TRANSCRIPT

SPEAKER: Edmund Shing

Hello and welcome to a new podcast from BNP Paribas Wealth Management. I'm Edmund Shing, Chief Investment Officer. I want to talk today about the potential disconnect between stock market rebound, on the one hand, and the risk to US economic growth slowing down on the other; and finish with a little commentary on, what I find a very interesting and possibly underappreciated asset class, which is performing well now, namely infrastructure.

So, to start: over the last month or so, we've seen clearly a very big relief rebound unfolding in the stock market, not only in Europe but particularly in the US. Remember that the S&P 500 index from peak had fallen by 20% in the aftermath of the 2 April reciprocal tariff announcement by Donald Trump to the recent lows, and has now rebounded by 20% from that low point over the last few weeks. This implies, in my view, no long-lasting damage to the US economy from these higher tariffs and from the uncertainty unveiled by Donald Trump.

We should remember, however, that even with Donald Trump stepping back from the brink, particularly with trade deals starting to be unveiled, notably so far with the UK, but others should follow very shortly, and also stepping back in terms of the tariffs being levied on Chinese exports, with a 90-day agreement to lower the US tariff from 145% on Chinese exports to the US now to 30%, the Chinese have, in return, lowered their tariff level on US exports to China to 10%.

Nevertheless, even with this 30% level on Chinese exports to the US, the US tariff level overall on goods imports is going to average something over 14%, up from below 3% before Trump's second mandate began in January. So, a big extra tax on US consumption, whichever way you look at it, certainly looking at the goods sector.

If we look at the economic side of the picture, surveys at least do not reflect this very sanguine outlook on the US economy. In fact, survey data, whether you look at the monthly surveys done on consumer confidence, on the one hand, or on business confidence on the other, looking at either PMI surveys or looking at small business sentiment, these all look terrible and suggest that economic growth in in H2 2025 should slow down over the next few months quite dramatically.

However, if then you look at indicators of how activity is tracking at the moment, the retail sales, on the one hand, or looking, for instance, at the Atlanta Fed GDPnow indicator, you see a different picture. Activity up to now continues to hold up relatively well. The Atlanta GDPnow indicator, for instance, suggests growth close to 2.5% for the second quarter of this year. So, it doesn't seem to bear out the pessimism being outlined in these surveys.

Nevertheless, there is a risk that beyond the second quarter, we could see a slowdown as the real full impact of these higher tariffs hits consumption. It hasn't hit yet, but it probably will hit likely from June onwards.

Now, one of the offsets that we have here, particularly in the US, against the potential inflationary impact in the short term from these tariffs being passed through into higher goods prices for the final consumer, one of the offsets is energy cost. We are now seeing lower energy costs across the board, whether you look at the US or Europe, and that is helping to offset this potential hike in US inflation in the short term and also lower the hit to GDP growth due to tariffs. Why do I say this? Because if you look, for instance, at US gasoline prices, US gasoline futures are now sitting at $2.10 a US gallon versus $2.50 back in May 2024. So, on a year-on-year basis, gasoline prices are down 16% in the US. This is reflected in overall energy inflation. If we look at overall energy inflation on CPI in the US, you have -3.7% year-on-year for energy costs.

In Europe, pretty much the same, at -3.5% year-on-year. So, in both regions, energy costs being lower, particularly the oil price being lower, is helping spread disinflation and keep inflation under wraps. And remember, we should remember that overall inflation does tend to follow energy costs over time. So, where the energy prices go, overall inflation tends to follow with a lag.  

Just finishing up here. Yes, I still have some caution therefore on the US economy. Let's see how that plays out. Let's see to what extent the hard data follows the soft survey data. One asset class, aside from stocks, that is performing pretty well in the year-to-date, as I mentioned at the beginning, is infrastructure. These are the real assets that underpin the essential services such as provision of water, provision of power, transport and so on. Now, if you look at a general overall listed infrastructure fund, such as an ETF, you will find that they are up roughly 10% in US dollars in the year-to-date. So better performance than let's say US stocks, which are only up about 2% year-to-date.

However, if you look at some of the subsectors within infrastructure, they are even doing better than that. For instance, if you look at infrastructure development on the electricity side, such as companies involved in building out electricity, power generation and networks, you are seeing much stronger performance from these types of funds and ETFs.

Clean water is also performing well, so funds and ETFs focused on clean water, are also up something like 10% in dollars year-to-date. Clean energy: now this is a surprise because this, if you think about solar and wind energy, is a segment which has been under extreme pressure really since 2021. But now, following the surprise announcement of lower-than-expected revisions to the Inflation Reduction Act in the US, so basically, there were a lot of tax credits included in the IRA that the Biden administration launched that were targeted at boosting clean energy investment.

Trump was expected to pull these back. But in the end, what the Trump administration is doing in reforming the IRA is nothing like as bad as expected. And so, these tax credits will be higher than expected and stay in place for longer than expected over the next few years. And that certainly is helping the clean energy sector.

So, if you look at clean energy funds in ETFs, they are starting finally to perform a lot better and in dollar terms, up 10% roughly year-to-date. But the real star is actually European focused infrastructure. There are ETFs and funds focused on that. And if I look at one ETF which is focused on European infrastructure, this is up over 21% in the year-to-date in euro terms. So clearly if you're thinking about infrastructure, the place to be at the moment is Europe. And this is not surprising considering that the German coalition government have recently announced a jumbo defence and infrastructure spending plan as part of their new budget, clearly in response to what goes on in Ukraine. But more than that, really, in response to the poor infrastructure that exists in Germany today. Clearly the impulse in terms of infrastructure spending coming from Germany, but this is likely, I believe, to spread to the rest of Europe. And of course, the joker in the pack would be any potential ceasefire in Ukraine. Talks are ongoing. There has been no resolution yet, but were there to be some sort of ceasefire eventually agreed, then we might think about reconstruction efforts in Ukraine, and it is likely that European infrastructure-related stocks could do pretty well off those reconstruction efforts, because clearly the infrastructure in Ukraine would need to be rebuilt. There you have it.

Question marks, firstly, over how soft economic data in the US will translate into the hard data in terms of economic activity. So far it hasn't happened. Secondly, remember that energy costs are lower than they were a year ago in the US and Europe, which is clearly both helping to keep inflation down and also lowering any hit to growth and actually supporting growth. And thirdly, focus on infrastructure. It's a real asset play that has performed very well historically and is even performing well looking at listed infrastructure funds in ETFs over this year-to-date.

Thank you very much for listening to this podcast from BNP Paribas Wealth Management. We aim to put another one out in another week, but until then, thanks for listening and goodbye.