Despite widespread scepticism over President Trump’s follow-through on tariffs – highlighted once again this week by his dramatic reversal on food-import tariffs for Australian products – Bentham Asset Management has emphasised their crucial role in the period ahead.
Writing in a recent note, Bentham CIO, Richard Quin, detailed the current state of tariffs.
“Markets now face a totally different tariff environment compared with expectations at the start of the year. Our calculation puts the average tariff rate at around 18 percent,” Quin said.
He stated that figure is “almost double” what the market was initially expecting, marking a huge policy shift that is already having knock-on effects; with less activity in the US, weaker non-farm payrolls, and a steady drift lower in labour indicators.
Compounding this issue, Quin explained, was the recent US government shutdown which choked the flow of data for weeks on end.
“The breadth and length of the shutdown was extraordinary.
“This one impacted six weeks of salaries for 1.4 million federal workers. Confidence dropped sharply, and the Federal Reserve is now operating with far less information than it would normally have,” Quin said.
The resulting data vacuum has the ability to disrupt the path of interest rates even now, with the outlook for further Fed price cuts now being less certain, despite markets expecting ongoing easing earlier this year.
“The Fed may be hesitant to cut because it simply doesn’t know how bad or how good things are. Inflation is trending a little higher, and some numbers are stronger than expected, others are weaker. We’re navigating in fog,” Quin said.
Although the firm still anticipates multiple cuts both in the US and the UK, Quin stated that fiscal policy in many countries is so strained that new fiscal discipline could be pro-cyclical and unhelpful during a downturn
“That means some economies could face more pain before things improve,” he said.
In contrast to the US, Quin described China as continuing to “export deflation” to the world economy.
“They have excess capacity and low domestic demand, and they are exporting loss-making goods,” he said.
Reflecting on the year, he noted that it was a favourable period for bonds, with fixed income outperforming cash and many credit market segments delivering excess returns, despite weaknesses in high-yield and CLOs.
However, the tariff environment going forward will present a different backdrop that is still unclear.
AI pie in the sky
Beyond tariff drama and US politics, Quin argued that the transformative impact of AI is poised to remain a major force in the year ahead.
Echoing mounting concerns over a potential AI bubble, he said the firm is also wary of the sheer scale of capital pouring into AI investments, which he said has “real” parallels to the dot-com cycle.
“According to JP Morgan, the world is about to spend five trillion dollars supersizing AI. We’ve already seen Meta come to market with a 30-billion-dollar issue that traded down.
“That is not normal,” Quin remarked.
His message for the year ahead was one of caution, suggesting that the excitement around AI has long been seen through rose-tinted glasses.
“There’s a narrative that everything AI-related is good and everything old-economy is bad. I’m not convinced that’s the right way to think about it.
“AI could create zombies out of some companies by shifting cost curves so dramatically that established companies simply can’t compete,” he argued.
In Quin’s view, inflation looks likely to remain choppy and unpredictable, with AI only adding to the uncertainty.
Portfolio response
In response to the current environment, Quin said Bentham has reduced risk and boosted exposure to defensive assets.
“We’ve reduced our riskier credit positions and added to government bonds and agencies, and these are paying well above swap curves and well above treasuries,” he said.
He added that while the firm still favours Australian bonds, it has trimmed exposure to increase diversification from US and UK bonds.
“Overall, there’s risk in underpriced leverage. There are refinancing risks, and policy changes will create casualties. We want to be positioned for that,” he concluded.
