Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Lyndon: Hello, this is Super Informed Radio, the official UniSuper podcast. My name is Lyndon and it's the first business day of the month, which means that David Colosimo is here in the studio with me. Now, as regular listeners will know, he's an economist and is the Head of Fixed Interest in our investment team, and he's here to impart his thoughts on investment markets over the last month, and looking ahead to April. David, welcome.
David: Thanks, Lyndon. Good to be here.
Lyndon: Now, David, we are recording this on the morning of April Fools Day. I do hope you're not planning on pranking us or something outlandish, are you?
David: No pranks from me thanks Lyndon.
Lyndon: You’re going to keep it simple?
David: Mm-hm!
Lyndon: Okay, good—alright, let's get into it. As usual, there has been quite a bit going on. We've had a federal budget, we've had an election called. And there's also been quite a bit of volatility in markets over the last month, David, and it seems that not many parts of the market were spared.
David: Yeah, that's right. Lyndon. Australian shares were down 4%, US shares down nearly 6%. From their peak in February now, US shares have actually had a 10% fall from peak to trough. So initially, it really felt like the sell-off was concentrated in the shares with the highest PE ratios—that’s price to earnings ratios—so I'm talking about the big tech names, the AI companies, and they were definitely hit the hardest in this downturn. But the falls themselves in March were actually pretty broad-based in the end. Share markets—we often break them down into 11 different industry sectors, and in the US nine of them were down, so it was only the energy sector that was in the green. Utilities were basically flat. In Australia, 10 of the major sectors were down. So again, it was only utilities that was flat. So not many areas of strength across both markets. And if you look at a lot of the other share markets around the world, they were weak as well, though not as weak as the US. Europe and Japan, they were both down 4%. So, hard to find a bright spot.
Lyndon: Well, let's have it then, David—what was driving those falls? I mean, I know there's lots of talk still flying around about the threat of tariffs and the like from the US. Was that a big part of it?
David: Yeah, I think that is, but that played into a few other things as well. If we think back to when Donald Trump was re-elected, we had a lot of enthusiasm in the markets, a lot of the financial market surveys at the time, they suggested that a Trump presidency was overwhelmingly seen as good for growth. He had an agenda to cut taxes, to deregulate, to lower energy prices—and business optimism was pretty strong. People recognised that there'd be some inflation risk from tariffs but I still think that we're running off the template from the first Trump presidency. So, there was a lot of talk of tariffs then, but not much enacted. And it really felt like Trump really saw the share market as a barometer of his success. And so when his policy announcement caused market weakness, he would tend to reverse course quite quickly.
Lyndon: But it sounds as though things are a little bit different this time around, is that right David?
David: Yeah, yeah. The second Trump presidency, it is shaping up to be very different. It's become apparent that the extent of tariffs will be significantly higher than most assumed. I mean, every few days it feels like we're seeing something more. First there was Mexico and Canada, and China. Then tariffs on aluminium and steel, 25% tariff on motor vehicles. And that's even before the big tariff announcement that he's got planned coming up soon. Now the market has just come to realise that Trump won't be swayed by share market falls this time. There's no longer a ‘Trump put’.
Lyndon: David, that is a new term I'm hearing—are you able to give us maybe a bit of a lowdown on what you mean by that?
David: Yeah, sorry. So, a ‘put’ is a type of option or a financial derivative. It's a bit like buying an insurance policy that helps to protect the downside when you own shares. Now, in this case, though, we're not talking about an option. When we use it informally like that—the Trump put, the Fed put, the Greenspan put, the Powell put—it denotes how much share market weakness a policy maker is willing to tolerate before they ease and help support the market again. Now, when you hear that the Trump report is dead, it just means he doesn't seem to care about the fact the market's down 10%. He hasn't swayed from talking about tariffs. And he's openly admitting there might be some economic disruption. That's not to say he might not get worried by 15 or 20% fall though.
Lyndon: So back quickly to what was driving that market weakness. On top of tariffs and the like, what were the other factors at play?
David: So yeah, Trump's been very focussed on tariffs to begin with, rather than his pro-growth policies, and market surveys are now suggesting a Trump presidency is actually negative for growth. Tariffs are also bad for inflation, that makes it harder for the fed to ease rates. And so as a result of that, we're seeing that forecasters are once again talking about the very real risk that the US economy is headed for recession. Now, in our position, we have the benefit of being able to interact with some very well connected American investors, and we've heard from a couple of them recently that the CEOs they speak to are privately talking about how weak business has suddenly become. More than a couple of companies are downgrading their earnings outlooks as a result. So, both Delta and United Airlines, for example—they were each down more than 25% in March. Nike was down more than 20%. So it comes down to lower growth, higher inflation, talk of recession. It's just not a good environment for share markets.
Lyndon: Goodness that all sounds a bit grim, David. I don't suppose there were any bright spots, were there?
David: They were a few. Berkshire Hathaway was up nearly 4%. It's been sitting on more than $300 billion in cash. And a weaker market like this is exactly the opportunity it's looking for to pick up some bargains. Some of the commodity names have also been doing very well. One interesting aspect of Trump's tariff threat has been the boost to the price of copper trading on US exchanges. Copper's trading more than 10% higher compared to where it would trade on the equivalent London Exchange. So that's a boost to any copper producer who can sell into the US. And that’s been good for US mining company Freeport-McMoRan, for example. It was up 3% in March. Similarly, all this geopolitical uncertainty has boosted the gold price. It's now at record highs above $3,000 an ounce, it was up more than 9% in March and 50% over the last 12 months. So, if you look at a large gold miner like Newmont, it was up nearly 13% in March.
Lyndon: So, David, with all of this talk about US tariffs and recession risk and the like, what do you see that meaning for us here in Australia?
David: Well Australia runs a trade deficit with the US. So hopefully we won't fare too badly on the tariff front. But tariffs just threaten global growth generally, so our market did get pulled lower. That aside I think there were two big news stories here impacting Australian companies this month. The first was the conclusion of the ACCC inquiry to supermarkets. So that noted that Coles and Woolworths, they have increased their margins. But the inquiry didn't find evidence of price gouging. So the share price of both of those companies jumped on the news on the day, but still did finish weaker over the month. The second big thing was that Australian building materials company James Hardie announced plans to merge with a US decking company, AZEK. And it is paying a big multiple in the hope that being able to sell the products of both companies side by side will really realise big synergies between them. But the share price was down 24% in March, so that really suggests that the market doesn't have much confidence in those synergies being realised.
Lyndon: Changing tack for a second, David—we were talking last month, if you remember, about, some big political changes in Germany and I gather that there's been some progress there. How did that pan out?
David: Yeah, so the outgoing German parliament, under the new German chancellor, they were able to pass a really big stimulus package based on infrastructure and defence. And that really boosted confidence. So we've seen a real change in the political environment in Europe. And that's really in response to Trump pulling back. So it feels like at least one good thing has come from this uncertainty. But if Germany really wants to change its path, it would really do well to introduce some structural reforms as well—so, aimed at reducing bureaucracy and encouraging the type of innovation that the US has excelled at over recent years. As we did talk about last month, European shares have outperformed the US this year, but they were still lower in March, and that's because growth concerns have really dominated all markets.
Lyndon: Okay, David, let's get the crystal ball out and turn to the month ahead. What do you think's going to be driving markets this month?
David: Well, we've discussed tariffs a lot already. But there will be a focus on what President Trump has declared as Liberation Day, 2 April. So this is the day he plans to announce retaliatory tariffs on a range of countries that he deems to have been cheating the US through their own unfair trade practices. So not just tariffs, but non-tariff barriers as well, things like restrictions on foreign companies, regulations that hurt American companies. Now, if you think that Trump sees tariffs as a negotiating tool, then the opening announcement could be quite large, with the idea that then he has room to negotiate back from that. But the other really important factor here is how other countries are going to respond. For example, there's a lot of talk that if the tariffs on China are very high, then Chinese authorities might respond with another round of domestic fiscal stimulus to boost the economy.
Lyndon: And before we wrap up, David, anything else?
David: Yeah. Later in the month is a Politburo meeting in China. We could see additional easing measures there. And while I probably wouldn't normally mention it, we have had a real deterioration in the relationship between Canada and the US. That means that the Canadian federal election at the end of the month could be interesting.
Lyndon: Oh, and we can't forget central banks. The Reserve Bank of Australia actually meets today and last I heard, we weren't expecting any April Fool's hijinks from the RBA, is that still the case?
David: Yeah, so the outcome will obviously be known by the time this podcast is released. I don't think we'll see a change there. And in the US, the next Fed meeting isn't until 7 May.
Lyndon: Alright, David. Well, I reckon that'll do us. Thank you so much for being here as usual. And, we'll see you next month.
David: See you then, Lyndon.
Lyndon: And that is it for this episode. Thank you so much for listening. Don't miss out on future UniSuper podcasts. You can subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. Now we were talking this episode about volatility in share markets, and if you're interested in the thoughts of our Chief Investment Officer John Pearce on all of this, do head to our website and check out his February investment update video, because he does actually touch on that topic and offer some thoughts on UniSuper's approach.
We are UniSuper, the place where bright minds and passionate people strive to think great and create a future worth retiring for. If you'd like more information about our investments, visit unisuper.com.au. Thank you for joining us, we'll see you next time. And until then—look forward, think great, with UniSuper.
This podcast is general in nature, and it doesn't take into account your financial situation, needs or objectives. So, before you make any decisions about your super, we recommend that you seek financial advice first. Also, make sure you've had a read of the Product Disclosure Statement and the Target Market Determination that's relevant to you. They are all available on our website. It goes without saying that the past performance of any investment options that we talk about isn't indicative of their future performance, and it's worth noting as well that just by talking about certain companies, we aren't endorsing them for you to include in your own portfolio. Certain information contained in this podcast may include forward-looking statements, and we do not guarantee that these statements will eventuate. UniSuper has no obligation to provide updates or changes to the information in this podcast.