Good day. Donald Trump’s big bang action on tariffs on the first day seemed, at first, almost nothing: a memorandum calling for the evaluation of United States trade relations. Reportedly, the memo consisted of nothing more than giving the sabers a good rattling. It seemed a victory for the bark>bite vision of his presidency, to which Unhedged subscribes, and was consistent with the emphasis on gradual and negotiated the tariff policy of most (but not all) of the president’s economic advisers.
Markets seemed to like it, too, although it’s unclear how big of a discount the market had already placed on Trump’s tough words on tariffs. The dollar had a fairly big rise. declinewhich suggests a certain degree of surprise. The bullish move in stock futures was more moderate. At the very least, the lack of action seemed to confirm that the administration knows the markets don’t like tariffs and wants them to be happy.
The pardon lasted a few hours. At night, Trump said According to journalists, he was “thinking” about imposing 25 percent tariffs on Canada and Mexico. “I think we’ll do it on February 1,” he said. The dollar changed course against the currencies of both countries.
A comment that should be taken literally? Probably not. A negotiating strategy? Almost certainly. But for markets, strategic ambiguity cannot last forever. Trump likes tariffs and tariff threats. Investors, in general, do not. At some point the time for posturing will end and the time for policies will begin.
Trump probably cannot maintain high corporate profits and a lower trade deficit at the same time. And that won’t be the only decision you’ll face. He will also have to balance the United States becoming “a manufacturing nation” again with making “enormous amounts of money from tariffs”; The two objectives suggest very different tariff regimes.
Likewise, it has fiance much lower energy prices and large increases in domestic energy production. It can deliver, at best, one of the two. As the market waits for you to make concessions, volatility seems like a good bet.
The president is not being more dishonest than our national tradition allows. It is common to use the inaugural address to promise every citizen a tax cut, a lower deficit, world peace, and a pony. But any hint about which of his many commitments Trump will keep and which he will neglect will be seized upon by nervous markets. Email us your thoughts on the president’s real economic priorities: robert.armstrong@ft.com and Aiden.reiter@ft.com.
**Readers in Washington, DC must register immediately to Alphaville Pub Quizwhich will arrive in the capital on February 6. These events are a lot of fun and a good way to meet other financial economics types. Details here.**
Is the UK cheap, part two?
Last week, we asked whether UK stocks were as cheap as they seemed relative to US stocks. Our tentative answer was no. When the valuations of the two markets are adjusted for expected growth in the coming years, the UK’s discount appears small. And there aren’t many companies on UK indices that look like wonderful bargains. But readers wrote in with some ideas.
Several readers suggest comparing HSBC, Lloyd’s and other UK banks with their US counterparts; or BP to ExxonMobil and Chevron. An interesting contrast but, as Unhedged wrote in a discussion of the UK discount two years ago, there are structural reasons why the UK oil companies They should be cheaper than American ones: American companies have better reserve profiles and the mandates of many European institutional investors prevent them from owning oil stocks. As for UK banks, they have slower growing domestic markets and/or much weaker capital markets and trading operations than their US peers. Readers may disagree, but we don’t see bank and oil discounts reducing significantly any time soon.
Others responded to us with interesting comparisons of our list of UK companies with high US exposure, several of which we have added to the table below, along with some of our own (Tesco does not have high US exposure). , but we thought the Kroger comparison was interesting):
Unlike our European comparisons from last week, here at least it smells like a bargain. Some UK companies are trading at deep discounts to their US peers that are not explained by near-term earnings expectations. Medical device maker Smith & Nephew (a company with high US exposure) is much cheaper than Stryker, and the same is true for credit reporting agencies Experian and Equifax.
Several UK companies are also valued in the same range as their US counterparts, but offer higher expected growth for your investment: BAE, Tesco and AstraZeneca. Of course, this is just a starting point. There’s a lot more to explore before declaring the UK half of the pair cheap. But it’s something.
Michel Lerner of UBS’s Holt team wrote with another take on the valuation gap between the S&P 500 and the FTSE 100. He noted that the difference in valuation has never been greater in terms of free cash flow yield, as shown your performance graph:
Lerner points out, however, that the UK market is full of value stocks, that is, stocks that are highly cyclical and not particularly profitable over the cycle:
On comparable terms. . . US and UK value stocks are no different; It’s just that there are more such stocks in the UK than in the US. The stock is cheap compared to other cohorts across all markets because it is full of low-yield businesses that are highly cyclical; This is not the area that has driven America’s outperformance.
UK growth and quality (high yield) stocks appear “more attractively valued than their US peers”, Lerner says, but there simply aren’t many stocks in either category in the UK, especially among large caps.
The point about market capitalization brings us to another interesting comparison. Without big tech companies of their own, European and British indices look a bit like US mid-caps: decent margins, some international exposure and a high proportion of value companies. The other day we observed that there is only about a 10 per cent premium in the S&P 500 large cap index relative to the EU and UK indices, using a PEG analysis. Here is the same analysis using the S&P 400 Mid-Cap Index:
Although the PEG ratio is an imperfect metric, it suggests that the US mid-cap S&P 400 index could be cheaper than the UK and EU large-cap indices. If you’re uncomfortable with valuations for large-cap U.S. stocks, looking at smaller stocks could make as much sense as looking overseas, if not more.
(Reiter and Armstrong)
Correction
In our last letter, we wrote that Peter Navarro was the former United States Trade Representative and Robert Lighthizer was an advisor to the first administration. That was a confusion. Lighthizer was USTR, Navarro was a trade adviser and director of the Office of Trade and Manufacturing Policy, an office created by the Trump administration, which was not filled during the Biden administration. Apologies.