266. Trump Turmoil: An investor's perspective

0:00That's going to be what really drives his decision making. The November midterm elections, where his colleagues will be up for re-election and he will find out whether he maintains control of the House of Representatives and the Senate, the two arms of Congress. And if he loses control of those, then it's very hard for him to do anything to legislate. And so his mind will be, as we move through the next weeks and months, increasingly focused on making sure the outcome of those midterms is good. The big concern when you look at the U.S. electorate is affordability, cost of living pressures, very much like here.

0:40People fed up of the rising cost of living. And so the longer this goes on and the longer oil prices remain elevated, it's a tax on our growth.

1:02Karen Ward:Hello and welcome to The Rest is Money with me, Steph McGovern. Back with us is Karen Ward, Managing Director and Chief Market Strategist for Europe, Middle East and Africa at JP Morgan Asset Management. I wanted to get Karen back on to find out what she thinks is happening in the markets. It seems to be all anyone's talking about at the moment is the volatility in oil prices, in what's happening with stocks and shares. And she's got some really interesting thoughts on it. For example, why you do not need to panic if you do have money in stocks and shares, whether that's through your pension or ISIS or whatever it is, and also why she doesn't think we're heading for another financial crisis.

1:42Karen Ward:So here is my interview with Karen Ward. Karen, it's lovely to have you back. I feel like you're part of our podcast furniture now. Obviously the nicest, most sophisticated, like Shares Lounge or something, not like, you know, a lamp. I was really keen to get you back on just because of everything that's going on. It just feels really chaotic. And I think there's a lot of people out there just hoping someone sensible like you can, you know, just put some light on it all in terms of, do we need to worry? What is going on? What are investors thinking? That type of thing. So I guess my first question is very, very big and broad in that, what's going on?

2:22Karen Ward:What's your take on it all? Well, pleasure to be back. I'd be happy to be a lamp. I could be enlightening, couldn't I? Yes, actually, shining a light on what's going on. Clearly, the latest events, this attack on Iran from the US and Israel, the problem is, of course, as we all know, it's caused spiralling commodity prices. And I think this is where markets have sort of swung between optimism and pessimism is how the news flow has progressed in terms of when we might reach that resolution. So we've been trying to work out, well, what is the US administration's ambition here in this conflict? Is it full regime change in Iran or is it purely reducing their nuclear capabilities, at which it seems they've already achieved a lot of that?

3:15So what is the US's game plan and when are they going to almost call time on the conflict? But then I think as the weeks have gone on, Steph, the concern I think has become, well, even if the US is wanting to call time and walk away from the conflict, almost has Pandora's box been opened? And are there other actors here, whether that is Israel or whether that is Iran itself, that actually have incentives to make this a much longer conflict and to keep the strait closed? And this is where I think, particularly over the last couple of weeks, where oil has then moved above$100 a barrel, it's, I think, really been about that concern.

4:04Well, is Iran actually going to prevent this conflict ending? Because Iran is really demonstrating, I think, its power, not only in the region, but of course, the impact on the global economy because of its power it has over the strait. So it's all about this straight up Hormuz, the vessels that are stuck there. And it's about 20 % of global energy. So that just gives you a figure for how important it is.

4:33Karen Ward:Karen, loads more still to talk to you about. We'll find out after the break.

4:39Karen Ward:We're delighted to say that this year, The Rest is Money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six? You know what? We've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable, then Aldian Little turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that.

5:18Karen Ward:energy could well be going that direction well cheers greg and thank you for powering this episode of the rest is money it's interesting your point on iran as well because one of the things the iranians have come out and said is we've got enough reserves we've got enough stuff in the country to last us for a year so it feels like they are they're not what trump was expecting not they're not what Israel and the US were expecting in terms of they haven't just given in. You know, I think we saw that, didn't we, with China and when Liberation Day happened and Trump went hard on China and then China very much reacted like, bring it on and, you know, put up their reciprocal tariffs.

6:04Karen Ward:And so it does feel a bit like who's going to blink first in this, which must be really difficult as an investor, as the markets or, you know, if you're working out whether to buy or sell or whatever else, it must be really hard to work it out because it doesn't feel predictable or rational. I think rational is the key word. My job is to sit there and not necessarily tell people exactly what's going to happen, but to say, right, well, let's work out what are the key actors in this conflict? What are their incentives to prolong or de-escalate? And I'm doing a very rational piece of analysis to get to a conclusion.

6:45But then, of course, you have to overlay that with, well, you know, is one party focused particularly on the economic outcome? Or are there other, you know, factors that are much more important to them? And I think the one thing that keeps me still quite optimistic, coming back to this point about whether actually Iran wants to prolong the conflict. And you mentioned China with regards to trade tariffs, but China are really other important player in this because of all of that energy that leaves the strait, 80 % of it heads to Asia and half of it goes to China and India. Now, China has oil reserves that it's been working through.

7:33So it hasn't been particularly affected as yet. But we're getting to the point now where the delivery is due in the next couple of weeks. They won't arrive in these big countries. And the impact on them economically will be really significant because India can't afford, it's a big net oil importer, it can't afford to be spending$100,$120 a barrel on the oil it needs for its transportation assets. And so I suspect that actually it will be the influence of China and India in discussions with Iran, which actually see the strait reopen. To me, that's the more likely way this story plays out rather than actually where we're all spending our attention at the moment, which is what is happening in the dialogue between the US and Iran.

8:28Karen Ward:It feels like every time Trump speaks as well, like we've seen, haven't we, you know, we're recording this on a Wednesday and it was last night that Trump has suggested this conflict with Iran is going to end in two to three weeks. And off the back of that, we've seen the markets rally a bit and oil's fallen a bit again to just over$100 a barrel, hasn't it, where it's been much higher than that in the last few weeks. So it does feel real. It's so volatile, isn't it? It feels like it can be just Trump saying something on a whim that can completely change people's investment portfolios, people's pensions and how they're doing.

9:10Karen Ward:And obviously, we're all told as investors, don't look at it day to day. That's the worst thing you can do, apart from in your job, obviously, but for people who have got their pensions or whatever in funds. But it feels so volatile. What's it like working in that? Obviously, I want to get all your big global thoughts and stuff and what you think the long term is. But just day to day, Karen, what's it like when you're trying to work all this out? Yeah, I mean, spend all of my energy thinking, watching the news and the latest headlines. You have to filter all of that and just sit back and say, okay, well, what's important to the president?

9:48What is important to the president is the November midterm elections, where his colleagues will be up for re-election, and he will find out whether he maintains control of the House of Representatives and the Senate, the two arms of Congress. And if he loses control of those, then it's very hard for him to do anything to legislate. And so his mind will be, as we move through the next weeks and months, increasingly focused on making sure the outcome of those midterms is good. And that to me is my sort of anchor of knowing that's going to be the priority. And therefore, four dollar gasoline prices is not helping.

10:31You know, the big concern when you look at the U.S. electorate is affordability, cost of living pressures, very much like here, people fed up of the rising cost of living. And so that's going to be what really drives his decision making. I think the U.S. administration will, as we move through the timeline, I think, is short because of that midterm election. So I don't need to focus on what the latest statement was because I'm very anchored by that. And then, you know, the day to day, I think, you know, in some ways, Steph, my life becomes really hard because demand to speak to me goes up. But at the same time, it's when actually, you know, I have a real purpose in saying to people, well, OK, let's go through the let's go through the facts.

11:20So, you know, 20 percent of energy comes out of the straight, but 80 percent of it goes to Asia. Let's think about China in this. Let's think about India in this and the pressure they're going to be exerting. And sometimes just helping people with data and facts so that they can filter that news flow and make better decisions. I mean, a really good example, I'm sure you saw a couple of weeks, Steph, when there was an energy field hit in Qatar.

11:47Karen Ward:Yes. And it was sort of presented as there's going to be no global gas. And, you know, then again, my job is to say, well, hang on. Okay, it was two of 14 of the, they call them trains. I don't really know why. I think it's because of how the gas gets filtered and moved through this column to become liquefied natural gas. two of the 14 in Qatar got hit Qatar produces 20 % of the world's liquefied natural gas but that's only then 20 % of total gas so sometimes my job is to just almost hold hands and say let's take a deep breath and just go through the numbers and let's then work out we might still ultimately once we've done that be really nervous or we might go okay maybe it's not as bad as some of the some of the headlines would suggest.

12:35And it's that process, I think, of just helping people filter the noise, go back to what the facts of the situation are, which allows them, I think, to work out whether or not to change their investment position.

12:49Karen Ward:Yeah. Yeah. I wanted to ask you, the last time you were on was kind of mid-Feb, towards the end of Feb. And I remember you saying at the time about how Americans are feeling because of the big, beautiful bill. And you talked about people who particularly, if you're on low income and you get tips, for example, and the tax change on that is going to mean you have a bit more money and that's coming in. And now, as you know, you're talking about the price of fuel is going up in America, which is going to have that counter effect. So what's your feeling of how, of that situation now in terms of, I know you can't predict what's going to happen in the midterms.

13:31Karen Ward:But do you think that's going to change sentiment? Trump must be conscious of that, as you say. He must be thinking, hang on a minute, the money they're going to make from the big, beautiful bill is now going to be totally eaten by diesel costs or whatever. Yeah. I mean, we've quenched through the numbers, Stefan. Exactly as you say, the lower income part of the US population were getting this tax rebate. So that should have been a lovely boost for their incomes, make them feel better about life, go and spend. But actually, with rising gasoline prices, because so much more of their income is spent on non-discretionary, non-fun, I like to call it, items, it's gone.

14:22It's sort of wiped out. So the boost that we were supposed to get from that fiscal package that Trump announced for the lower income households, they're not going to feel the effects of that. Now, I think it's entirely possible that if gasoline prices stay elevated, if I'm wrong on my political calculus, and actually this does end up being a more prolonged conflict, I wouldn't be surprised if we get more stimulus in the US because of that focus on the midterms. But that worries me in the bond market because I'm not sure, you know, we know the US government is already borrowing an awful lot from the global bond market this year.

15:05If he tries to go for more, then I think that could be problematic for global markets. So I think his options maybe are a little bit more limited. Yeah.

15:17Karen Ward:And on your point as well about filtering through the noise, I know you've written a blog on this in terms of what are the things that do deserve attention in all of this? What is standing out to you as things we do need to think about in the longer term? We have to acknowledge the world is definitely changing. For 20 years prior to the pandemic, maybe you could say 40 years incrementally prior to the pandemic, we were just becoming much more integrated. The world economy was globalizing, as they call it, this big trend of globalization where it was easier to buy goods from far reaching parts of the world, but there were quite a lot of migration flows.

16:01But there was also a lot of capital movement, money moving around the world as well. So we were just becoming a lot more integrated. But you can definitely feel the electorate questioning whether that's worked for them. And I think the difficult thing for politicians is there are certain parts of their electorate who it's worked really well for. You know, myself, Steph, I haven't felt my, you know, job prospects be hindered, worrying about migrants, you know, taking my job. And therefore, my sort of day to day standard of living hasn't felt much more precarious. And at the same time, I've had all these cheap goods available to me.

16:46So I'm fully aware that I'm in that little economic bubble that probably feels that life has been the globalization has been lovely for me. But there's definitely a segment of society where it's made their life really hard. They've become much more insecure about their job prospects and whether they are going to have good real wages and their kids are going to have good real wages. And so I think that part of society that's discontent about the way the world has changed, they just seem to be growing and they're voting. And that's where I think, you know, we all sort of get obsessed about what President Trump's doing.

17:28But actually, if you look at the political shift happening across the West, maybe even started here with Brexit, it's you're seeing that groundswell from the electorate. So as an investor, I have to recognize the world is changing. Now, politicians can't often sort of disrupt our way of life that quickly. I mean, everything that's going on at the moment shows how hard it is. you know we as you said earlier just before this we were all grappling with the tariffs and um and that was the last thing that the administration was up to and that was their that was their attempt to respond to the electorate and say we're going to bring all those manufacturing jobs home and we're going to cut off chinese imports and the second you try and do that you realize it's quite hard and you upset the part of the electorate that was doing quite well from globalization.

18:21So it's not easy to do quickly. But I think as an investor, it's really acknowledging how the long term changes are going to shape the way the world moves, but also money and investment opportunities. And it's not all bad for us here in Europe. I think actually, a lot of the capital that used to go and work in the US or go and get put to use elsewhere in the world, actually, a lot of that money will increasingly come and find opportunities at home. So it's not all bad news, but you just have to sort of, as an investor, you have to really check your biases about, right, how was the world set up?

19:05What did that mean for what returns used to look like and how might the world over the next 20 years just be really different to that

19:13Karen Ward:yeah that's such a a good point about the the globalization and how actually now what you're seeing with particularly with populism is that playing to the unease of globalization and why actually global fragmentation i suppose is is something we should go back to you know that then it will bring jobs back and then it will stop problems with migration. And that's fundamentally where we're at at the minute, isn't it? It's people who feel like they've done badly out of globalization and the few have done well out of it, have just got richer and everyone else has got poorer. And so how do you, because you're totally right as well about you can't just change that overnight.

19:57Karen Ward:You can't turn up. It's the same with energy, isn't it? we do need as a country to have um you know to be less dependent on the rest of the world for energy and but you can't just turn a tap off and expect another one to start because it's a lot more about infrastructure it's about skills it's you know a ton of things which are so finely woven into society and it's really hard to unpick that so and on that then just like news in the uk as an example because the last time we spoke you were feeling quite optimistic about how we were looking as a country you know you said we could be set for a strong year of growth because that the right variables the right mix of variables were there has that are you changing your mind on that now given what's happening geopolitically or are you still of the mind that no actually we just need to we'll get through this and it'll still be you know there's good the growth is ahead because i would love to hear that.

20:54Yeah, I mean, it's taking the shine off the story. There's no doubt about it. So the foundations for my optimism when we last spoke was basically making the point that actually our private sector here in the UK, private sector, households and companies are actually in really good shape. We've been focused on paying down debt. So household debt is lower than it's been since 2002. And corporate debt is lower than it's been since 1998. So we're not weighed down with this massive burden of debt that we're carrying. Our real problem is one of confidence. And we just don't feel optimistic about the future.

21:33So we're unwilling to go and spend the savings that have been accumulated, because actually, we've also accumulated a trillion pounds worth of savings since the pandemic. It's not spread equally amongst society, for sure, but it's there. So, our households and our companies just need that confidence in the future to just go and spend a little bit more. And then that gets you into a nice virtuous cycle where households spend a little bit more and then companies feel a bit more optimistic about life and then they invest a bit more and then they employ a bit more and then households feel even better about their job prospects and their real income.

22:12And I just felt like we might, for the first time in quite a long time, get into that virtuous cycle. So, this isn't helpful, for sure, because of course, A, those savings are going to increasingly get eaten up as we fill our cars and heat our homes next winter if energy prices don't come back down. And it's just not good for business confidence, for businesses thinking like, right, this is a nice, stable environment that I can go and invest in. So it takes the shine off the story, for sure. I don't think this is us going to now stumble into a recession because our starting point was really good.

22:55That makes us, I think, quite resilient. But it definitely, the longer this goes on and the longer oil prices remain elevated it's just it's a tax on our growth we just are increasing you know using more of that fun money to fill up the car and that's that's not good

23:15Karen Ward:karen i want to ask you a bit more about how this all impacts us here but let's go to a quick break

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24:24Karen Ward:And just on the point about prices as well, because obviously there's lots of talk here now about what's going to happen with inflation. The Bank of England, by everyone's predictions, was going to cut rates a bit. Now that looks like it's not going to happen. And potentially if inflation does become more of a problem, then rates are going to go up. What's your take on that? Do you think inflation is going to be a problem? So there's no doubt inflation is going to rise from here. And, you know, I feel sorry for the Bank of England in this scenario. Central banks all around the world, the worst thing that can happen to them is cost shocks or energy shocks because they just have there's no good outcome.