Speaker 1: Hi, this is Copy Time, a podcast series on markets
Speaker 1: and economies from DBS Group Research. I'm Tambe, chief economist,
Speaker 1: welcoming you to our 145th episode. Happy New Year. Today
Speaker 1: it's just yours truly here. I'm gonna talk a bit
Speaker 1: about where we stand with the markets in 2025.
Speaker 1: Now, I'm having this discussion recorded just a few hours
Speaker 1: after Donald Trump took over office, and there has been
Speaker 1: a slew of executive orders taking the US out of
Speaker 1: the Paris climate treaty, withdrawing US from the WHO, talks
Speaker 1: about 25% tariff on Canada, Mexico, uh, starting on the
Speaker 1: 1st of February. I think it will take a while
Speaker 1: before
Speaker 1: The market can fully digest, if ever, but at least
Speaker 1: not now. It'll be a while before the markets can digest,
Speaker 1: even remotely the far reaching implications of some of Trump's measures,
Speaker 1: and I don't think we can wait that long. I
Speaker 1: think we need to suss out what awaits us perhaps
Speaker 1: with some historical context and that's where I'd like to
Speaker 1: begin today. Uh, let's travel back.
Speaker 1: To the 1890s, 1890 to be precise, when William McKinley,
Speaker 1: who was the powerful head of the House Ways and
Speaker 1: Means Committee, pushed through a wide range of tariffs uh
Speaker 1: for on on US imports, and the idea at that
Speaker 1: time was to make sugar non-dutiable and balance.
Speaker 1: The loss of revenue from sugar import to a wide
Speaker 1: range of other non-sugar products. And the reason for that
Speaker 1: was in the late 191880s the US was going through
Speaker 1: a bout of high inflation, food prices were up, and
Speaker 1: the view was that a certain imported food items, including sugar,
Speaker 1: maybe if you make it duty free, it'll help inflation,
Speaker 1: but if you lose that tariff, well, that's a problem,
Speaker 1: so impose tariffs on everything else.
Speaker 1: And as a result, the average tariff on duty of
Speaker 1: imports in the US went to about 50% and the
Speaker 1: average tariff on all imports went to about 20%. This
Speaker 1: proved to be actually pretty unpopular because the Congress actually
Speaker 1: got a revenue windfall, uh, because the tariff that they
Speaker 1: took away from sugar and put on everything else actually
Speaker 1: amounted to more money.
Speaker 1: The Congress actually was called the billion dollar Congress in
Speaker 1: the early 1890s, and the Democrats ran against this measure
Speaker 1: by Republican McKinley to increase tariffs on a wide range
Speaker 1: of things in the midterm elections in 1892 and the
Speaker 1: Republicans lost the House and the Senate altogether, uh, because
Speaker 1: of the unpopularity of tariff. Now, the Democrats who ran
Speaker 1: against tariff, spent the next few years, at that time,
Speaker 1: by the way, they had all three chambers of the House,
Speaker 1: uh House and the Senate and the presidency.
Speaker 1: Grover Cleveland was a precedent, and they tried for the
Speaker 1: next couple of years to remove the tariffs. It didn't
Speaker 1: work out that well. I think that's lesson number one
Speaker 1: from history. Once you put up tariffs, it's not that
Speaker 1: easy to take out because all those industries that get
Speaker 1: protected by tariffs start fighting against it.
Speaker 1: So the Democrats tried and failed, and by the mid
Speaker 1: of 1890s, tariffs were still there and the US was
Speaker 1: stepping into a big recession. There was a banking crisis, uh,
Speaker 1: monetary policy was very tight because there was not a
Speaker 1: lot of extra gold and the US dollar was linked
Speaker 1: to the gold. So for a variety of reasons, uh,
Speaker 1: public opinion turned very, very sour pretty quickly and by 1896,
Speaker 1: the Democrats lost and the
Speaker 1: McKinley tired guy, McKinley, William McKinley became the president of
Speaker 1: the United States.
Speaker 1: Um, now, the subsequent years when McKinley presided over high tariff,
Speaker 1: the US actually went through an amazing spurt of growth, uh,
Speaker 1: both with respect to GDP and productivity, and it was
Speaker 1: something that has been noticed by Donald Trump.
Speaker 1: He always says that McKinley is his favorite president. He
Speaker 1: wants to be a tariff president himself, and he cites
Speaker 1: the years of McKinley presidency and the years after that
Speaker 1: early 1900s as proof that you can have high tariffs
Speaker 1: and high growth at the same time. So it is
Speaker 1: important for us to understand some of the things that
Speaker 1: happened in the US in the late 1890s that led
Speaker 1: to the strong growth and the conditions we might be
Speaker 1: encountering going into 2025 and beyond.
Speaker 1: How did the US manage to put a massive wall
Speaker 1: of tariffs, discourage competition, push away overseas uh flow of goods,
Speaker 1: and somehow miraculously grow so fast. Two things happened. First,
Speaker 1: the Klondike gold rush. There was a huge discovery of
Speaker 1: gold in the US. That gold entered the market, and
Speaker 1: since the dollar was linked to the gold, that resulted
Speaker 1: in a huge expansion of money supply.
Speaker 1: Now, as a result, the US went through a monetary
Speaker 1: easing while dealing with some of the headwinds from tariffs.
Speaker 1: So that was a very nice offset. The second big
Speaker 1: offset was massive amount of immigration that was continuing into
Speaker 1: the US from mainland Europe. So, in the late 1890s
Speaker 1: and early 1900s, the US was blessed by substantial monetary
Speaker 1: easing and substantially easing of labor supply because of substantial immigration.
Speaker 1: Do we expect either of those to happen in the
Speaker 1: next couple of years in the US? I think very unlikely.
Speaker 1: Inflation is still a problem, tariffs could fuel even additional inflation.
Speaker 1: Trump also has plans to cut taxes. That certainly won't
Speaker 1: help the inflation cost in the near term, and therefore,
Speaker 1: we might actually see monetary policy remain where it is now,
Speaker 1: or it will be marginally easier over the next year
Speaker 1: or two.
Speaker 1: So the late 1890s style massive monetary expansion simply is
Speaker 1: not on the cards. The second one is immigration. I
Speaker 1: think we can all safely say Trump is not interested
Speaker 1: in increasing substantial immigration. He's trying to decrease, particularly undocumented
Speaker 1: immigration in the US, so we were not going to
Speaker 1: see an expansion of the labor supply unlike what we
Speaker 1: saw in the late 1890s. So my lesson from comparing
Speaker 1: what's coming versus what happened back then.
Speaker 1: Is that substantial additional tariffs will almost certainly add to inflation,
Speaker 1: immigration measures will almost certainly add to tightness of the
Speaker 1: labor market.
Speaker 1: And therefore, going forward, I'm not particularly hopeful that Trump tariffs,
Speaker 1: whichever shape and form they come in the coming days
Speaker 1: and months, uh, would be particularly helpful to the US
Speaker 1: growth outlook. I've seen some forecasters out there looking at
Speaker 1: about 2.7% growth for the US. I mean, this is
Speaker 1: the most optimistic end of the spectrum. I am probably
Speaker 1: more with consensus looking at low 2s, about 2.1%, because
Speaker 1: if indeed the tariffs get implemented in a
Speaker 1: Wholesale manner, universal tariffs, substantial tariffs on additional tariffs on China,
Speaker 1: substantial tariff on Mexico, Canada, all those things would be very,
Speaker 1: very disruptive for business sentiment. It would be disruptive for
Speaker 1: the inflation dynamic, uh, would be, uh, disruptive for flows
Speaker 1: of trade, putting it on, and of course, let's not forget,
Speaker 1: I forgot the other important point.
Speaker 1: There would be retaliation. As the US raises tariffs. Other
Speaker 1: countries would raise tariffs, US exporters would suffer, that would
Speaker 1: then come back to again hurt US growth outlook. So
Speaker 1: I would probably shave off 40 to 50 basis points
Speaker 1: from that very optimistic end of the forecast instead of 2.7%.
Speaker 1: I think a reasonable forecast for the US for 2025
Speaker 1: would be in the low 2s, maybe 2.1 or so,
Speaker 1: assuming some of the shocks that are likely to come
Speaker 1: in the coming days and months.
Speaker 1: Now, beyond the issue of growth, which again I'm underscoring
Speaker 1: to be in the low 2%, uh what are the
Speaker 1: other market implications for the US? And the first is
Speaker 1: if rates do stay high, uh, there are negatives for
Speaker 1: the equity market, which has been on a tear the
Speaker 1: last couple of years. Uh, very rarely is the case
Speaker 1: that you see two consecutive years of 20% plus return.
Speaker 1: So from that perspective, uh, the headwind that will come
Speaker 1: from the US equity markets is a simple uh yield
Speaker 1: gap that if you have 10 year bonds yielding close
Speaker 1: to 4.7%, 4.8%, even 5%, uh, the dividend that the
Speaker 1: S&P 500 gives uh looks very.
Speaker 1: Attractive by comparison, and that becomes a sell signal in
Speaker 1: many equity evaluation models. Now you could of course argue
Speaker 1: that dividend is passe, all that matters is growth, and
Speaker 1: US tech companies are growing so fast. There's this huge
Speaker 1: AI boom going on, so why should we be negative
Speaker 1: about the US stock market. So I think that, you know,
Speaker 1: you could be constructive about certain parts of the market,
Speaker 1: but still be fairly cautious about the overall market outlook
Speaker 1: uh based on the yield gap calculation and also
Speaker 1: The good news for the tech uh companies is so
Speaker 1: deeply priced in because as soon as Trump got elected,
Speaker 1: we've seen a massive rally in the Teslas.
Speaker 1: And the tech companies in general, ah, because they're expected
Speaker 1: to benefit tremendously under the Trump administration. So I think
Speaker 1: the the upside is very much priced in. What has
Speaker 1: not been priced in is the likelihood of rates remaining
Speaker 1: high under the high tariff environment and therefore I am
Speaker 1: fairly cautious on the US equity side.
Speaker 1: And also let's not forget there is a tremendous amount
Speaker 1: on a relative basis value in the rest of the world,
Speaker 1: whether it's in Asia or in Europe. They haven't had,
Speaker 1: they haven't been blessed by the kind of growth momentum
Speaker 1: that the US has had lately, but I wouldn't put
Speaker 1: it past equity portfolio managers looking at those opportunities outside
Speaker 1: of Asia if rates do remain high through the course
Speaker 1: of 2025. The other issue related to rates is of
Speaker 1: course the private markets in the US. We will discuss
Speaker 1: Uh, private markets in a deeper dive, uh, in a
Speaker 1: couple of weeks' time at a separate podcast, but there
Speaker 1: has been a big expansion of private equity, private debt, uh,
Speaker 1: and the impact of interest rates remaining sticky on those
Speaker 1: asset classes, um, I don't think it's going to be
Speaker 1: particularly constructive. I'm not necessarily foreshadowing some systemic risk coming
Speaker 1: out of the US financial system, uh, because of high
Speaker 1: interest rates, but it cannot be a
Speaker 1: You know, help in any way or stretch of imagination.
Speaker 1: It's a tail, it's a headwind, and we need to
Speaker 1: be cognizant of that risk on the financial stability side
Speaker 1: coming from high rates. Credit, same story, credit spreads are
Speaker 1: exceptionally narrow. There there's only one way for them to
Speaker 1: go in my view, which is higher and with
Speaker 1: Policies likely to remain fairly restrictive going ahead. Uh, I
Speaker 1: think that there is room for some, particularly in the
Speaker 1: sub-investment grade category for credit spreads to widen from the
Speaker 1: historical narrows that we have right now.
Speaker 1: How will Asia deal with all this? I urge you
Speaker 1: to read the weekly we published, uh, yesterday. Uh, we're
Speaker 1: gonna put the link on the show notes. Uh, we
Speaker 1: talked about the issue of trade, uh, you know, a
Speaker 1: simple metric would be which country exports the most to
Speaker 1: the US and the Vietnam, Taiwan's, Japan's are the highest
Speaker 1: in the region. China is actually not that vulnerable uh
Speaker 1: of China.
Speaker 1: Total exports, barely 15% or even less, uh go to
Speaker 1: the US these days. It's come down a lot. Now
Speaker 1: you might argue that China has diverted the trade through
Speaker 1: Mexico and Vietnam, and those countries trade share with the
Speaker 1: US has certainly gone up, uh, but it is still
Speaker 1: a final demand export from those countries that tariffs will
Speaker 1: affect those countries directly, China downstream indirectly.
Speaker 1: But if I were to look at countries that are
Speaker 1: most vulnerable to a universal tariff, I would not put
Speaker 1: China at the top of my list. I would think
Speaker 1: more about Vietnam, Japan, Taiwan, and so on. Uh, I
Speaker 1: also think that some of these countries are such strong
Speaker 1: allies of the US, Japan and Taiwan in particular, that
Speaker 1: there will be a lot of horse trading and exceptions
Speaker 1: made to universal tariff. Nonetheless, tariffs are coming.
Speaker 1: Markets will know that these countries will see some of
Speaker 1: their export demand in the US go down as a result,
Speaker 1: and they would be cautious about the outlook of the
Speaker 1: export industry, particularly of those countries. In addition to export performance,
Speaker 1: the other thing for Asian economies to worry about in
Speaker 1: the tariff for 2.0 scenario.
Speaker 1: Is the currencies. Uh, that is usually the first place
Speaker 1: where the market reflects its view on the impact of tariff.
Speaker 1: If I think Country A is going to be heard
Speaker 1: by tariff of Country B, then Country A's exchanges should
Speaker 1: be bid down against Country B. And then we've seen
Speaker 1: this play out in the last couple of months, uh,
Speaker 1: Asian FX in particular, including that of Mexico outside of
Speaker 1: Asia have sold off ever since Trump got elected in
Speaker 1: anticipation of the tariff shock that's coming, exchange rates have
Speaker 1: been adjusting. But these sort of developments rates remaining likely,
Speaker 1: you know, high in the US, exchange rate outlook becoming
Speaker 1: a bit cloudy, exports outlook looking a bit difficult. This
Speaker 1: will put
Speaker 1: Monetary policymakers in the region in a bit of a quandary.
Speaker 1: You've seen in Asia in the last couple of months
Speaker 1: some central banks choosing to stay on pause, some being
Speaker 1: a bit brave and cutting ahead of any further shock
Speaker 1: that is coming out of the US, but by and
Speaker 1: large I think it's safe to say if the Fed
Speaker 1: becomes reticent about cutting rates, Asian central banks would have
Speaker 1: a very hard time.
Speaker 1: Uh, trying to differentiate themselves away from the fat and
Speaker 1: cut by themselves. Mind you, rate cut imperative is not
Speaker 1: that great in Asia anyway. Asian economies have done pretty
Speaker 1: well this year.
Speaker 1: There aren't that many headwinds to worry about beyond tariff.
Speaker 1: Regional travel, tourism has picked up. The region is going
Speaker 1: through a purple patch with respect to investment, and in
Speaker 1: that mix of fairly decent macrodynamic, I don't think there
Speaker 1: is a great deal of desperation or urgency among central
Speaker 1: banks to cut rates. It would be nice to cut rates,
Speaker 1: but it won't.
Speaker 1: The end of the world. I would not be revising
Speaker 1: down Asian growth forecasts in a wholesale manner if I
Speaker 1: start losing confidence in the rate narrative. I don't think so.
Speaker 1: So rates may come down or not may come down.
Speaker 1: I think Asia can chug along pretty well. But again,
Speaker 1: if you are hugely exposed to the trade cycle, if
Speaker 1: you're hugely exposed to the US markets, there will be
Speaker 1: noise that just goes without saying.
Speaker 1: I will conclude my short podcast for today, uh, and
Speaker 1: guests are coming, don't worry. Next year podcast, we'll have
Speaker 1: some excellent guests. Uh, I want to finish the podcast
Speaker 1: today by talking about China. The Chinese economy eked out 5%
Speaker 1: growth for 2024. People always have some quibbles about China's
Speaker 1: national accounts numbers, but when we look at
Speaker 1: performance from a wide variety of companies which report audited
Speaker 1: accounts outside the US, outside of China, and when we
Speaker 1: look at their books and their sales in China, they
Speaker 1: don't look that different from an economy that is growing by, uh,
Speaker 1: you know, 4 to 5% in real terms or expanding
Speaker 1: in nominal terms by 5 to 6%.
Speaker 1: So we do think that China had a decent year,
Speaker 1: led by exports, of course, the manufacturing sector had a
Speaker 1: great year, exports did very, very well, mind you again.
Speaker 1: While exports to the US are import for China, almost
Speaker 1: 90 or 85% of China's exports go to the rest
Speaker 1: of the world.
Speaker 1: Those markets have been very buoyant and again, we're not
Speaker 1: just talking about third market parties through which those countries
Speaker 1: eventually trade with the US. Asian domestic demand has been strong,
Speaker 1: Middle East has been strong, Latin America has pockets of strength, Africa,
Speaker 1: same story, and those areas are increasingly intertwined with China's
Speaker 1: trade and exports, uh, dynamic.
Speaker 1: So, China had a good 2024, 25 will be clouded
Speaker 1: by the trade and tariff wars and the uncertainties vis
Speaker 1: a vis the US, but at the same time, we
Speaker 1: do expect a substantial more support measures coming from the authorities.
Speaker 1: Our China team in their reaction to the 2024 GDP numbers.
Speaker 1: said that to sustain anything close to that 5% in 2025,
Speaker 1: we'll probably need 50 basis points at least of prime
Speaker 1: lending cuts. We probably would need additional fiscal stimulus, not
Speaker 1: necessarily higher quantum, but better targeting aimed at areas that
Speaker 1: need revitalization.
Speaker 1: And I do think that some of those things are
Speaker 1: fairly well understood within the policy circles in China and therefore,
Speaker 1: watch out for a more targeted, if not more quantity
Speaker 1: of stimulus coming out of China in 2025. So I'm
Speaker 1: gonna wrap it up for that uh on that right
Speaker 1: for the time being. So thanks to listening to the
Speaker 1: first podcast of 2025. It's great to have you guys.
Speaker 1: And your support. Copy Time was produced by the very
Speaker 1: efficient Ken Delbridge at Spy Studios. Violet Lee and Daisy
Speaker 1: Sharma provided additional assistance. It is for information only, does
Speaker 1: not represent any trade recommendations. All 145 episodes of Copy
Speaker 1: Time are available on YouTube and on all major podcast platforms,
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Speaker 1: and DBS Research Library. Have a great day.