31/03/25: Growth outlook, bond markets & tariff updates

Monday Espresso Podcast - 31 March 2025

[00:00:05] Nathan Sweeney: It is Monday, the 31st of March. Hard to believe we are already through the first quarter of this year. So, I'm really pleased to be joined by James Athey this morning, bond fund manager here at Marlborough Group. A lot happening last week. So I wanted to get James on the show to talk us through. Good morning James.

[00:00:16] James Athey: Hi, Nathan. Thank you for having me back.

[00:00:23] Nathan Sweeney: No problem at all. I'll start off firstly with just a quick recap of what's happening in markets. So it looks like markets are pretty much in a holding pattern. Last week pretty flat across the board. We did have European equities were down slightly for the week. But ultimately markets kind of waiting with bated breath to see what we get next week on Liberation Day.

[00:00:41] Nathan Sweeney: And this is obviously what Trump has been calling. You know, the reciprocal tariffs which are going to be announced on the 2nd of April. So we get a lot of insight into that. But we have seen some moves in markets were sensitive to auto tariffs last week. So Japan Korea which sold off and particularly the auto sector being hit by the announcement of tariffs last week, but actually really good for Tesla.

[00:01:04] Nathan Sweeney: So we're seeing a strong rally in Tesla stocks. And now the real reason behind that is because they manufacture a lot of their cars within the US. So likely to benefit from tariffs coming in on all of those autos being imported into the US. And then also we have completed the end of the first quarter. So actually not a great first quarter for the S&P.

[00:01:25] Nathan Sweeney: As we all know we saw a correction within the S&P. But actually there's some areas which are doing really well. So we've talked about Europe quite a bit and European equities up 10%. So yeah strong moves there on that side. So James let's get into it really. So we've had a couple of questions from clients last week. And they're concerned about the borrowing costs within the UK. And will that likely hurt bond performance?

[00:01:50] James Athey: Yeah. So obviously we have seen gilt yields drifting higher really for quite some time, not just last week where, you know, similarly to how you describe equity markets. Bonds were actually in a bit of a holding pattern quite choppy. But yields were drifting higher of course, the big event this last week was a Rachel Reeves spring statement, not a budget, because she promised she would only hold one major fiscal event each year, and that comes in the autumn, so desperately at pains to make an announcement without making it significant enough to be qualified as a budget.

[00:02:28] James Athey: Actually, really, there's a lot of noise in terms of significant policy steps. There wasn't much in there, but we were slightly disappointed at the extent to which she reined things in. Obviously, cuts to welfare spending had been trailed in advance of the spring statement itself. I think the Chancellor will have been disappointed that the OBR was not willing to account for as large a saving as the government had hoped, and that probably hurt her plans a little bit.

[00:03:00] James Athey: We also have concerns that actually she did a little bit of increased spending in the near term. So while she's given herself back the fiscal headroom relative to her own fiscal rules that she had initially created with her budget back in autumn last year, the near-term, the fiscal situation is deteriorating quite significantly. Growth has been weak, yields have gone higher.

[00:03:25] James Athey: And as I say, there's been a slight increase in spending from her side as well. So the deficit gets bigger for a few years. And then as often is the case with these processes, it magically all resolves itself by the forecast horizon. And she comes back within a fiscal rules. So we were slightly disappointed. I think the market was as well.

[00:03:44] James Athey: It's worth mentioning that the DMO, the debt management office who are responsible for issuance in the UK, issuance of gilts, they actually reduced the size of total issuance and they reduced expectations for long dated gilt issuance. And that's definitely a positive for gilts investors and helped to offset some of the negativity from the Chancellor. But, you know, medium term, there are still really significant questions about fiscal policy and how sustainable the current situation is. And, you know, saying gross a lot, unfortunately, is not a strategy for growth. And we're yet to see one that looks credible.

[00:04:22] Nathan Sweeney: But interestingly, you know, it's kind of sounds like bad news for bond markets. But interestingly, you mentioned the UK growth and the fact that UK growth is weak. But, you know, that actually opens up the door for the central bank to deliver performance for the bond market through rate cuts. So kind of what's your view on that side?

[00:04:39] James Athey: Yeah, exactly. That's right. You know we're long gilts actually because as much as there is a huge amount of bad fiscal news out there, we think much of that is in the price here. And exactly to your point, one of the major sort of drivers for the gilt market over any time period is what's happening to the economy and what that means for the Bank of England.

[00:05:00] James Athey: We did have some slightly stronger growth data last week in the UK, particularly retail sales. But CPI that all important inflation print, which of course the Bank of England has a laser focus on that was slightly softer than the markets had been expecting. So a bit of relief on that side. We could talk for hours about the detail underneath the headlines.

[00:05:19] James Athey: I'm not going to bore our listeners with, you know, a very detailed bond investors take on it. But the services aspect, that which is more domestic and more significant for the bank, did not come down as had been hoped, remains at 5%. So the concern is still there for the Bank of England. All view is still that the economy is weaker than it appears.

[00:05:41] James Athey: It will continue to weaken, particularly as the labor market softens. That will bring inflation pressures down, and that will allow the Bank of England to cut more than expected. So a lot of bad news in the price. We have a more bearish outlook for the economy. And so we do see value in gilts here.

[00:05:57] Nathan Sweeney: So really a case of, you know that bad news actually being good news for bond markets. Guessing a lot of people will be pleased to hear that. Just thinking about the week ahead. So obviously it’s been trumped as a big week. So we have the announcements on tariffs. So Liberation Day. So what's your take on the tariffs and what to expect.

[00:06:13] James Athey: I was really hoping that I'd managed to get through this podcast without you asking me that question, trying to forecast, you know, policy which seems to be scattergun in the extreme. There are contradictions even between things that President Trump says one day versus the next. Never mind. You know, other policy makers within the government. So it's very hard to say. It obviously seems likely that we're going to see some tariff announcements this week. On the 2nd of April. It seems likely that they are going to try this reciprocal tariff approach, essentially, calculator a number which represents tariff and non-tariff barriers for each country, and then blanket apply that to most trade between those countries.

[00:06:58] James Athey: An incredibly complicated task. I don't think very efficient when all is said and done. And it's probably not good news for financial markets, but the extent to which that's already in the price is very hard to say right now. So I think the only thing I'd probably feel comfortable talking about in the near term is that volatility is likely to continue as investors try and work out what exactly these policies mean.

[00:07:24] James Athey: And obviously, once we get clarification on what that policy looks like, at least for the next few days and weeks until the president changes his mind.

[00:07:31] Nathan Sweeney: Yeah. So I think, you know, coming into April, we always expect that it will be a volatile month because of, you know, tariffs and related reciprocal tariffs and retaliations, etc. But it is important to highlight that, you know, some markets are performing well and others aren't.

[00:07:46] Nathan Sweeney: But that's the whole reason why we always talk about diversification and having good diversified portfolios. So thank you James. Really insightful there. And thank you for our listeners for sending in questions because, you know, we love to bring them up on the show. Thank you for listening and have a great week.