Devon Funds Morning Note - 02 April 2025

Wednesday 2nd April 2025

One day more

Global

The US indices were mixed in choppy trade as investors readied for details on Donald Trump’s tariff policy rollout on Wednesday. The White House confirmed that the tariffs once announced, will go into effect immediately. There have been unconfirmed reports that his administration is considering implementing tariffs of about 20% to most imports into the U.S. What is known is that a “country” approach is being adopted as opposed to an industry one for this announcement. This means it could be a wide net, and leaves the potential for surprises either way. Uncertainty is the main issue, and this is also feeding through to the economy. US job openings edged lower in February, and manufacturing activity fell in March.

The Dow was flat, the S&P500 rose 0.4%, and the Nasdaq jumped 0.9%. Investors have been kept in a shroud of secrecy over the makeup of existing tariffs, and this weighed on the indices last month. The S&P500 fell 5.8% in March, while the Dow was 4.2% lower, and the Nasdaq tumbled 8.2%. For the first quarter, the Dow was down a relatively modest 1.3%. However, the S&P500 lost 4.6%, and the Nasdaq Composite dropped 10% - the worst quarterly performance for both benchmarks since 2022.

The details of tomorrow’s announcement will have an impact on to what extent the indices snap back, and particularly if the worst factored in outcomes (see yesterday’s note) don’t eventuate. History is also supportive of a rebound. The S&P500 has only fallen more than 3% in March in seven years going back to World War II. In all those years, the broad index rose in April, notching an average jump of nearly 6%. From April through to the end of December, all but one of those years (2001 when it fell 1%) brought gains.

April 2 has been designated by Donald Trump as “Liberation Day.” Time will soon tell whether investors are as upbeat about the approaching barricades of “freedom” and the revolution he is looking to drive on the trade front.

Certainly, there are already some impacts to the economy of his tariff policies. Factory activity in March moved slightly lower while price pressures accelerated, according to the Institute for Supply Management. The index edged down to 49, representing the percentage of respondents that reported activity was increasing, down from the prior 50.3. The New Orders Index (45.2) contracted for the second month in a row following a three-month period of expansion. Within the survey, the prices index jumped to 69.4, up 7 points for the highest reading since mid-2022. Inflationary pressures are coming back it seems.

Comments from respondents across a variety of sectors also noted the uncertainty of tariffs and included the following: “Customers are pulling in orders due to anxiety about continued tariffs and pricing pressures.” [Computer & Electronic Products], “We are starting to see slower-than-normal sales in Canada, and concerns of Canadians boycotting U.S. products could become a reality.” [Food, Beverage & Tobacco Products], “Business condition is deteriorating at a fast pace. Tariffs and economic uncertainty are making the current business environment challenging.” [Machinery]. Trump’s quest to Make America Great does not appear to be resonating with businesses yet.

Meanwhile, job openings fell to 7.57 million, down 194,000 from January and slightly below estimates. The labour market is loosening with the ratio of openings to available workers fell to 1.07 to 1 (it was 2-1 at the pandemic peak). The Great Resignation has been consigned to the annals of history - quits of 3.2 million were largely unchanged.

The onset of tariffs has though seen activity for some sectors pick up, in an effort to get imports in ahead of the deadline. General Motors reported a 16.7% jump in U.S. sales compared with the first quarter of 2024. Hyundai and Kia Motors have also reported sales gains of roughly 10% and 11%, respectively, compared with the first quarter of 2024. Honda reported a 5.3% increase. Prior tariffs announced that were ordered by Trump took effect this week, including 25% on imported vehicles. The new landscape is though already seeing a reaction from automakers. Mercedes-Benz said it is considering withdrawing its least expensive cars from the US. Meanwhile American’s can expect to pay more for their cars generally, with second hand vehicle prices expected to follow those for new ones higher. Tesla gained 3.6% ahead of its sales numbers.

On Tuesday sectors exposed to the consumer were moving different ways. Home Depot and Nike edged higher, but airlines were losing altitude. Delta fell ~3%. There are concerns about weaker-than-expected travel demand amid looming tariffs and a sharp drop in consumer confidence. There have been a number of broker downgrades across the sector.

On the new listings front AI play Coreweave leapt 42%, while shares of conservative cable channel Newsmax surged for a second day, soaring 183%. The stock is up around 1300% since listing. The right-wing cable channel has gained traction during President Donald Trump’s second term and has been getting around 300,000 prime-time viewers, but is still some distance behind Fox’s 3 million.

Elsewhere, PVH leapt 18%. The fashion clothing company which owns Calvin Klein and Tommy Hilfiger said that quarterly revenues (both over US$1 billion) were down 2% and 5% respectively for the two brands but issued a better-than-expected outlook and announced a US$500 million share buyback. The shares are down nearly 30% year to date.

Johnson and Johnson fell over 7% after a U.S. bankruptcy judge denied the health-care product maker’s US$10 billion settlement proposal tied to thousands of lawsuits alleging its baby powder and other talc products caused ovarian cancer. J&J has been attempting to resolve the lawsuits through a subsidiary company’s bankruptcy, after two previous bankruptcy attempts failed in other courts.

Across the Atlantic, the STOXX50 rallied 1.4%. Annual Eurozone inflation dipped as expected to 2.2% in March. Core-inflation, which excludes more volatile food, energy, alcohol and tobacco prices, edged lower to 2.4% in March from 2.6% in February. Separately the seasonally adjusted unemployment rate in the euro area in February hit 6.1%, continuing on its recent downward trend.

The final PMI for March rose to 48.6, its highest level in over two years, while the output component moved into expansion at 50.5. The EU like elsewhere, is braced for tariffs, and the jury is out in terms of what effect it will have on growth and inflation in trading partners. The jury is though in on far-right National Rally Party Leader Marine Le Pen in France, whose presidential hopes have been dashed after she was convicted of embezzling EU funds. A 5-year ban effectively disqualifies Le Pen from the 2027 Presidential election.

In the UK, the FTSE100 rose 0.6%. UK manufacturing activity deteriorated further in March, with output and new orders falling sharply amid rising costs and heightened trade uncertainty. The latest S&P Global purchasing managers’ index fell to 44.9, its lowest since October 2023 and well below the 50 threshold that separates growth from contraction. The decline was broad-based across all manufacturing categories and company sizes. New orders fell the most in 19 months. UK business sentiment also weakened to its lowest point in nearly two and a half years, with firms citing geopolitical instability, subdued client demand, and broader economic slowdown at home and abroad.

In Asia, the Nikkei was flat, as was the CSI300 in China. The Hang Seng rose 0.4%. China’s private Caixin PMI for March came in at an expansionary 51.2, slightly higher than the 50.8 reading in the previous month and in line with estimates. There was continued export growth and a lift in employment and production. Employment expanded for the first time in 19 months and there was a sustained rise in new orders. New export sales increased at the quickest pace in nearly a year. The read supports official data which was also in expansionary territory at 50.5. China’s economy is looking a little healthier.

China will be watching developments in the US with interest. Fun fact: if the US economy were to constantly grow at just 1% and China at 5%, the latter would become the world’s largest economy in 12 years’ time.

New Zealand

The Kiwi market rose 0.35% to 12,166. Exporters Fisher & Paykel Healthcare rebounded 2.9% and Mainfreight rallied by $1. Auckland Airport gave back the previous day’s gains, falling 2.1%. Meridian rose 2.1%. It was a very light day in terms of announcements.

Tower was the main feature with shares in the insurer falling 6.7% to $1,385 after Bain Capital sold its 19.9% stake. The shares are still above the $1.30 price at which the shares were sold. The PE firm had been a shareholder for 7 years and after modest performance over much of that period, will have enjoyed the strong share price gains over the past 12 months.

More good news for dairy farmers. Prices are up at the latest auction overnight with a 1.1% gain for the GDT index. Prices for skim milk powder leapt 6%.

Australia

The ASX200 rallied 1.04% to 7925, and after the RBA left rates on hold, but noted that inflation had fallen faster than expected, while also being cognisant of the risks posed by global trade developments. All sectors were in the green, with interest rate sensitive sectors in demand. Property was up 2%, with Goodman Group jumping 2.7% - the acceptance of a A$365m bid for home builder AVJennings aided sentiment. CBA, NAB and ANZ were all 1%+ higher. BHP rose 1.8% and Rio gained 1.4% on the upbeat data out of China and as iron ore hit US$104 a tonne, the highest level in almost three weeks.

The RBA left rates unchanged at 4.10% and noted that a cut was not on the table at this meeting. Officials will continue to rely on data and evolving risks to guide decisions, while noting that the labour market remains tight. Governor Michele Bullock also referenced China, and that the fiscal stimulus there could offset the negative impact of trade tariffs.

The RBA did comment that US tariff announcements are impacting global confidence and could be amplified if the scope of tariffs is widened. The central bank is cautious about the outlook for inflation but also noted that it was declining at a faster pace than expected. Inflation has stayed within the bank’s target range since August 2024.

Bullock said that tariff uncertainty is not having a ‘specific’ impact on policy decision at the moment, but the bank is “not endorsing the market path” to rate cuts. Markets are more confident that two rate cuts are coming with two cuts fully priced in by July/August. Money markets imply a 75% chance of a cut in May.

The Aussie economy continues to remain somewhat resilient, and while the property market is on the up, there are some patches of softness. February retail sales came in a little weaker than expected lifting 0.2% versus a 0.3% gain forecast. Spending on household goods moderated following the typical promotional period for retailers.

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