Global shocks, local gains: Investing in a tariff-tangled world

In this episode of A Value View from the Merchants Trust, host Jon Cronin sits down with Portfolio Manager Simon Gergel to unpack the seismic shifts in the global economy triggered by President Trump’s 2025 tariff policies. From the ripple effects on US GDP and global trade to the implications for UK-listed companies and the Merchants Trust portfolio, this conversation offers timely insights for investors navigating uncertainty. Recently announcing 43 consecutive years of dividend growth, the Merchants Trust also demonstrates a measure of resilience in volatile markets.

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JC: Hello and welcome to Value View from the Merchants Trust. Thanks for joining us. Now at A Value View, we have a simple objective. We aim to bring you insights and views on some of the biggest current investment issues of the day. And we'll do this, as we always have, by looking at the world through the prism of the Merchants Trust, which boasts a diversified portfolio of well-established and well-known UK-listed companies. So, who better to guide us on this journey than Simon Gergel, Portfolio Manager at the Merchants Trust. Simon, it's good to be with you again.

SG: Hi Jon, great to see you again.

JC: P Well, we've got a lot to talk about in this episode, because we're almost halfway through the year, but when the historians look back, Simon, at 2025, I think it's likely they're going to be able to sum up this volatile year in a single word - tariffs. President Donald Trump's much vaunted US tariffs policy has shaken the global economy to its core. Governments, economists, investors, businesses have all been racing to understand what the fallout from the Trump administration's policy will be, but what's clear is that the global financial order has been turned on its head. So, Simon, let's look at what all this means from your perspective, managing the Merchants Trust. And let's go back to the source, what the impact of the tariff policies are having on the US economy. So, we've seen a drop in US GDP very recently. Was that expected?

SG: I don't think that was actually expected, but I don't think it's a massive surprise.

JC: So not a worry?

SG: Well, I don't think that specifically - that data point, minus 0.3 for Q1 GDP - is a worry in itself, but clearly the tariff policy and what that could mean is potentially a worry for both the economy and markets. And it's really hard to know exactly, I mean, we don't know what Donald Trump's going to say. We don't know what Donald Trump's going to do, and we don't actually know if he's going to sustain that and keep it, so he might talk about tariffs but then rein back, as we’ve seen a lot, and delay and postpone these things. One thing we, if we try and think about what we can learn from what's happened, I think the first thing we can say with some certainty is there's a lot of uncertainty and a lot of decisions are being put on hold. If you were running a company and you had to make a big investment decision, whether it's in the US or outside the US, you're probably thinking, I don't know what the tariffs are going to be in my industry. I don't know what the world economy's going to look like in 6 months' time. If I wait 2 or 3 weeks or 2 or 3 months, I'm not going to be any worse off, and I might be in a better position to assess that, and that delay is very negative for growth potentially.

JC: And how long can companies keep on delaying? You talk about a couple of weeks, a couple of months, but you know, this president, this administration is going to be as unpredictable and volatile, most likely, for the duration, so what does that mean for businesses trying to make decisions?

SG: Well, I think it all depends on what you're talking about delaying. If you're delaying a building of a new manufacturing plant for cars, which takes 5 or 6 years, you're going to wait till you're pretty sure that you need to do it in that point. If you're talking about a bit of extra capacity, another line for packaging soap, or something like that, you probably make that decision in a week or two, or in a couple of months, you just wait a little bit of time. So, I think it depends all totally on what you're talking about. But it's not just the uncertainty of tariffs. The two other things I think that are going on. One is that what Donald Trump’s government had done to the public sector, which is shed a load of jobs and actually make a lot of public sector employees worry about losing their jobs, and therefore they're probably not focusing so much on doing their day to day activity, which again could constrain activity if you're looking for planning permission, if you're looking for approvals for so and so and such and such, that could affect the ability to operate.

JC: This is Elon Musk's infamous DOGE, isn't it.

SG: Absolutely. So, that Department of Efficiency is getting rid of public sector employees and could affect the economy. And then the other thing is the crackdown on illegal immigrants and the deportation of people and the closing of the border with Mexico does seem to be having an effect on the number of people who are not turning up for work, and very, you know, very reluctant to go out and try not to be found. Again, that can affect economic activity. So, I think all of this paints a picture of uncertainty, but probably less economic activity than we would have had otherwise. Beyond that, it's really hard to know how these things play out.

JC: Absolutely, I mean, it's early stages still, isn't it? And I guess, in that light, I suppose it is slightly unfair question, Simon, but what do you think this might ultimately mean for the status of the US, you know, it's economy, but beyond that, you know, the exceptionalism with which the US views itself and much of the world views it. The notion that the dollar is the only reserve currency in the world. Are we looking at the beginning of the end of that?

SG: Well, we might be, and I never thought I'd say that. That is possible. It's certainly not just the uncertainty over trades and tariffs. It's the question about the legal system, the judicial system, checks and balances in government, the status of the universities, there's a lot of areas where this administration is having an impact, and all of this just leaves a little bit of a question mark about the dollar, about the status of US Treasury as the risk-free assets. I think it would be far too early to call the end of that, because that, you know, it's not clear who takes their place, but I think many governments, countries around the world, will be looking at that and thinking, do I really want so much exposure to the US assets in the broader sense?

JC: OK, well, look, the old saying goes that when the US sneezes, the rest of us catch a cold. So, let's look at the rest of the world, the rest of us. What does that tariff policy that President Trump is still pushing, what does it mean for the wider global economy, and the impact that it'll have?

SG: It's a really interesting question and it's not uniform, and it's not all that clear. I mean, firstly, the US economy is actually quite self-contained compared to sort of something like the UK, which is a very international trading economy. The US is much more domestic than many other countries, but clearly it's a massive purchaser of product from Asia, particularly places like China, and a big trading partner for many countries around the world. So, it will absolutely have an effect if the US economy slows or goes into recession. That will absolutely have effect on world growth. The tariffs themselves are potentially quite inflationary in America, but they might be disinflationary elsewhere, by which I mean if goods are being manufactured in China and they can't go to America, or they don't go to America because the tariffs are too penal, they could be sent to other markets, like the UK and that could push prices down in some of those markets because there's more goods looking for a home, whether that's cars or electronic goods or whatever. So, you could actually see, ironically, see a bit of disinflation in other countries, if they don't all put up tariff walls at the same point against each other. So, we need to see what happens, but growth with all other things being equal, you'd expect growth to be a bit lower, but inflation could be a bit lower also in some other countries as well, although…

JC: Might that help, that lower inflation, might that help stem the potential for growth to slow as well?

SG: Well, if you look at a country like the UK, if you get lower inflation, it would allow the Bank of England to cut interest rates more, which could stimulate the economy and offset some of the pressures, if there is slightly lower international growth. So, if you had significantly lower interest rates in the UK, mortgage rates have come down, people's cost of living would go down, and that would potentially be quite good for the economy. So yes, absolutely. Whereas a country like China, if China has very high tariffs with America, it might be very different, but I, you know, talk more about the UK, probably.

JC: Yeah, I mean, when you talk about the inward nature of much of the US economy, are we sort of seeing perhaps then we've talked about the reserve currency, the end of US exceptionalism, possibly, but are we starting to see a more serious decoupling of the global economy, you know, the US in its own orbit and other countries finding a way to work with them, with each other?

SG: That's a tricky question, possibly. I mean, already Japan's on a different trajectory to America. It is possible that you see a bit more variation. I think you're also going to see, in terms of money flows, we've had a lot of money flowing into the US in the last few years. I suspect that might be, people might think they've got as much as they want, or maybe more than they want, in US assets, and that could see changes in flows. But it's too hard to predict at the moment if the world economy is going to decouple and break up into different groups; it's a bit early to say.

JC: OK, so companies, of course, need to deal with the consequences of all of this, and they need to deal with the consequences - good or bad - of government policy, more generally. So, what impact are we starting to see on company profits from all of this?

SG: Yeah, again, it's a great question, and to some extent, it will depend what actually happens on tariffs and trade and growth. Of course, if we look at our portfolio and UK-listed companies, many of them have large operations in America, whether that's pharmaceutical companies, energy companies, industrial companies. And then many of them are more domestic in the UK. For the ones that have exposure to America, clearly they are exposed to whatever happens in that market as much as they are elsewhere, so that will be something that we'll know more about as time goes on. At the moment, we're not seeing, in our portfolio specifically, we're not seeing that much disruption, but many companies are just withholding guidance or not really sure. If we look domestically, I think it's quite interesting because one of the flip sides of this is it's likely the Bank of England is going to cut rates more aggressively than they would have done otherwise. Partly as I said, because inflation might be lower, and partly growth might be lower and lower interest rates can help areas like retail, it can help consumer areas because of low mortgage rates. It also helps assets like real estate, which are priced off on yields and interest rates. So, lower interest rates could actually really help the domestic stock market and domestic companies. So, it's an interesting situation. But of course, it depends how much the economy suffers in the UK from what's going on globally, so we're too early a stage really, to be sure.

JC: And again, I suppose it's an early stage of events to ask this question, but you mentioned stock markets there. What’s the fallout been, so far as we can tell, for the markets, in particular, the UK stock market and how it might be compared to the US?

SG: Well, we saw a similar pattern actually in the UK and the US in April. So, the beginning of April when the tariffs were announced we saw a very sharp fall, sharper in America than we saw in the UK, and quite a sharp fall in the dollar, and then we saw a very rapid recovery. So, by the end of the month, the S&P index was barely changed and actually the UK market and stock market was barely changed on the month, which is really quite surprising, perhaps. But I think what… I think behind that, I think it feels like there's been a mood change. That people don't necessarily want to have so much money tied up in America and there's a bit more interest in European and UK equities and assets. As I say, it's too early to be sure, but I think we are starting to see that move take place.

JC: And what does that mean finally, closer to home? What does that mean for you, for the Merchants Trust and for the outlook for the Merchants Trust's prospects as well? Sort of joining this all together and thinking about ultimately, you know, what we care about, and that's the Merchants Trust and the investments that you make. What do you think are the implications there?

SG: Well, I think, and we, as you know, are predominantly invested in UK companies, UK-listed companies, and there has been a lot of money flowing out of the UK stock market in recent years, largely to America. If that reverses or even stabilises, if you get no flows in or out of the UK, there's some very big buyers in the UK market already. Companies are buying back a huge amount of their own stock. And we're seeing lots of takeovers and acquisitions. So, if you get a slowdown or cessation of the outflows of money from the market, it's likely the market would go up because there's so much internal buying. And if you're getting any money coming into the market again, there probably aren't that many sellers left in the stock market, so it could be very beneficial to get money flows into the market. Of course, it all depends on the outlook for the economy and what's going on in the real world, if you like, rather than the stock market, but I think it could be very positive. And then within the portfolio, we're quite well positioned if we get lower interest rates if the consumers’ side of the economy starts to do better because we've got large positions in sectors like house builders, consumer, real estate, those types of areas which would benefit from lower interest rates and a bit more stimulus. So, I think on top of the fact that I'm confident anyway, long term, because the valuations in the UK are so attractive, if we do get money flows back into the UK stock market, I think it could be very helpful.

JC: And of course, Simon, that will all have potentially a beneficial impact on the dividend, which I gather for the Trust is showing its 43rd year of growth. Congratulations on that.

SG: Yes, I mean, it's a great achievement from the company. The Board of Directors have recently announced a final dividend, which would be the 43rd consecutive year which the company's been able to deliver dividend growth each year. I think it's really helpful actually, particularly in times of volatility and uncertainty like we are at the moment, to think about the dividend stream that not just that we're paying out or that Merchants have been paying out, but also the different stream we're receiving from companies, the income and the cash they're generating, because it's really easy as an investor to see all the volatility in the market, the share prices go up and be concerned when share prices go down. But if you think of it as a stream of income, whether that's being paid to you in dividends or just cash that's being generated by companies. You, as a shareholder, own the stream - a share of a stream of income, and that stream of income tends to be relatively steady, certainly doesn't go up and down like the stock market does. When the stock market goes down, you get that stream of income at a lower price, you're getting more income for your pound, if you like, and that's quite a good way if you could think in that mindset, it can allow you to ride through some of the volatility in markets and not be swept up in it and actually see volatility is an opportunity to make investment decisions rather than a concern really, if you're a long term investor.

JC: OK. Well, Simon, I'm afraid we're out of time, but thank you very much indeed for your time. And thank you for listening to A Value View from the Merchants Trust. You can find out more about the Merchants Trust and read and watch Simon’s latest investor notes by going to merchantstrust.co.uk. But from all of us, for now, it’s goodbye.