May markets & the rise of TACO

In episode #11 of The Active Investor with SGH – May markets & the rise of TACO, Steve Hiscock and Rob Hogg break down the strong equity market rally in May, surprising economic resilience, and the emergence of “TACO” (Trump Always Chickens Out) as a new lens for interpreting policy noise. They examine the impact of paused tariffs, Japan’s shifting bond market, Australia’s evolving rate-cut path, and whether markets may be getting ahead of themselves as optimism builds.

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May markets and the rise of TACO

Transcript:

Steve Hiscock:

Hello to everyone listening to our podcast, the Active Investor with SGH. I’m Steve Hiscock, the chair of the company, and it is my pleasure to be your host for today’s episode. In today’s podcast, we’ll be looking at what happened over May 2025, and we’ll be discussing the outlook going forward. This podcast is being recorded on Wednesday, June 4, 2025, and joining me again today is our Chief Investment Officer, Rob Hogg. Hi, Rob.

Rob Hogg:

Hi Steve. How are you?

Steve Hiscock:

Welcome back again again, what a month. It’s always unpredictable, as we said last month in markets, and that’s true for this month as well. Could we start by just briefly running through what happened to the markets over the month?

Rob Hogg:

Yeah, no, for sure. And look again; as we’ve seen most months this year, investors are, in a sense, running from one side of the ship to the other.

And look, a lot of that’s down to Trump, to be fair. However, last month, a reasonable amount of it was also due to other factors. All of which is impacted, to be fair, by the tariff announcements and so forth. So, what we saw over the month of May was a strong month for equities globally.

The US market was up a little bit over 6%. So, it was a very strong month. The Aussie market, so the broader ASX 300, was up a little bit over four. Small caps did better than that. They were up almost 6%. So, it was a very strong month. And we saw similar rates of return around the rest of the world as far as equity markets were concerned.

So, a pretty consistent story globally in May of higher equity markets. When we start examining other asset classes, the story takes a slightly different turn. If we look at bond markets, the two bond markets globally that moved quite a bit over the months were the US. And I think that’s sort of related to what we saw in equities with US equities so strong and bond yields rising there for some similar reasons. However, the other standout was Japan, where yields on their 10-year bond rose by around 20 basis points. Now, that’s quite a bit when you’re going from 1.3% to 1.5%. That was Japan and the US. Here in Aus, the moves are not quite as dramatic. The 10-year bond was a little under 10 basis points.

That’s why the 10-year shorter maturity bonds were pretty much unchanged here in Australia and just looking at Europe across the continent and the UK, for that matter. They were relatively small moves in bonds. Equities: big moves, US, Japanese bonds, big moves, other bonds, not much of a move at all.

And then currencies, look, they were remarkably unchanged. The Aussie moved from around 64 US cents exactly at the end of April to just 64.30 by the end. So a very small move. Less than half a per cent. And the trade-weighted US dollar, which we all know has been a focal point, has seen weakness this year against many currencies. However, during the month of May, the trade-weighted US dollar remained largely unchanged. So, it is a very intriguing sort of month, but clearly one marked by stronger equity markets.

Steve Hiscock:

And so perhaps if we don’t talk about Japan often in this podcast. Can we talk a little bit about Japan just last month? As you say, a 20 basis point change in bond yields is historically quite large for Japan. Why was that, and what happened?

Rob Hogg:

Look, very intriguing in the context of what’s going on. Japanese bonds have now been selling off, so yields have risen quite significantly for more than all of this calendar year to date. Indeed, let’s go back to around July or August of last year when monetary policy started to change. You might recall that there was a month last year that was very negative for equities, and a significant portion of that was due to the Bank of Japan’s policy adjustments, which surprised investors with a tightening move.

They’ve generally continued to move in that direction, albeit slowly. But I think what’s happening here is that inflation expectations, which they’ve done so much to try and increase, have finally started to rise. There is also an element of that occurring. So, changes in policy settings and expectations of further adjustments, as well as an increase in inflation expectations, appear to be reflected across the Japanese yield curve.

So we’ve seen, as we’re saying, some pretty significant moves, and last month wasn’t the only month that we’ve seen those. We’ve seen several months of quite significant moves in the Japanese bond market. It’s an interesting bond market. Historically, there have not been many global investors in the Japanese market.

However, we’ve started to see more investors taking note, as what happens in Japan can have a significant impact globally. And that’s mainly because of the nature of portfolio flows. And that’s particularly true of portfolio flows by Japanese investors offshore. Still, we’re now reaching the point where those sorts of yields, such as one and a half per cent on a 10-year Japanese government bond, or JGB, are now looking increasingly attractive to domestic Japanese investors. So that we could start to see changes, such as Japanese portfolio flows globally.

Steve Hiscock:

Yeah. Well, they might bring money back offshore, right? And that could also have implications. Rob, I’m going to throw this word at you, and it sort of resonates for me. It’s an old behavioural finance term that I’m sure you remember from your economics days. But, habituation, it seems to me that the equity market is becoming more resilient, if you like, to the volatility of Trump’s announcements. Is that a fair comment?

Rob Hogg:

I think it is. One way to think about it is through habituation, where the market is now becoming somewhat accustomed to continual Trump-related tariff announcements. So after the shock of the Liberation Day announcements on the 2nd of April, which had a huge impact, as we remember, that the ongoing toing and froing and toing and froing each time has had less and less effect, which I guess you sort of expect through time. However, another word that has taken on significant meaning during the month of May is TACO. This all comes from an interview given by I can’t remember his first name, but Mr. Scaramucci, who, from memory, spent a couple of weeks in the White House during the first Trump administration. He might have been treasury secretary. Anyway, he and Trump fell out very significantly during Trump’s first term.

However, in an interview with the Financial Times just a couple of weeks ago, he coined the acronym TACO. TACO, which stands for Trump Always Chickens Out. And I think there’s an element of that as well in what we’re starting to see. So, it’s part habituation, but I think it’s also part of the market, starting to think, well, maybe TACO does describe the way Trump tends to operate. Coming out with big announcements scaring people, and then gradually watering that down. But look, I don’t know that should give us an enormous amount of comfort because it’s not beyond the bounds of possibility that Trump’s not terribly keen on this description of him and that at some point in time, he chooses to really push back on that. But anyway, for the month, I think one of the words of the month was TACO.

Steve Hiscock:

Just on habituation then and the tariff side that you were referring to, there was a pause in the US-China tariff implementation. Can you just walk us through that?

Rob Hogg:

Yeah, so that was announced around mid-month when the US and China together announced that the tariffs on each other would decline by a little more than a hundred percentage points. So that’s obviously pretty big. Having done that, that leaves an increase of only around 30 percentage points for US tariffs on China in 2025 and around 15 percentage points for China’s tariffs on the US. So, much, much lower obviously than the first sort of ambit claim. So maybe this is a case of TACO.

Anyway, these rates will be effective for 90 days, so we’ll have to revisit all of this in the next three months, as the statement also implied that the rates on both would rise after those 90 days. Again, not back to where they were, but rise again. The statement that accompanied this announcement also noted that the US and China will establish ongoing dialogue on economic trade relations. And that the two countries have worked towards a rebalancing of trade.

Well, look, talk is cheap. The reason they have the trade imbalance they have is due to a variety of economic-related reasons, and it’s not quite that simple. It’s not quite that easy just to rebalance with the click of a finger. But anyway, mid-month, that came out. That did have a quite significant positive impact on the market. I think not only because of the size of the back down or the revision downwards. However, I also think that it was because the evidence was pretty clear, and perhaps this is when Scaramucci decided to coin his TACO term. It was evidence that significant negotiation could be done regarding some of those April 2 announcements. So those two things together, I think, were important.

Steve Hiscock:

Yeah. And I think the fact that they’ve done that. It’s interesting, Rob, that they’ve also tried to have agreements. Well, they have made an agreement with the UK, and so I suppose it’s becoming increasingly clear to markets that the worst-case scenario of April 2 is unlikely to happen. It’s more just Trump using this as a negotiating tactic to try and extract better deals for the US, but they’re not going to be anywhere near as bad as originally thought.

Rob Hogg:

That is fair with most countries. I think some analysts point to Europe as being maybe a tougher nut to crack. So we’ll need to see what they do there. But certainly, the evidence so far, as you suggest, is regarding the UK and China, that the agreements that have been reached are quite different in magnitude and impact. Then, one may have thought, just looking at the announcements back on the 2nd of April.

Steve Hiscock:

And so the other thing that happened was the Big Beautiful Bill, the triple B that was passed in the House of Representatives but wasn’t exactly a resounding success.

Rob Hogg:

No. Yeah. But I guess one vote’s all it takes, and one vote was all it got. One extra vote that’s passed through the House of Representatives in the US Congress. Now, there will be a lot of toing and froing between the House and the Senate to negotiate the details. But look, I think here is the important thing, and this is what I think the market’s taken out of it. The bottom line is that even after what will likely be a potentially significant negotiation on the details between the two, the Houses and the Congress.

The bottom line is that this will likely be quite stimulatory, and it will lead to a fiscal expansion relative to current law. Analysts expect it to be enacted by August, so we could potentially see some impact from this in the current calendar year. And look, I think it’s fair to say that the nature of the bill, in its current guise, anyway, will, in all likelihood, have a positive impact on corporate cash flows this year. So it’s right in a sense or sensible in a sense that equities moved a little bit higher on the back of that, starting to discount some of the very likely positive impacts.

Steve Hiscock:

Yeah. The issue, I guess, is that you’ve now got quite high-profile critics of the bill and probably no more high profile than Musk. And I know this is in June, but he, you know what he said last night, actually was calling it a disgusting abomination. There’s obviously going to be much work that needs to be done because one vote, as you say, is not much. And therefore, there’s likely to be room for change, one would’ve thought on this thing.

Rob Hogg:

Yeah, I’m pretty sure you’re right. Interestingly, one thing that it seems Elon Musk will carry on from his days in the White House is this sort of language. And words that Trump uses as well are disgusting abomination.

Steve Hiscock:

Oh, no, that’s incredible. So, one of the things that surprised me during the month and you and I have spoken about this for a couple of months, Rob, is that we’ve been waiting for the data to soften, and I’m talking specifically about the US, one of the key risks that we’ve spoken about over the past few months is that there is a risk that the US will head towards the recession. And therefore, the soft data, which had been showing softness, if you like, in the outlook. We had expected that to be reflected in the hard data, but that’s not actually the case. Is that correct? And if so, why do you think that is?

Rob Hogg:

Yeah, as you say, it’s been quite remarkable how rapidly and sharply a number of these sentiment indices have moved lower. And we’re talking here really about this survey. They’re survey-based measures, so they’re sometimes described as soft data because they don’t represent actual spending or investment dollars. For example, they’re sentiment surveys, and look, they do often indeed, probably most usually have a bit of a leading nature to them, but it’s not always the case. They’re not an infallible guide to the future of what actually happens in the real economy.

However, we’ve been seeing this trend since probably February, or it might have been earlier, when we started to see a quite significant weakening in several consumer confidence surveys and also in various corporate-related surveys. And so it was both. The size of the falls and the very low levels to which some of these indices fell. So, back to the COVID-19 time levels, that is what really led investors to expect that this would inevitably affect the real economy. And we were no different.

Indeed, that may still occur, and it probably will to some extent. But to date, what we’ve seen is, firstly, no real impact, no discernible impact on real economy data. And by that, I mean things like employment and filings for unemployment claims, which, if we remember, we’re all expected to start rising significantly on the back of the whole Doge campaign run by Elon Musk. We haven’t seen much in the way of unemployment from that or any other source. Investment spending is still doing okay. It’s not racing away, but neither is it collapsing, and it’s certainly not doing what may have been expected, given the sharp fall in some of these corporate sentiment surveys. Similarly, with household surveys, even though household confidence has fallen sharply, we haven’t seen a significant decline in things like retail sales.

The retail sales report released in May, which pertained to April, actually surprised on the upside. That’s one thing we haven’t yet seen the flow through to real economy data, as described, such as actual spending and actual hiring. The resilience has been there. But the other thing that happened during the month was that the so-called soft data surveys, which had fallen, as I say, to very low levels, have started to recover. Somewhat. According to the analysts who compiled these surveys, the discussion of the tariff freeze and other related topics had a positive impact.

So, trade policy, the wind back in some of the trade policies does seem to have had an impact, but I think it’s probably also due to the fact that having fallen so sharply so quickly, it wouldn’t really take a hell of a lot for things to turn around a little bit. And I guess that’s the other thing. They’ve turned around a little bit. They’re certainly not rebounded to where they were pre-this year. However, they have nevertheless rebounded, and as I mentioned, the underlying macroeconomic data remains quite resilient. But of course, the market moved in reaction to this. This is perhaps the most important reason why equity markets perform so well during the month: the underlying resiliency. As a result, the markets have now really bought in, certainly partially. Perhaps a little more than partially, into the ongoing resilience of the US economy.

So, if anything, we’re now facing the potential risk that if we start to see any cracks in this resiliency, we may well see equity markets move lower as a consequence of having effectively priced in resiliency in earnings and the economy. That may not be what occurs, and you’d have to think that all of the disruptions that we’ve seen in the US, in manufacturing, even in the services sector, this cannot be unwound just because the level of tariffs has been wound back somewhat in a sense the egg has been cracked, the omelette’s been made.

I think all we can say so far is that the impact of volatility and uncertainty has not yet presented itself clearly or significantly, as some feared, in the real economy data. So we still have to wait and see. But this must be seen in the context of what markets have done. They’ve recovered a lot. Equity markets have recovered a lot.

Steve Hiscock:

They’re not passing their all-time highs. Right?

Kind of, as we’ve spoken about before, Australia’s a little bit protected from the volatility of tariffs. I can’t remember what the exact all-time high is. Still, we can’t be far away from it in terms of the S&P. So, it is a bit of a concern. We’ll talk about the market outlook in a second, Rob. However, with the hard data, such as retail sales, I wanted to ask you: Do you think the retail sales data in April might have been affected by the pull-forward of consumption ahead of the tariff rise? Is that, or would they have already occurred?

Rob Hogg:

The month of March saw an enormous rise in retail sales, up 1.7%. So that was the pull forward. But what was significant about April was the fact that even after that huge increase in March, the total value of sales moved fractionally higher again.

And that’s what makes it such a powerful outcome: a small positive in April, following such a huge positive in March, a 1.7% gain. So that is the significance. I think, yes, as you say, it does reflect the bring forward, but it built on the back of an extremely strong month, which very likely was absolutely all about bring forward.

And we’ve seen the same thing in trade data as well. You might recall that when the first quarter GDP numbers came out in the United States, there was a huge negative contributed by a very significant increase in import volumes because, in a national account sense, imports are a negative, as far as GDP is concerned because they reflect spending on offshore manufactured goods and services. So, that was one of the reasons, as measured by GDP, why growth was so incredibly weak in the March quarter, and there was a huge increase in imports. However, we then see a significant decline in the total value of imports in April compared to March.

And this timing mismatch impacts the bring forward of imports. So, look, all of this does make it a little more difficult than usual to get a sense of the true underlying pace of the US economy. These movements around as consumers and corporates, for that matter, try and beat the tariffs and so on. Import earlier, spend earlier, and so on. So it’s still a little bit murky. Yes. It’s a little bit murky because of that as well.

Steve Hiscock:

One of the things that’s murky as well, or a little bit surprising, is inflation. I think it’s fair to say that most people are expecting that inflation would rise or, at least, given the tariffs, but that’s not actually the case, is it? What happened in terms of the inflation index, and what does that mean for the US Central Bank, the Fed?

Rob Hogg:

Yeah. Well, look, as you say, inflation, a bit like the resilience in the real economy data; inflation has surprised many investors as well, exactly as you said.

The outcomes appear to be, if anything, a little lower but a little better than expected. Now, the Fed, the US Central Bank, has preferred measure of inflation. That being the core private consumption expenditure deflator, also known as the PCE deflator. In this context, the deflator simply means the index used to convert nominal or current dollar data into volume-type data.

That’s typically used in a national accounts perspective. It’s deflating to get a real measure. This is the deflator or the index they use to do that, just by the buy. But this is a very broad measure of private consumption spending. That’s why it gets the focus. It has a much broader range of goods and services compared to the CPI, for example. Hence, the Fed’s focus. Anyway, bottom line. In the most recent reading, there was an increase in the month of just 0.1% in April. That was the second consecutive month of such a small increase, and it has seen the annual rate of growth, or the year-on-year change, continue to decelerate. So, moving in the right direction.

All of this makes it a little bit easier for the Fed to continue cutting rates. Over the last two months, we’ve seen an increasing number of voting members of the Federal Open Market Committee (FOMC). More and more of them have been talking about, understandably, the incredible uncertainty of tariffs, what it’s going to mean for inflation, the economy, and so on, and want to see more clarity on that before they perhaps move to lower rates again. We’re now starting to gain a little more clarity, and the news so far is quite positive if we were to continue.

Steve Hiscock:

Yeah. And that’s probably part of the reason why the equity market has become a little bit more sanguine, right? More relaxed. That’s a nice segue, to use a word I haven’t used in a while, to Australia in terms of rate cuts. The RBA cut rates, and you predicted that last month, but they also discussed a larger cut, didn’t they?

Rob Hogg:

Yeah. And that was the most significant thing. Look, the market was really pretty, almost unanimous in expecting a rate cut. So it really wasn’t a surprise on the day. This was back on May 20th, but I think what was a bit surprising was the fact that the new policymaking board discussed a rate cut of more than a quarter of a per cent.

I think the minutes of that meeting have just come out yesterday. This makes clear that the policy board discussed three potential policy outcomes: one being no change, one being the 25-basis-point cut that they ultimately made, and another being the half-percentage-point cut. And that, as you can imagine, has been viewed quite positively and bullishly by the shorter end of the yield curve. And that, by being discussed, has, as a consequence, led the market to coalesce around the expectation that the next RPO meeting will likely see another 25 basis point cut.

Now, interestingly, the minutes. When discussing why the 25 basis point cut was ultimately decided upon, they mentioned a preference for moving predictably and cautiously in removing restrictiveness. And I think that’s completely consistent with what, you know, you generally want a central bank to be doing.

Moving as predictably as possible and cautiously, particularly given all of the uncertainty. And that may well be how this policy cycle turns out.

Steve Hiscock:

So, what’s the market building in now, Rob? In terms of the next, say, 12 months? In terms of RBA cuts.

Rob Hogg:

We look at the current market pricing in future markets. By December, the market’s looking for a total of 50 basis points, so that’s a couple of rate cuts or a couple of 25 basis point rate cuts. And then, come March next year, another 25 basis points. So over the next, well over through to March next year, 75 basis points through to December this year, 50 basis points. That’s not a hell of a lot changed over the last couple of months, but it’s reasonably smooth. If we look at the shape of the forward curve, there’s a reasonably smooth adjustment lower in rates that is seen, and that I think is consistent with what the RBA said about moving predictably and cautiously.

Steve Hiscock:

So, does that mean inflation’s under control, from your perspective, in Australia?

Rob Hogg:

So, as you know, we now get monthly and quarterly CPI reads and the most recent monthly CPI, that being for April, showed that inflation was running at around 2.4% in annual terms. So that’s pretty much right in the middle of the RBA’s band. And there’s really nothing to suggest that inflation pressures are going to start increasing imminently. If we look at things like the currency, the Aussie dollar rebounded, oil prices were lower, and economic activity. Whilst it’s fractionally better, in some cases, it’s not rocketing off.

And wage outcomes are generally continuing to ease at the rate of increase. So, all of that together does tend to suggest that, if anything, the balance is towards lower inflation, so further disinflation. You generally expected that would be consistent with further rate cuts by the RBA. That and the fact that the cash rate is still close to 4%. It’s now less than 4%, but close. The cash rate remains at a relatively high level, higher than neutral. Therefore, all these elements, including the current level of the policy rate, collectively suggest that the most likely outcome is further rate cuts.

Steve Hiscock:

I guess one bit of data that is slightly concerning from an economic perspective is that retail sales were softer. Quite a bit softer than expected, wasn’t it?

Rob Hogg:

Yeah. Yes, it was. And, look, we also had the national accounts released today. And they were very weak. They were very weak and indeed showed another contraction in growth in GDP on a so-called per capita basis. And I think, indeed, over the year, a contraction in GDP on a per capita basis. That is extremely rare. I think you’d only see those numbers amid a very significant recession.

So now, to be fair, there were swings and roundabouts in the accounts, as there always are. Government spending was much, much weaker in the most recent quarter. And, of course, that had been a huge and significant underpinning of growth over the last probably six or seven quarters. So, there is a bit of a reversal there and several weather events as well. However, despite all of this, the underlying trend in the economy remains relatively soft. So, there is nothing in those numbers to suggest that the RBA can’t be cutting rates.

Steve Hiscock:

So, despite that, the local equity market had a good month, as you said, right up front. Following on from the US as well. Would you like to go into a little more detail about what the market did?

Rob Hogg:

Yeah. As we mentioned earlier, the broader market returned more than 4%. And smaller companies performed even better than that. So that’s a reasonably good sort of cyclical indicator. But look in the month, positive performances were broadly based. That’s a pretty positive trend to see across sectors and individual stocks. And now, since the lows of April 7, as indicated by the ASX 200 price index, it has rallied by more than 15%. So that’s a pretty significant rebound from those lows on April seven.

And look, that’s one of the reasons why we were getting a little bit more cautious because a lot of that, almost all of that, has, in fact, come on the back of higher multiples rather than earnings upgrades. And that, of course, starting from a position where multiple on the market was already at a pretty high level. The market certainly is not cheap and has become, in fact, more expensive. Look, financials are still making a huge contribution, and CBA continues to make an outsized contribution on a month-to-month basis, and absolutely since the April seven lows and really for quite some months now.

But look, over the recovery period; materials are done relatively well, as well as you’d sort of expect as growth expectations come back from very low levels to slightly less low levels, if I can put it that way. And as you’d also expect, the other side of the coin is about the defensives.

They’ve been positive, making a positive contribution since the lows, but their contributions have not been nearly as powerful as those in the financials, materials, and other sectors.

Steve Hiscock:

Yeah, and it’s interesting, Rob, you spoke about CBA, and it would be interesting to know just exactly how much has contributed to the total return of the market over the past 12 months, but it must be huge. I was looking at a chart the other day. The price-to-book ratio of CBA compared to any other bank in the world is just it’s like, it’s a different sector, and I don’t; I’m not asking for an answer here because I don’t think anyone’s really got the answer other than just sheer demand for a safe stock. Still, it’s extraordinary how highly priced it is relative to other financials.

Rob Hogg:

Yeah. Look, it is. It has always been a relatively expensive bank compared to its global comparisons. But where it is now is just a huge step change from that. And, look, there are numerous theories as to why this is ongoing. Some of it, I think, might be due to the nature of the shareholding base, which is largely comprised of retail holders who are probably reluctant to sell due to the capital gains implications.

Some of it might be due to the type of flows we get into indexed sort of products. Some of it involves numerous stories about the increase in the weighting of some of the very large funds in the banks. And CBA is the largest sort of, benefiting significantly from that. And, more recently, perhaps we have seen increased global flows, and that has been particularly the case with the US. We haven’t spoken about it in this episode, but we’ve spoken about it before.

All of the policy changes and policy uncertainty in the US, as well as the general winding back, really reflect the nature of the governance structure of the US government, its regulatory bodies, and other associated government institutions. All of that does seem genuinely to have led to some capital moving out of the US, and we judge that by looking at the currency and how it has softened. And that’s moved back out of the US, and some of it’s very likely coming to Australia. So that may well be an element as well.

And, of course, CBA is a big stock, the biggest stock in the market. It would be unusual if it weren’t a beneficiary of at least some of that. So, look, as with all of these types of things, it’s, I think it’s a little bit of a whole lot of different things, but it’s all just come together presently and just push the stock up to higher and higher record closes.

Steve Hiscock:

Amazing. So, Rob, one final question before we get to the outlook. There has been a lot of press recently about the $3 million superannuation tax, and various parties, obviously interested parties, are sharing their own opinions, all of which differ significantly from one another. I think it’s going to be a topic that we’ll talk about in the next few episodes, but have you got a sort of a headline comment at this stage as to where we are?

Rob Hogg:

Yeah, well, look, it’s still a little bit uncertain as to how exactly it’ll pan out. But the government does seem just judging by what we see in the paper. Now that we are starting to contemplate potential indexation, and 3 million does seem to be the amount rather than two, as some other political parties have suggested.

This is leading to a lot of thinking about what those investors, the superannuates who were affected, may do. There is a wide range of discussion about various strategies to put one in the best possible position.

Steve Hiscock:

The issue I’ve got, which we can talk about next time, is that these sorts of changes lead to unintended consequences where people seek to change their superannuation strategy as a result. And you know, with untaxed gains, it’s not clear what’s going to happen there, but one would expect that there’ll be widespread transfer of assets into other vehicles. It will be interesting to see how it goes. But more on that in the next couple of months.

So, Rob, just wrapping up, do you think things have changed in terms of our outlook? I mean, we have been cautious. The market has risen, and I think it’s risen probably despite the consensus of caution. And where do you think we go from here?

Rob Hogg:

Yeah. So look, as we’ve been talking about in this podcast, the reasons, I think, for the very, very stellar performances globally and certainly in Australia with equities come down to those elements of, you know, tariff-related stuff, the pauses, the US, China, and the reduction. There’s that, but I think this whole resiliency thing has been possibly the most important. So, we’re sort of back where we’ve been over the last several months; it does seem likely that there will be some effect on the real economy from all these tariff-related changes and associated uncertainty. We have not yet started to see that, and I think that led to what you might describe as a relief rally.

But the uncertainty remains. And it’s still, I think, a little bit too early to heave a sigh of relief and say that the worst is over. Perhaps, as we were saying earlier, Trump decided that he doesn’t want to be described as a TACO. Perhaps that’s maybe what happens. Perhaps we will start to see clearer signs of an impact on the real economy due to the uncertainty. Perhaps when Trump starts negotiating with the Europeans, it won’t quite go as smoothly as it has with other countries and regions. But look, I think in a sense what we’ve seen, what we saw in May, was quite a fair and reasonable response by the markets to what surprised investors and that is the resilience of the US economy in the face of all this uncertainty and the disruptions that we know are already occurring across the US economy.

Markets are back near record highs, and that is absolutely the case, but the world is not exactly the same as it was when those record highs were reached back in February. For example, in the United States, things have changed. We were all very concerned with the April 2 announcements. A lot of them have been wound back, so it’s only natural that after markets plummeted or sharply corrected. They’ve then rebounded when the negative impacts do not come through as quickly or sharply as expected.

But perhaps we’ve run as we’re running from one side of the boat to the other. Perhaps we’ve run a little bit, again, to one side, the overly optimistic side. Perhaps when we’re sitting down to discuss this in another month’s time, it may be the case that some of the elements that positively surprised investors in May have lost some of their momentum in June. But we’ll have to wait and see.

Steve Hiscock:

We will, and talking about momentum, it’s great to see from our perspective that small companies in Australia have started to perform well. Just looking at the returns that our small companies funds have peaked out over the past 12 months. They’re both the Opportunities Fund and the Small Companies Fund are both above 20%. So, for the rolling 12 months, it’s quite clear that opportunities are starting again in small companies.

Is that a fair comment?

Rob Hogg:

Yeah, no, that’s absolutely right. We’re starting to see a little more liquidity and a little more capital market-related activity as well. And that’s really what you need. You need to see this for longevity. And that does seem to be falling into place.

Steve Hiscock:

Well, that’s good news. Well, Rob, thank you very much, as always, for your insights. I think it’s fair to say that volatility again is what we’re expecting, and, as you say, I think the question we all need to face is that there’s a lot of good news baked into the market. So, um, you know, perhaps it doesn’t; it means that the good news stops and maybe what happens to the market in that case. So, we’re not calling, as we didn’t last month. We’re not calling it a bear market. We’re just calling it a continuation of this sort of volatility. So again, that’s good for us as active managers. So, Rob, thank you very much for your time. That brings us to the end of today’s podcast.

We looked at what happened in May. We then examined what this means for investors going forward. As we said last month, it’s unpredictability and volatility, the two words. And now TACO is also another word. We hope you enjoyed today’s episode. Please subscribe so you don’t miss out on future podcasts. Follow us on LinkedIn, YouTube, Spotify, Apple, or wherever you get your podcasts from.

Please let us know if you have any questions or comments about what we’re doing. Until next time, stay informed and stay active.

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Disclaimer:

This podcast is produced by SG, Hiscock and Company. It does not constitute financial advice and assumes a certain level of knowledge. It’s general information only and does not take into account the investment objectives, financial situation, or needs of any person and should not be considered a recommendation. For more information, visit: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.