It’s Not About Trump
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View Membership BenefitsKey takeaways
- Falling energy prices could have greater impact on inflation than US tariffs.
- Lower energy and food costs are a positive for falling interest rates and ultimately the consumer.
- UK real estate, building and materials could be the beneficiaries of this environment.
Redefining the ‘art of the possible’
Otto von Bismark would, no doubt, be hugely impressed by President Donald Trump as it was he who said politics is the art of the possible; and Trump has redefined the possible, flummoxing opposition and markets alike who have said, “I didn’t know you could do that”.
‘Liberation day’ delivered a baseline global tariff of 10%, but with higher reciprocal tariffs on those countries deemed to have unfair trade practices, notably China and Southeast Asia.
But once the initial surprise is over, we are left with cold hard economic facts and decisions that businesses take in the light of the new order. Politics may be about the art of the possible… but events always change the outcome.
Energy is the root of all inflation
The central issue for markets is now stagflation. Will the actions of the Trump tariffs, combined with extremely tight labour markets around the world, lead to higher-than-expected inflation? Will central banks have to head that off with higher-than-expected rates, thus ensuring growth remains at today’s non-existent levels? Either way we get stagflation: the one scenario all assets, except cash, hate.
And this is where it isn’t about Trump. Because the forces in place today point to something quite different. The actions of the market have caught participants by surprise. Firstly, the weakness of the US dollar was in no one’s play book, quite the opposite. Secondly, the sharp price fall of oil.
Almost all post 1970 inflation has as its root cause the price of energy. Energy prices feed first the price at the petrol station, then the price of food, then transport, then housing and rents and as inflation rises, annualised wage rounds pick up on it. Thus driving a secondary impulse to all the broadest service industries and in particular government employees. Thus, we are still feeling the impact of the 2022 price rises today. Rising rates dampen demand and reduce both inflation and company margins. You could do the same with tax rises, but no politician is ever going to do that!
So what is the energy position today? Well, almost the entire rise in demand for energy is met by renewables in 2025, and onwards to 2027.
Left exhibit source: International Energy Agency. Global electricity generation by source as at 12 February 2025, 2014-2027, IEA, Paris https://www.iea.org/data-and-statistics/charts/global-electricity-generationby-source-2014-2027. Renewable electricity capacity additions by technology and segment, 2016-2028, IEA, Paris https://www.iea.org/data-and-statistics/charts/renewable-electricity-capacity-additions-by-technology-and-segment-2016-2028, Licence: CC BY 4.0.
Right exhibit source: Rystad Energy as at 12 December 2024. Shaping energy markets in 2025: 12 trends to watch in the year ahead. There is no assurance that any projection, estimate or forecast will be realised.
A deal in the Ukraine, that restores the flow of Russian gas will increase supply. ‘Drill, baby, drill’ increases supply. But do we need that supply? The International Energy Agency (IEA) made it quite clear that we really don’t. Energy prices are and should be trending down without any new rise in supply, which would add further downward pressure on prices.
Energy driven inflation is very much on the way out. It is now clear that as a result of tariffs, growth will fail to meet earlier estimates, lowering energy demand. The threat and fear of recession is stalking the markets. Could tariffs turn out to be deflationary for the Rest of the World. Could we have deflation and growth slump? Stagflation is replaced by De-Slump-flation.
But what of the goods and products that are displaced from the United States. Where do they go? Clearly elsewhere in the world, the impact is unlikely to be inflationary, and in some cases (such as food), it could have a deflationary effect. More De-slumpflation?
Food prices lag energy prices by 6-18 months (dependent on the crop or livestock), and we are just seeing the impact of last summer’s energy price rise on food now. But as energy prices continue to fall, consumers could potentially expect to have the positive combination of both falling domestic energy and food prices.
Global economic growth projections were revised downwards in Q1 2025 impacted by the escalating trade tensions. The overall outlook into 2026 overall remains muted1, however, all this combined with falling inflation is supportive of further interest rate cuts.
Left exhibit source: US Energy International Administration as of 30 April 2025. WTI is West Texas Intermediate, WTI and Brent Spot are oil price indexes. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
Right exhibit source: Bloomberg and British Retail Consortium and NielsenIQ as of 26 May 2025. There is no assurance that any projection, estimate or forecast will be realised. Past performance is not an indicator or a guarantee of future results.
Back to bad news is good news
Where does this leave the United Kingdom, with its lower growth and higher inflation? Firstly, the bad news: it’s getting worse. We have just had the worst Purchasing Manager Index construction number (excluding COVID-19), since the 2008 global financial crisis.2 No one wants to build when rates are high, and business and consumer confidence is low.
Real wages, that bounced hard last year, will stabilise at a small positive, job vacancies will fall and that may be led by the public sector, which is what has held these numbers up so high.3 After all, private industry is cutting and cutting fast.
And that is just what the Governor of the Bank of England, Andrew Bailey needs. The Monetary Policy Committee (MPC) is slow to move, it says it is data dependent (odd for an institution that is supposed to predict the future and set rates accordingly) but in the words of the author Ernest Hemingway, it will… ’Gradually then Suddenly’. And the reaction of the markets at that point will be surprised.
And yes, this has nothing to do with Trump. We anticipate rates to be at or below 3.0% next year and it could go further, especially if Europe keeps cutting. This may lead to a steepening yield curve, but without the gilt 10-year rate rising from the 4.6% it is now.4 That will certainly trigger a recovery in 2026 from the economy and before that the markets.
So, what areas of the UK market could benefit? The consumer? Although lower interest rates mean more disposable income, the impact on the retail sector could be limited.
Real estate is the sector most correlated to interest rates and any fall in rates should be beneficial. And it’s not just housebuilders, but also firms operating logistics, warehousing and storage where the property portfolio is key to businesses success. If properties are getting built, then there is the wider ecosystem to consider. The building and materials sector should in turn benefit, especially those positioned to meet regulatory standards in terms of energy efficiency and habitability, for example through improved ventilation – an impact from Awaab’s law5 coming into effect in October 2025.
Financial firms could see a mixed impact, but an increased demand for loans (and mortgages) could boost their revenue for interest payments. Lower interest rates also help our manufacturing and industrial sectors, with easing capital requirements firms can invest more in research and development (R&D) and implementing new technology.
So bad news is good news. The worse it is the more rates will fall. And that has got nothing to do with Trump.
Footnotes:
1. Source: IMF as of 22 April 2025.
2. Source: S&P Global UK Construction Purchasers Manager Index as 31 March 2025.
3. Source: Office of National Statistics as of 15 May 2025. Average weekly earnings in Great Britian in 2024 and 2025 – April 2025.
4. Source Bloomberg as of 3 June 2025.
Awaab’s law will force UK landlords to fix dangerous homes.
WHAT ARE THE RISKS?
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Equity securities are subject to price fluctuation and possible loss of principal.
Active management does not ensure gains or protect against market declines.
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