This week President Trump marked 100 days in office, a tenure marked by volatility. His second term began with a decline in US GDP, while jobs and prices hold steady. Investors are concerned that the outlook is getting worse. Keith McLachlan, CEO of Element Investment Managers joins CNBC Africa to examine the big questions the market is facing with the rest of Trump’s term.
This week President Trump marked 100 days in office, a tenure marked by volatility. His second term began with a decline in US GDP, while jobs and prices hold steady. Investors are concerned that the outlook is getting worse. To help us examine some of the big questions the market is facing as it tries to navigate through Trump′s term, we are joined by Keith McLachlan, CEO of Element Investment Managers. Keith, thank you so much for your time. So, let′s look back at April. Let′s look back at April 2nd and the subsequent events. Your key takeaway as you, you know, analyze things. So, Natasha, I mean, you summed it up really nicely, talking about, you know, the volatility and the chaos of Trump′s first 100 days. And it′s only been 100 days. He′s here for another couple of years. I think the takeaway is that the one thing Trump has been very consistent on, because he′s flip-flopped on a lot of things, and there′s a lot of things he says, and then a lot of things he does. But the one thing he′s been surprisingly consistent on from first term to second term is tariffs. And this is, this is quite a serious matter. If we go back to the last period in history where tariffs, and assuming Trump gets the tariffs in that he′s discussed, even after this reprieve of 90 days. But the last time in history tariffs were this high was the 1930s, and that period was the Great Depression. Now, there′s significant differences between that period and this period, and we can discuss those. So, no need to overly panic on that. But it′s just showing how serious these tariffs are, particularly to the American economy, because these tariffs tend to be in trade flows into and out of America. Countries haven′t started tariffing each other. It is predominantly American flow at this point. But America is big enough in the global economy that this is serious for global growth. This is serious for China. And we are, we left last year cautious and defensively positioned in the market, and we have gotten more cautious and more defensively positioned. That really sums up, in a nutshell, our view is that these tariffs and Trump is negative for growth. I′m curious, as you navigate the landscape and come in with a cautious and defensive view, how are you framing the next 12 months as you interact with clients, given a time where there′s a lot of uncertainty and possibly more volatility ahead? Certainly. So, first of all, although we are valuation sensitive, this is a period in time to lean into quality. Good companies will be able to navigate this scenario. So, quality thematic is important in what you select. Good balance sheets, good profit margins, good management, these sort of things are important. Then, getting more nuanced and looking at those sectors that, and once again, rolling it back to the 1930s, those sectors that actually performed well during the Great Depression. Those sectors were healthcare, consumer, non-discretionary, and interestingly enough, mass or value entertainment, when times are tough, people want escapism. So, we are overweight in those sectors. It′s very, very simple. But there′s obviously a lot more nuances within that. For example, what healthcare, what consumer, non-discretionary. For example, we are quite negative on the snacking part of the market, given the rise of GLP-1s and weight loss drugs. And therefore, it is the non-snacking part of consumer, non-discretionary is where we are weighted. And then, you kind of have a look at the more bifurcation of the world, where in the 1930s, America was one, a major industrial economy, and two, China was a rounding area. And now, America is dominated by healthcare, tech, and finance. It doesn′t really have much manufacturing. China is the second biggest economy in the world and a significant player. So, what you have is, you have quite a different breakdown of the global economy to the 1930s. And therefore, your best defense here is having some geographic diversification. We do think that there′s some merits in being a long Chinese tech, particularly for South African investors, that would be process NASPERS. And then, there′s good arguments for emerging markets as bastillions of growth, where most of these tariffs, if they remain targeted in and out of America, really, that′s going to have the most significant negative effect on the American economy. And other economies might be a little bit more resilient. So, there′s definitely nuances on positioning that we have. Your best friend at this point is leaning into quality, having a diversified portfolio, and avoiding junk. I wanted to know, when it comes to looking for quality and leaning into defensive, do you find that your exposure right now is still more US heavily weighted, or are you moving around between US and the emerging markets? What′s the play going forward here? So, that′s an excellent question, and it does depend which mandate we′re looking at. But, without going into individual mandates, the broad picture is, the American market is too big not to have some exposure. We have been underweighted. Like I said, we were cautious going into the back end of last year. We′ve remained that way. Nothing has changed there. We′ve slightly up-weighted China at the beginning of this year, and that′s worked out quite well. And then, don′t forget there are other asset classes here. We have been bullish on gold for a while. Since the tanks rolled across the borders of Ukraine, we′ve been net buyers of gold, and that position particularly has worked very, very well, particularly in the face of a weakening US dollar and arguably cracks appearing in the safe haven status of American treasuries as well. So, the combination of all these things means that you have probably a bit more of a balanced portfolio. If one doesn′t look at benchmarks, one merely looks at spread of assets. You know, you′ve got good developed market exposure, you′ve got some emerging market exposure, you′ve got some diversification into gold particularly. I noticed you didn′t mention Europe, given that Europe had a very interesting performance at the start of the year, especially going into Trump′s inauguration. What′s your take on what′s going on in Europe? So, we′ve been bullish on European defence stocks in the mandates where we can hold those, and that as a thematic has played out very, very well. We still think that there′s multi-year cycle there. The defence sector spend is a long cycle spend, particularly when it′s allocated from a sovereign budget. So, that is a sector we′ve been quite bullish on. We′re generally cautious and we′ve been slightly penalised for being somewhat underweight Europe, because although it′s not America in terms of valuations, it is also not America in terms of lack of growth. What I mean by that is Europe is cheap, and there is actually many reasons why it′s cheap. There′s many, many problems, there′s many, many risks, but it has performed well. So, that′s one that with hindsight bias, we should have been higher weight in our portfolios, wasn′t. Like I said, we′ve had a relatively diversified exposure, so we did catch some of that, and particularly on the defence sector side. We still think there′s legs in that sector, and wouldn′t necessarily be selling right now. As we navigate the 90 days, and we try to see who comes to the table between the US and China, or US and Europe, what are you paying close attention to as you make sense of the day-to-day developments, whether they′re coming out of the truth social platform or the White House? So, the absolute most important single thing to be watching in the global market right now is the US Treasury. US Treasury prices, and probably the 10-year, but arguably the entire yield curve on that side. And it′s not just a gauge on risk, it is also increasingly a gauge on American risk, and a gauge on how confident or cautious, or how volatile the negotiations between China and America goes. Don′t forget, when you zoom out the big picture, is the trade flow has been America buying Chinese goods, funded by China buying US Treasuries. That trade, how fast and how violently it unwinds, and if it completely unwinds, it′s going to have massive ramifications around the world. And China, at this point, the best estimate we can have, owns about a tenth of all Treasuries, American Treasuries. So, they are a gigantic potential net seller of Treasuries. We have seen them selling some, we suspect, in the market. This will not be announced on SENS or news or headlines. What you will see is a violent rise in terms of Treasury yields, when there′s big liquidations. Because once again, if you go back to the 1930s, not that we are in the 1930s, but history does sometimes rhyme, and there′s a lot of lessons to throw back when you go and you have a look. But when countries have serious sovereign fights with each other, what can happen is that if one country holds the other country′s debt, they just quite simply don′t pay that debt. And China is absolutely aware of this. And therefore, that is the single most important data point to be watching in global markets right now. Keith, thank you so much for your time this afternoon. I look forward to catching up with you again as we watch that data point that you mentioned and talk about it in depth, and perhaps even see if there′s any takeaways from the art of the deal that we can give us a sense of how to play this out. But thank you so much for your time. That was Keith McLaughlin, who′s the CEO at Element Investment Managers.
Theme: Navigating Market Volatility During Trump's Presidency
The first 100 days of President Trump's second term have been turbulent, marked by volatility in the markets. While the US GDP saw a decline at the start of his tenure, job numbers and prices have remained relatively stable. However, investors are growing increasingly concerned about the economic outlook as they try to navigate through Trump's presidency. In a recent interview with CNBC Africa, Keith McLachlan, CEO of Element Investment Managers, provided valuable insights into the key questions facing the market as it grapples with uncertainty. McLachlan highlighted the significance of Trump's consistent stance on tariffs as a major concern for the economy. Drawing parallels with the high tariffs of the 1930s during the Great Depression, he emphasized the serious implications of such measures on global growth, particularly for the American economy. Despite the differences between the current trade landscape and that of the 1930s, McLachlan stressed the need for caution and defensive positioning in the market. As the market braces for potential volatility ahead, McLachlan advised investors to focus on quality companies with strong balance sheets, profit margins, and management. He recommended leaning into sectors like healthcare, consumer non-discretionary, and value entertainment, which historically have shown resilience during tough economic times. Additionally, geographic diversification and a balanced portfolio approach were deemed essential to weather the uncertainties. When asked about the balance between US and emerging markets exposure, McLachlan highlighted the importance of having some exposure to the American market despite remaining cautious. He mentioned a slightly increased focus on China and emphasized the strategic value of assets like gold in a volatile market environment. McLachlan's approach reflected a nuanced strategy that aimed to capitalize on diverse market opportunities. Regarding Europe, McLachlan expressed a bullish sentiment towards European defense stocks but acknowledged the challenges and risks associated with the region. He noted the multi-year cycle in the defense sector and emphasized the need for a diversified portfolio to navigate market fluctuations. In light of ongoing trade negotiations between the US, China, and Europe, McLachlan underscored the critical importance of monitoring US Treasury prices as a key indicator of market sentiment. Highlighting the interconnected trade dynamics between the US and China, he warned of potential repercussions if China decides to liquidate its substantial holdings of American Treasuries. In conclusion, McLachlan's prudent advice to investors revolved around quality, diversification, and vigilance in monitoring key market indicators. As the market continues to navigate through uncertain times, staying informed and maintaining a disciplined investment approach will be essential for preserving capital and seizing opportunities in a volatile environment.
"The absolute most important single thing to be watching in the global market right now is the US Treasury. US Treasury prices, and probably the 10-year, but arguably the entire yield curve on that side."
['Keith McLachlan', 'Element Investment Managers', 'President Trump', 'market volatility', 'US GDP', 'tariffs', 'global growth', 'quality companies', 'geographic diversification', 'US Treasury prices', 'trade negotiations', 'investors']