Monday Digest

Posted 31 March 2025

Tariff ‘stick’ to be followed by fiscal ‘carrot’?
Markets have been fluctuating, initially with some positivity due to Trump’s planned phased and toned down tariff “Liberation Day” announcement. However, Trump’s unexpected permanent 25% tariffs on autos and threats of further tariffs swiftly reversed the market mood.

For the Trump administration, tariffs are about trade, domestic jobs, and tariff revenue, though it’s unclear which aim dominates. While tariffs are headline news in Europe, most Americans are only marginally aware. Fox News has no mention of tariffs, while CBS covers it as a secondary story.

Fox’s omission suggests it recognises that tariffs can raise prices for consumers, increase inflation and are generally unpopular. More attention is now on the administration’s first budget bill, which are created by Congress, not the President. The interim budget must pass before September, with the debt ceiling expected to be reached in August. Counterintuitively, Trump requested an amendment to increase the debt ceiling, facing opposition from Republican fiscal hawks.

This may well imply that the focus on spending cuts and tariffs (the ‘sticks’) may be overtaken by larger tax cuts (the ‘carrots’). US equities were supported by thoughts of larger tax cuts, but rising bond yields could harm growth more than tax cuts help.

For the UK and its chancellor Rachel Reeves, there is a similar problem. Trump plans to cut taxes, and Reeves has said she won’t raise them. Investors are sceptical that the Labour government can maintain its hawkish stance if growth undershoots. Despite sticking to its rules, gilt yields have risen, meaning investors doubt the UK economy can be remedied without dramatic expenditure cuts.

To build fiscal credibility, the Chancellor needs to navigate the 2025 slowdown while displaying fiscal hawkishness. Productivity improvements and global economic resilience are crucial. Institutional portfolio rebalancing and economic data releases will influence market movements.

Next week marks the end of a quarter, prompting institutional portfolio rebalancing and against the recent market movements would point to selling bonds and buying back of equity allocations. Important economic data, such as US payrolls, will be released and with Trump’s April 2nd tariff announcements we could have another climactic week, with markets expecting stop-and-start action and little policy clarity. It takes a brave observer to say they know how it will pan out.

Who are the Magnificent Seven?
America’s technology giants – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla – dominated market returns the last two years but are struggling in 2025. It’s time to reassess whether grouping these “Magnificent Seven” companies together makes sense for investors. Their fundamentals differ significantly, but their grouping has reinforced their similarities.

Investors group the Magnificent Seven (Mag7) together because they are all technology companies with revenue streams from tech innovation, displaying strong earnings growth and healthy balance sheets. For investors they have been top performers, unrivalled earnings growth and very healthy balance sheets with plenty of available cash. However, growth prospects differ markedly. Nvidia is expected to post 22% annual revenue growth until 2028, while Apple is projected at 8%. These differences are not surprising when in market terms Apple and Microsoft already dominate well-established markets, while Nvidia and Tesla are geared towards new and growing markets.

Mag7 companies face different challenges requiring varied business plans. Apple and Nvidia need little capital expenditure, while Meta, Amazon, and Tesla are more capital intensive. These differences mean the risk-reward trade-offs vary across the group and on that basis the Mag7 is not a coherent investment thesis.

Tesla exemplifies why the Mag7 is no monolith. As a car manufacturer it is not a purely a tech firm. Yes, it is the largest carmaker by market cap but not by revenue. Its high valuation relies on rapid sales growth backed by high paced tech innovation, which is uncertain. Tesla markets itself as pioneering new technology, creating a new industry of electric, self-driving cars. This approach is uncertain, making Tesla a different investment proposition compared to Apple.

Tesla’s share price is also tied to the political fortunes of CEO Elon Musk. It soared with Trump’s election win but fell due to backlash against Musk’s politics. Investors struggle to quantify these political benefits when valuing Tesla.

Despite differences, the Mag7 grouping is not entirely incoherent. Their size and correlated share prices mean the correlation will persist. Mag7 funds reinforce this correlation. Grouping in financial products impacts the companies, giving them easier access to capital and higher valuations. Their size also provides political influence, allowing them to collectively lobby for favourable regulation.

Grouping winners together makes sense in a winner-takes-all capitalism. Arguments against grouping the Mag7 apply to other stock indices. Investment themes evolve; the BRIC countries were once a popular theme 20 years ago but are now rarely grouped together. The Mag7 stocks may not be as correlated in 20 years, but for now, there is little reason to think they will split up.

The Rise of Sovereign Wealth Funds
One notable Trump Executive Order from February was to create an American Sovereign Wealth Fund (SWF). Trump claimed it would be one of the largest funds in the world. But why do SWFs matter?

SWFs are state-owned investment funds, often established by countries with government surpluses from natural resources like oil and gas. Trump’s announcement sparked out interest because the US, with a deficit of over $35 trillion, would need significant disruption to create a government surplus for its SWF. To take a step back, the term “Sovereign Wealth Fund” was coined in 2005, but the concept dates back to state funds in the US, like Texas’s fund for schools, while the first national SWF was Kuwait Investment Authority in 1953.

Energy price rises created government surpluses which led to the creation of SWFs by other oil producers. Norway’s Government Pension Fund Global, established in 1990, is the largest SWF. Nations with wealth from other sources have also created funds, like the Korea Investment Corporation (2005) and Australia’s Future Fund (2006). By 2008, there were 23 SWFs, and the International Forum of Sovereign Wealth Funds was formed.

SWFs have grown significantly, managing over $13 trillion by 2025, up from $1.2 trillion in 2000. Their investments have performed well, better than Public Pension Funds and Central Banks. The IFSWF sets standards for governance and investment practices, defining SWFs as special purpose investment funds owned by the government for macroeconomic purposes.

SWFs have diverse investment strategies. Some, like Abu Dhabi Investment Council, invest in alternative unlisted assets, while others, like Norway’s GPFG, invest in listed securities. SWFs aim to invest proceeds from current account surpluses for the future, anticipating that the source of the surplus may diminish.

Some SWFs exploit their sovereign-like reputations to borrow money at cheap rates, like Singapore’s Temasek. Despite generally being well-run, there have been failures, such as 1 Malaysia Development Berhad (1MDB). Established in 2009, 1MDB faced allegations of misappropriated funds and amassed over $10 billion in debt, leading to political downfall and legal actions.

SWFs have improved governance and, despite some sceptics, have improved their image. Next week, we will explore President Trump’s proposed US SWF, its funding challenges and its ramification on the US and global economy.