult place to be. And for example, let's say you put Bitcoin in the portfolio because you think, you know, the US dollar is no longer going to be global reserve currency or currencies generally are going to be devalued because of all the debt and the difficulty with economic growth, et cetera, et cetera. That might be a sensible idea. But as Lance has shown, trying to... predict these things is hard. And so we put it in the portfolio. You allocate, I don't know, 5% or 10%, whatever it might be. And then you sit back and you hope. You don't really know what's driving the price at all. There's no cash flow, as I said. And so when markets turn, as they did at the beginning of the year, will something like Bitcoin or other cryptos bail you out? You just don't know. So it's much easier to allocate to something that is guaranteed to be safer. Maybe guaranteed is a strong word, but far more likely to be safer. You know, like cash, which you've got lots of in your portfolios. If you're nervous, yes, it's not going to go up a ton at times like this. But really, you know, when the tide's going out, that's when it comes into its own. You know what it's going to do for you. And with Bitcoin and others, you just don't know. And I think that creates a lot of uncertainty for building portfolios that we find quite difficult to incorporate.
SPEAKER_02:Yeah, I mean, Lance, have you got any perspective from the Cavendish West side
SPEAKER_01:at all? I think Rory and I are very much on the same page. Historically, we've been a little bit more willing to look at gold. Gold's got 2,000-year track record, but more relevantly for investment purposes, let's say a 30-year, 40, 50-year track record. Actually, the gold matters since countries like the US came off the gold standard.
SPEAKER_00:That's true,
SPEAKER_01:yeah. But it goes through regime shifts. But there are certain times you can say, based upon history, gold is very much likely to behave like this. Not guaranteed, but likely. And we've had investment in gold in the past. It was successful. But if we're candid, and we were candid at the time to clients, we were successful because gold is priced in dollars and our clients made money on the dollar side of it rather than the gold side. And we sold out of gold because gold was not behaving as we envisaged it would behave in that regime. And therefore the risk reward was not in favor of our clients. We recycle the money into equity markets and we've made money for our clients that way. That's fine. Bitcoin has been around for a lot less time. The adoption has been much more rapid than gold has been. We took a couple of thousand years. That's the benefit of digital environment. But we've seen, as we said, particular times when, for instance, inflation spiked. Bitcoin went down in value. When we've had equity market volatility, Bitcoin has gone down in value. So it's been a great opportunity and it's been much harder for UK investors to access. And certainly we, who are regulated by the FCA, have severe hurdles in accessing it or using it for our clients. But it's not yet... a similar beast in behavioral terms to gold. It's really, if you look at the statistical analysis, it looks like the US equity market on steroids. So when everybody is risk on, Bitcoin tends to do very well. When everybody's risk off, Bitcoin has more often than not also gone down. So as a diversifier to Bitcoin, our client's main asset, which is equity, it's not going to add any value. So it's just, well, tell me what sentiment is. If you can tell me that the US Federal Reserve is now going to create a Bitcoin reserve and pump a couple of billion, a couple hundred billion dollars into Bitcoin, then let's go for it. But do you have any visibility on that, Rory? Definitely not.
SPEAKER_02:I mean, again, it's fascinating, isn't it? And it kind of all takes me back to, you know, looking at how businesses are performing, the sort of, I guess, the dangers ahead of them in terms of what Rory, what you said about the kind of tariffs and pricing that all in. I mean, it makes a lot of sense. And I guess the problem is, for us, I would describe as the general public, is you're kind of just seeing the headlines the whole time and trying to make sense of it. So, you know, it's really interesting. And as I said before, comforting to hear that it's sort of still the same old job to be done. A question I had was, I think, you know, a couple of weeks ago, there was some, I think it was job data, which came out of the US. And I know job data is always one of those things which is looked at quite closely by people like yourselves. Trump didn't like what he saw, so he fired the person who gave him the numbers. And I just wondered, like, that sort of behaviour and, you know, what you can kind of see in that, is that sort of a bit more of, you know, what you expected started to kind of come through? So...
SPEAKER_00:The US jobs data thing was fascinating. The jobs data typically comes out from memory around the first week of the month following the period that it's assessed. And because it's not final, it does get revised. But you would expect 10,000, maybe 5,000 jobs. From memory, it was 285,000 jobs that were revised, somewhere around there. So it was a big number. And at the same time, I think US unemployment crept up from 4.1 to 4.2, something like that. So the world's biggest economy was showing very slight increases in unemployment. I guess it's been known as the engine for growth across the world. And why there's been this big response to tariffs is because it is that important as an economy. And I suppose what it was saying is that not everything's as healthy as everyone thought. And even this big, amazing economy filled with optimists and capitalists is itself struggling. And of course, markets sold off quite significantly on the day. For a daily sell-off, it was quite a big day. One and a half down or something like that. But, I mean, a day later, it was back. And that's been the story of markets. You've had news come through that is quite regularly disappointing, worrying in the case of tariffs. Not really been seen before at this sort of level in recent times. And yet markets sell off and then they're straight back again. And it is quite an interesting trend. exercise in noticing when things sell off, as they did on the back of this job's data, what gets sold the most. Usually, but not always, where the greatest optimism has been priced in is often the most fragile investment around. So those optimists that are perhaps uber-optimists start to sell off those investments. And of course, it was the big tech names, the US mega caps and things that got sold quickest. And similarly, at the beginning of the year during tariffs, it was the trend. So it almost feels like the markets are playing a bit of a momentum trade, pushing things along. What I mean by momentum is sort of almost knowingly, the prices are high and they're pushing them up, but still want to go along for the ride. And then as soon as that ride looks a little fragile, are jumping off pretty quickly. And that was a good example of it, actually, the jobs data, as was tariffs previously. And it creates a very interesting situation for investors. So folks like Fundhouse and Lance, when we're sitting in investment committees having a conversation, we are very aware It's a fact that the US, the big US tech businesses are better businesses than the UK equivalents. Of course, they are. They're amazing businesses. They're fabulous businesses. And you therefore feel the sense of missing out or this guilt almost with pairing investments away from that, leaning away from that, going underweight and selling those down a bit. Because they are such amazing businesses. Why would you not have your clients invested in those? And there's one reason why. And it's when prices get to a point where a good company becomes a poor investment. And markets push companies up to extreme highs, lots of optimism, when the story is amazing and the story is very valid. I mean, the internet stocks, the story was very valid, very different time and very different way that markets behave. But the story was very valid. The internet, like AI, AI is amazing. It's going to transform our lives. It's brilliant. But it gets taken too far. And And I think that's really good evidence. And the jobs data sort of tended to show where the optimists were positioned, certainly in our mind, as it did during tariffs. So yeah, it is, I think, really important when we are faced with these sorts of moments where both prices are shooting up in ways that are hard to describe because we mentioned uncertainty, particularly with tariffs and the likes, that we sort of hold our ground. that we know that we'd rather be allocating to lower quality investments. We appreciate that, but at a far better price because there isn't serious optimism priced in. There's often pessimism priced in, which means that it's much easier to outperform on those allocations because it doesn't take much. And so much of the bad news is already priced in. And avoiding those amazing companies is, as I say, can be painful. But I think it's important to hold our line on that.
SPEAKER_02:Very interesting.
SPEAKER_01:I'd just like to circle back to the beginning of the question about the US jobs numbers. There's the measurement of... The jobs market and the challenges is not unique to the US. We've seen it in the UK with the Office of National Statistics, and we've seen it in some other countries as well. It's been exacerbated in the US because there's been underinvestment in the Bureau of Labour Statistics. But the main reason is that the world of work has changed so much over the last decade, and especially post-COVID, with the increased number of part-time and temporary workers. Measuring this in real time or very short time lag is very difficult. And the other aspect is we've got the absolute number of jobs and change. It needs seasonal adjustment, which is also changing. And we've also got to know the rates because The absolute number is not necessarily helpful in itself. It's a bit like saying, well, I've got£10,000 of credit card debt, which would make Rory and me just melt. But, you know, Jeff Bezos had£10,000 on his credit card. Yeah, who cares? Yeah. You need to know how large the workforce is. And that changes for many reasons. So it's increasingly hard to get... an accurate handle on jobs data. But the fact that Trump sat the head of the BLS, the Bureau of Labor Statistics, because the number wasn't good, is just another piece in the jigsaw puzzle that the quality of the US under Trump is declining. And there are a number of aspects about US economy, US bond market, US equity market, and the US dollar that basically rely upon or boosted by the US dollar being the global reserve currency in that exorbitant privilege. And whilst this isn't a catastrophic issue, it's a chipping away at that. And we've actually seen it in that the dollar's been weak. Now, Trump wants that because that helps export all the trade balance, but for us, and our clients measure their wealth in sterling, it means that the performance of the US equity market in sterling terms has actually not been that stellar. So it's all part of that mosaic in investments. We don't make currency forecasts. If I say that economic forecasts are really difficult, currency forecasts are even worse, but the dollar is weakening. As an aside, I think we all need to get this slight degree of relative confidence proportion, because apparently when Stalin didn't like the economic statistics, he had the person shot. So, you know, it's not that bad yet. And also to the second part of Roy's comment about the way that the U.S. equity market bounces back particularly. And this is we've been scratching our heads over this for a number of for a long time. What we've seen in the U.S., more so than anywhere else, is the increased retail participation in U.S. equity market. And that participation is via index tracker funds. And the culture of buying the dips. And all the data shows that in the U.S., Retail investment participation is at all-time highs. There's also evidence that people are borrowing money to invest. And that as soon as there's a dip, they buy more. And so far, it's been very successful. And it does feel, in the short run, like you're standing in the way of an express train, holding your hand up and saying, stop. And it's just not going to. But that's momentum trade. And eventually... They run out of steam or energy. And history has always shown that when momentum trades stop, they don't consolidate at the top. They reverse quite sharply. I personally, and this isn't kind of, you know, I don't know whether Rory would endorse his view or just avoid taking the view. I think the clue in that is also very much in the U.S., employment stats. I think that if US unemployment does start to rise and US consumer confidence starts to weaken as people get a little bit more insecure about their job prospects, those flows might abate. But at the moment, it's flowing in. And if you're an index fund, you don't buy according to valuations. You buy according to market size. So$1,000 goes in. You know, almost 350 of those dollars without thinking is just automatically allocated to the Magnificent Seven. And that's the relentless buying pressure at the moment.
SPEAKER_02:Very, very interesting. Well, listen, I think we're sort of almost out of time. But I think that was a really good kind of catch up. It's really great to kind of hear... your perspectives. I did have one question and, you know, just a quick, quick, quick answers only. But, you know, going back to the jobs thing, I guess one of the things with AI is, you know, lots and lots of people talking about, you know, the impact on the jobs market. So when you're looking at the jobs market and the jobs data, do you do you look at like where where the, you know, losses have happened you know is this something that you're kind of starting to factor into your thinking because i guess you know if you read some of the predictions about what will happen with ai the sort of some profound changes in the job market itself so you know probably an unfair question but it was just you know i'm kind of interested in your when you're sort of looking at some of this data what you kind of think about
SPEAKER_00:um so Quick answer is it's very hard to forecast what that is. So we pay attention to it, but don't try and map it out because I think that is too difficult. But the markets do discount all of that. In other words, work it out for themselves and then see whether they should be um taking it into account or not and then our job i think is to try and work out whether that uh whether the market has done their job properly or not in other words whether it's a fair representation or not and um yeah we we we are investing broadly uh with fund managers who do the stock selection on our behalf and not selecting the individual names and um and so We pay attention to what the fund manager is doing and how the fund managers assess that problem. And then on top of that, if there's an opportunity to invest because there's a divide or a gap between the price we're paying and what we think the return potential is, it's not priced in, we will then allocate to that investment. But yeah, a lot of that conversation happens internally, but indirectly the decision makers, the fund manager on that.
SPEAKER_02:Very interesting. Very
SPEAKER_01:interesting.
UNKNOWN:And
SPEAKER_01:I absolutely agree with Rory, but I will weave in a couple of anecdotes. I think firstly with AI, it very much mirrors, I mean, Buffett has always got a great saying, and I think the parallel is when the motor car came along, you knew it was bad for horses, but you didn't necessarily know who the winners would be at that point. I think we're there, not least because the landscape in AI is changing very rapidly. And then a much bigger philosophical point, which I think we have, Dave, you and I have discussed off air, is that this has quite significant ramifications. I do worry what it means for our children. I think we've all got children of similar age. When we were young, a good education gave us advantages, which was for us to waste. Unfortunately, I think we benefited from it. I think AI may change that.
SPEAKER_00:Definitely.
SPEAKER_01:So I do fear for the, let's say, the long-term future or prosperity of my children. Yeah,
SPEAKER_00:me
SPEAKER_01:too.
SPEAKER_02:Yeah, no, well, I think it's... I mean, I... Brilliant. I mean, I was really kind of interested in your perspectives around that in particular because I think it's, you know, there's sort of definitely underlying trends. But listen, thank you so much, both of you. That was a really interesting conversation. I really do appreciate it.
SPEAKER_00:Anytime.