2025 has been one of the fastest starts to a year that I can remember. Plenty of news flow and new information to digest: Stargate, AI, DeepSeek, tariffs, inauguration, Jevons Paradox, LA fires, Big Tech earnings, the USD move. The one that got my attention was the headline from the Wall Street Journal earlier this month that read “Dumbest Trade War in History” as President Donald Trump unleashed the first salvo of his tariff war, with general levies of 25% on Canada and Mexico, and 10% on China - the start of a wave of promised trade barrages against foreign allies and adversaries alike. For no good reason. The Republicans used tariffs in the 1930s to try to alleviate the effects of the Great Depression and improve revenue for the federal government. Did it work? Anyone, Anyone?
The move is explosive in scale and goes well beyond Trump’s first-term tariffs. They all but abandon the trade deal he negotiated with Canada and Mexico in his first term and will raise the cost of key goods, like food, housing, and gasoline for Americans, while the overall fallout threatens to spill widely across the countries, which are the largest three sources of US imports, accounting for almost half of the total volume. It marks a new phase of the trade war, which targets multiple countries, including allies and China, to meet US economic and geopolitical policy goals.
Whilst many still believe that this is a negotiating tactic, and like any act of war, no plan survives the first five minutes of battle, Trump will have to re-consider the US position now that other countries are calling his bluff. Or risk stoking inflation, reducing US growth, and irritating his neighbours. I think we are past the point of no return on the latter (this appears to be the least of his concerns) and if you’ve ever had a tussle with a neighbour, you’ll know these things can escalate quickly. How bad will it get?
This is a dangerous game of chicken. Inflation is unpopular. Trump was elected partly because consumers were still reeling from the spike in prices in the previous year. I expect this argument to carry more weight in discussions over time, as ultimately Trump sees himself as a man of deals and a hero/saviour to the people.
The tariff news follows hot on the heels of the startling revelation that the Chinese have developed their version of ChatGPT, called DeepSeek, for a fraction of the price. And whilst it might not be able to provide you with a Wikipedia-type answer on 1989 Tiananmen Square, everything I read tells me it’s just as good in other respects. If you’ve hopped in a BYD or GWM lately, you will know that Chinese technology is impressive. However, with the Trump administration determined to be No 1, and the US tech hyperscalers spending hundreds of billions in the AI space, this is going to be a tech race, like the world has never seen in peacetime. Is this positive or negative for AI stocks and the market in general? I think it's positive. We are in the middle of a technological revolution that will improve productivity and efficiency and drive economic growth. These factors should lead to earnings growth and consequently higher stock prices. Importantly, this is a secular trend that I think is set to continue for some time.
In this environment, the bulls have tried their best to keep calm and carry on through all the turbulence, and January was a positive start to the year, but the pressure of uncertainty keeps them from peacefully grazing on stocks. I am expecting plenty of volatility this year, which may cause the herd to shift around a lot looking for greener pastures. We will do our best to navigate this, moving with the herd when appropriate, or positioning ourselves prior. But please forgive me in advance, it will not be possible to foresee every twist and turn that is likely to eventuate this year! As I alluded to at the end of last year, in the last couple of years there have been some obvious discrepancies in market pricing. Many of those are less evident today. One trend we are aware of is overcrowding. According to Bank of America strategist Michael Hartnett, US big tech stocks are set to become the ‘Lagnificent 7’. “US exceptionalism is now exceptionally expensive and exceptionally well-owned”. We therefore believe that this sector will either underperform the market in 2025 or perform in-line at best.
Finally, gold prices surpassed US$2,800 an ounce for the first time. The majority of our funds have exposure to gold via direct holdings in gold miners around the world. The rise in gold is a reflection of the political uncertainty and inflation that has plagued the world since COVID. Gold performs particularly well in these environments.
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