Optimism gives way to uncertainty

US company executives can tend to be ‘hardwired’ for optimism but, after the Trump rally at the end of 2024, euphoria has given way to an environment of disruption and uncertainty. Portfolio managers Julian Bishop and James Ashworth discuss how this is impacting global equity markets thus far this year, how it differs substantially from 2024 and what that might mean for the rest of the year.

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JB: Hello and welcome to the pilot episode of a new format for our Investment Trust podcast. For those who aren't familiar, Brunner is an all-weather global equity investment trust that looks to balance quality, value and growth factors, but always with a focus on cash flow. In this new podcast format, we're going to be talking a bit about what we're spending time on and recent developments in markets and some new purchases. I'm Julian Bishop and I'm joined today by my colleague, James Ashworth.  

JA: Good afternoon, Julian.  

JB: Global equity trust; at the moment, we have about 45% of the Trust invested in the United States. We have a slightly unusual benchmark, as some people may know, we are 70% global, 30% UK, so a bit of a home bias, but inevitably we have quite a lot of investments in the 'States, home to some of the biggest, best, most value creative companies on the planet. A lot of fully global trusts, of course, have more in the 'States, you know, the global index is probably 65% US these days. And that means we spend quite a lot of time in America, and you've just come back from the 'States, so tell us about your trip.  

JA: Yeah, that's a great place to start, I think. I spent last week in the US, as you say. I went to the Raymond James institutional investor conference, which is a giant event held in Orlando. They've done it every year, I think for 46 years. Have something like 350 companies and 1000 investors. It's a really good conference, a huge range of companies, all sorts of industries, all sorts of sectors. Lots of companies that I've met before, but also lots of companies that I've never seen. The US is a very unusual market and country where you can go to a conference like this, and there are always new companies that you never heard of. Many of them have, you know, 10 billion, 20-billion-dollar market caps. The US is really quite a remarkable geography. So, I spent 2 and a half days at that conference, had a lot of meetings, saw a lot of companies, came back with some great ideas. I also spent two days in Atlanta, home of Home Depot, Coca-Cola, lots of other really good businesses as well. Just meeting companies on their home ground, home territory, you get a different taste and a feel for the company when you actually go and see them in their headquarters, in their sort of natural habitat, if you like.  

JB: Yeah, absolutely. So, Home Depot, for those who don't know, it's sort of like the B&Q of America, but a much much more solid market position I think compared to B&Q though. I think you mentioned there, you know, in the 'States, there's a huge, huge range of companies that we could potentially invest in. I think overall, if you look at our… if you look at a typical global index - I can't remember the exact figures - but there's 5 or 6000 companies that we get. 

JA: Yes. 

JB: You know, potentially investing.

JA: Absolutely. 

JB: So, one of our jobs is to visit companies, turn over stones, kiss a lot of frogs, and occasionally, when we see that confluence of quality, value, growth, we’ll pull the trigger and take a new holding. What, what I'm interested in this time though, is, you know, what was the tone at that conference? Because obviously, 2024 was one of real exuberance in the US, and I think, you know, fair to say that markets by the end of the year were pretty euphoric. So, what was the sort of general tone from corporates at that conference and on that trip?

JA: Yeah, I think that's a good summary of where we came into 2025, and clearly we're recording this in mid-March, we've seen quite a lot of turbulence and disruption in the last couple of months with uncertainty about tariffs, uncertainty about the state of the health of the US economy, the US consumer, and I'd say that the tone from most companies was quite cautious, at least in terms of the outlook for 2025. 
Now, US companies as a species and US executives as a category, are always very optimistic about the long-term future for their business. 

JB: Yes.

JA: So, when we, when companies talked about the outlook and the future for their businesses, they were all very optimistic about what might happen in the medium term, but it did feel like there was quite a lot of caution about 2025 in particular. I think there's uncertainty around tariffs. There's uncertainty around really how the US economy will fare in what's turning out to be quite a different macroeconomic and policy environment than was the case in 2024. 

JB: Yeah.

JA: As you say, the Trump rally that we saw at the end of 2024, which really capped off a really good year for US equity markets in general, was driven by expectations of, you know, deregulation, lower taxes, stimulus really to the US economy, and that's really not what we're seeing so far. We're beginning to see more sort of disruption and uncertainty, and I think that is playing on executives’ minds in making them cautious about what 2025 might hold.

JB: Yeah, I mean we're certainly seeing in some of the data now some clear signs of weakness in the US consumer as well, so, it seems like there's been a sort of remarkable reversal of fortunes in the last year. So, you know, 2024 was all about the 'States. It was driven by the tech sector, which is all associated with AI, I guess, and then this idea that, you know, Trump was going to put America first, and that would be categorically good, and I think there was always cautionary comments from mainstream economists that tariffs are not good for anybody. I think that is now playing on the market's minds. And also, I think the uncertainty that is surrounding his administration so far, is meaning that businesses are stalling making decisions, but also consumers. So, if you think about DOGE, you think about Elon Musk and the, you know, the…

JA: Department of Government Efficiency.

JB: Yeah, DOGE, exactly. I mean, that sounds to me a lot like austerity in another word. So, in Europe, we call that austerity, which wasn't a great period for European economic growth, but it was done because it was a necessity. You know, we had big fiscal deficits. I think one thing that people don't always realise is that America is running a huge, huge fiscal deficit. Its budget deficit is very, very substantial, debt at GDP is very, very high. And it was interesting to note that in Warren Buffett's recent Berkshire Hathaway shareholder letter he talked of sort of, you know, fiscal folly, and that will mean that Trump can't cut taxes. No, he can't really stimulate the economy in perhaps a way that he would like. And in fact, they need to cut back on expenditure, which can be contractionary. I mean, that's sort of open to discussion. So, we started this year with you know, sentiment, very pro-US, very anti-Europe, everyone was very depressed in Europe. And you mentioned there as well, the sort of constant bullishness of US executives, which is, I think, you know, just if you've invested in the 'States for a long time, it's like just the way it is. Americans and American businesspeople, particularly just very perennially optimistic people, in stark contrast, you know, for example, if you go to Japan, you know, Japanese executives just brutally honest about how tough things are. 

JA: I think that's probably a reflection of, you know, how society works. And how you get to the top of a corporation in the US, many of these executives were heads of sales or came up through the marketing side of the organisation, they are, you know, hardwired for optimism.

JB: Yeah.

JA: Hardwired for enthusiasm, as you say, Japan's had a very difficult 20 or 30 years. Much slower turnover of individuals.

JB: Yeah.

JA: You know, jobs for life and the like.

JB: Yeah.

JA: Probably breeds a very different type of individual that ends up at the top of the organisation.

JB: I think you’re absolutely right. Just very different… well, just different experiences in business but also just very different culturally.

JA: Yes. 

JB: So, it is interesting, it's always very easy when you see an American company to sort of be seduced by the bullishness and the optimist, optimism of the management, it ignores reality in some instances. So, obviously, that's something we always have to consider when we're having meetings. But it is true, this change in sentiments of the year to-date, which has really been quite remarkable. And of course, we entered this year with US valuations very high. On the contrary, European, sorry, on the opposite side of the coin, European multiples were very, very depressed. We've seen this huge surge of outperformance by US markets, and unusually so given that normally developed market correlations are quite high. And then this year that has reversed, so in 2 months, we've seen the 20% outperformance of the US last year reverse, in just 2 months, which I've never seen before and it would be good to hear your thoughts on why you think, you know, what's, what's changed?  Why that very abrupt turnaround? 

JA: That is a very good question. Well, I think it's a few things, really. You’ve picked up some great points that, you know, 2024 was very unusual for the US. It's very unusual for the degree of outperformance, and as I think you wrote in the shareholder letter that went out in the annual report, you know, what we saw really was a very big divergence in trading multiples, valuations for businesses, the amount of, you know, the multiple of profits that people are willing to pay for businesses in the US was materially higher than in Europe. 

JB: Yep.

JA: We see that particularly in the UK market, which is obviously a very big weight for the strategy. But I think it's true more broadly across Europe. So, we exited 2024 with basically a yawning chasm between the valuation multiples in US versus Europe, in particular and versus the UK.

JB: And a yawning chasm in sentiment.

JA: And sentiment in particular. And I think what we've seen really is a sort of reversion to the mean in both cases. In the US we’re increasingly worried about tariffs, or investors in the US are increasingly worried about tariffs. They're worried about the impact of DOGE and austerity-like measures, the uncertainty that this brings to many people who work for the federal workforce in that country. And then on the European side, there are noises around potential resolution in the Ukraine. There's noises around additional German stimulus spending in the wake of the German elections, and really, where the German sentiment started the year very negatively, and European sentiment generally started very negative in 2025, we've got some sort of reversion towards a more neutral level, and the US is similarly reverting to a more neutral level, but from a much higher base. I think that's really what's driven quite a lot of it, and…

JB:  I think that's a good summary. I think that's a good summary. I think, one thing that's also got people excited is Germany, so the largest economy in Europe, you know, effectively, or factually in recession for 2 years. But, the thing about Germany is their prudency and, you know, and unlike the UK and unlike the US, pretty low government debt. Pretty low, that's overall, actually. Balanced budget, so they have this…

JA: They have actual scope, don't they? They have much more potential. You mentioned the US, they're running a budget deficit of nearly 7% of GDP. I think last time I checked. 

JB: Yeah, yeah. 

JA: High levels of debt, there's not really the scope to keep stimulating the economy, which you would, you would be surprised that  they are doing at this point in the cycle, given unemployment is very low.

JB: Yeah.

JA: And the economy is generally performing well, as you say, Germany in particular starts in a much healthier place and has much more potential for more. 

JB: Yeah. Exactly, exactly, and it's quite an interesting change in tone, so I think a bit of history is relevant, which is that Germany has its sort of collective memory, you know, the Weimar Republic, you know, so the government that existed between the end of the First World War and, well, the rise of the Nazis really, when there was experience of effectively money printing, which ended up in hyperinflation. That has created a political environment where that will never happen again. Let's live within our means. That's always been a big part of the German political mindset.

JA: Yeah, and we've seen that for the last 20 years, right? 

JB: Yeah. 

JA: Like, listeners remember the global financial crisis and the issues that Greece had and other sort of peripheral European countries. Germany was one of those who didn't want to loosen the purse strings and was…

JB: Yep.

JA: You know, basically enforcing austerity on many of those countries that were, you know, struggling. 

JB: Yep.

JA: So, this is quite significant in terms of the mindset, I think, 

JB: Yeah, exactly. So, it's a change of mindset and they have the dry powder to actually be able to ramp up spending, of course, the, at the moment they're talking about defence spending in particular, because Trump making the, I think, very fair observation that Europe should pay for its own defence.

But I'm conscious here we're talking a lot about macro and…

JA: Yeah, maybe this is a good time to move on to talk about sort of individual stocks, and we've talked a lot about what's going on in macro and how, you know, how the US came into 2025 with very elevated evaluations, lots of enthusiasm, lots of bullishness about that stock market in general, maybe the rest of the world offered more palatable valuations, more attractive opportunities. Maybe we should talk a little bit about what we've been doing in the Trust. Maybe you want to talk through some of the new positions we've invested in, or pick a new position? 

JB: OK, yeah. We can talk about one, which is certainly a bit different. So, try and balance quality, value, and growth, you know, collectively you have a slight preference for quality, you know, if you look at the style skyline for the portfolio, it skews to quality. But, occasionally, you find a sort of value name which you just think is so compelling you want to get involved. But the stock, which we've just taken a new position is the South Korean automaker, Kia. So, just as a bit of background, most, I think, professional investors would think you generally shouldn't invest in South Korea, corporate governance is a bit of an issue there. You have these big family-owned businesses called Chaebols, Samsung is the best known, but there were others too, which brings some governance issues with them, and automakers a horrible sector. I mean, it's fair to say, tough capital-intensive, cyclical, competitive business. 

JA: And because the auto space is one that we've been digging around with, you know, digging around for quite a while. 

JB: Yeah.

JA: I think we started looking at the space more than a year ago, intrigued by evaluations that you see across the space. 

JB: Yeah.

JA: We've looked at many of the European automakers. They're obviously in a fairly difficult competitive position…

JB: Yes.

JA: Relying in many cases on the Chinese market. Many of them sell a lot of high-end vehicles into the Chinese market.

JB: Yes, yeah.

JA: At high prices, high margins.

JB: Yeah.

JA: That's, you know, the Chinese economy is in a difficult place and those high-end vehicles are increasingly being replaced by local replicas, effectively, of those vehicles. 

JB: Yes, yeah.

JA: So, we never really got close enough to anything that we thought was, where there was enough margin of safety, effectively. Where the quality was good enough and the downside risk was modest enough…

JB: Yes.

JA: For us to pull the trigger, and it's a space of, you know, I spent some time on it last September. I went through some of the German manufacturers. I went to see the manufacturing facility at Mercedes-Benz. I had meetings with BMW, it's a really interesting space. As you say…

JB: Yeah.

JA: They're very difficult businesses, they're very capital intensive, they are very prone to sort of product cycles as well. You need to bring out new vehicles…

JB: Yeah.

JA: Every few years to keep interest going, and they're also at a very difficult point in the auto, sort of the history of the auto industry, as we go through this transition to electric vehicles…

JB: Yep.

JA: And driverless vehicles. 

JB: Yeah.

JA: So maybe, you know, a good, maybe a good sort of segue to… we looked at the European space, we couldn't really find anything. What was it about Kia that got us over those hurdles and made us comfortable that the riskiness here was less than we might see in other automakers?

JB: So, I think you picked up on one of the key things, which is that the Chinese market is very different, difficult for everybody. The German automakers BMW, Mercedes, Porsche make a lot of their money in China, and that's sort of now collapsing and a; a difficult economy and b; the weight of local competition. So, we sort of wanted to avoid China. Then with EVs, you know, it's clearly coming. So, we wanted a company which had a credible EV strategy. Another thing to mention with the European ones as well is they're slightly hamstrung by being based in high-cost locations. So, you know, Germany is an expensive place to produce cars. The US is, too, so you wanted someone who had essentially placed their assets more recently. So, Kia, their factories are in South Korea - it's reasonably low cost, they're in Slovakia to serve the European market. They do have plants in the US, they also have plants in Mexico and India, where they're doing a great job. So, overall, we thought pretty well placed. I mean, just to sort of back up, Kia is actually partially owned by Hyundai. 

JB: So, we talked about…

JA:  So, the other enormous auto manufacturer in South Korea.

JB: Exactly, so you might think Kia is quite a sort of small manufacturer. Actually, Hyundai and Kia together are the 3rd largest automaker in the world. So, after Toyota and Volkswagen as a group, they're the third largest, so they've got scale.

JA: I guess many people won't recognise the… would be surprised to hear that. 

JB: Yeah, yeah, I don't think people would necessarily know that. So, they're separate companies, but one partly owns the other. There's lots of centralised procurement, and actually they're building a factory together, a very large factory together in the United States. And then the last thing is, it's just very, very profitable. So they've done a good job taking their vehicles up further up-market, so it used to be that Kia was a sort of discount brand, increasingly they're sort of priced in the middle, and some of their models, you know, if you're into reading car magazines, you know, some of the most recent models, particularly the EVs are very appealing vehicles, they're pretty premium, and they've had a great deal of success in the US.
So, I think we're probably out of time.

JA: I think the producer is signalling us that we might need to bring this to a close.

JB: OK, so we're out of time, we've probably bored your socks off, but we hope that you've enjoyed listening. So, thanks for listening. We hope you have enjoyed hearing a little bit about what we're working on. If you'd like more information, please go to brunner.co.uk to learn more about how we invest. And with that, bye-bye from me, 

JA: And bye-bye from me. 

JB: Take care.