The investment landscape just got more complex

Donald Trump’s re-election as the 47th U.S. President has sent ripples through global markets, raising questions about inflation, regulation, and geopolitical stability. With shifts in economic policy, defense spending, and trade dynamics on the horizon, investors are reassessing risk and opportunity—PM Capital’s Paul Moore breaks down the key implications.

Transcript

Hello, I’m Paul Moore, Founder and Chief Investment Officer of PM Capital. On behalf of the PM Capital team, I’m pleased to present this short market update.

Our mantra is to ignore short term noise and focus on long term valuation. But with the election of Donald Trump as the 47th President of the United States of America, the noise level has become deafening and it is almost impossible to know where to begin this discussion.

If we start with the background; a more resilient US economy than expected, China struggling to overcome it’s over capacity issue and record low consumer sentiment and Europe being at a crossroad, as they face difficult and important decisions on defence, capital markets and regulation. Inflation has receded but is struggling to get back to central bank objectives and interest rates are probably where they should be – mid 4% in the US with short rates a bit below long rates, which is almost a perfect scenario. As we noted in our previous update, “Short-term interest rates need to be lower, but not by a lot. Otherwise, inflation will re-ignite. I still believe we will see higher lows and higher highs when it comes to interest rates and inflation.”

The secular forces of inflation have changed. Globalisation and decades of relative peace have transitioned to Re-shoring and War and the Politicians won’t stop spending. Inflation has a rigid backstop. One simple anecdote is my local council’s request to increase their rates by 40%, even though my rates have already increased at twice the rate of inflation over the last twenty years. This is endemic in our bureaucracies; the easy answer is always to increase spending. Throw in the continual bloating of regulation and it is evident that our inflation problem is now structural, not cyclical.

Then we have Donald Trump, who has hit the Tesla “insane” option on the accelerator pedal. It is anyone’s guess how this will change the status quo, suffice to say that there are going to be significant changes in the future.

President Trump has been clear; he wants lower taxes, lower interest rates, a lower dollar, lower regulation, lower government spending and the deportation of illegal immigrants. Then for Europe and the rest of the world, higher defence spending, tariffs, an end to the Ukraine war and a new “Riviera” in Gaza.

At first blush, ex government spending cuts, these are all inflationary measures and inheriting record fiscal and trade deficits, it’s going to be an interesting journey. I suspect there is a low margin for error.

How this plays out may well be dependant on how the rest of the world responds.

Two issues I would highlight are defence spending and regulation. Europe does need to pay for its own defence. Europe has generated perpetual trade surpluses, and the United States has generated perpetual trade deficits. So why is the US funding European defence? Second, regulation is strangling all our economies. It needs to be addressed. In these two instances, Trump is simply calling out and acting on the obvious.

The response is what matters and here it gets interesting. On Friday the 14th of February, JD Vance, the United States Vice President supposedly “stunned” the Munich Security Conference with “a blistering attack on European leaders”. European leaders were outraged at the lack of diplomacy. But on the very same day, Mario Draghi, the former president of the European Central Bank, wrote an opinion piece in the Financial Times and noted that Europe’s “High internal barriers and regulatory hurdles are far more damaging for growth than anything America might impose” and that “radical change is needed”. Exactly, self-imposed regulation is strangling productivity and inflating the cost of living, and it needs to change.

So how do we navigate the investment scene with all that is in play?

To state the obvious, it is not going to be easy.

Starting with a few observations.

The past ten years has been an extra-ordinary period for financial markets and the United States equity market, as represented by the S&P 500 index, is at the forefront. I have often said that the S&P 500 is the only market that matters, represented by the fact that whenever US markets are closed for public holidays, the rest of the world goes dormant. It’s greater liquidity also creates a valuation premium highlighted by the number of foreign companies that are increasingly changing their domicile to the NYSE or NASDAQ. The S&P 500 now constitutes a record 75% of the global index. The top 10 US stocks have a greater market capitalisation than the Rest of the World!!

How far can such extremes extend themselves? I don’t know, but I suspect we are at or very close to the end and it is probably a very good idea to walk away from these extremes. A perfect opportunity to diversify risk and that is what our portfolio represents, a completely different risk reward proposition. In fact, I would argue that the distinguishing feature of our investment process over time has not been the excess returns versus the index, but the returns being generated with a risk profile that bears no resemblance to the benchmark index.

If we look at our updated valuation table our portfolio Price to Earnings ratio, or PE, is nearly half that of the S&P 500.

European banks still sell on earnings multiples that are at a significant discount to their global peers. This is despite superior dividend yields, higher levels of profitability and arguably, better forward-looking fundamentals, as loan growth returns. For example, Spain’s economic growth exceeded that of the United States in 2024, yet Caixia Bank sells at 8 times earnings versus Bank of America selling at 12 times. And we wont mention that CBA here in Australia sells at 26 times earnings!!

In commodities, we have increased Newmont Gold to a 5% position which sells on a spot PE of 8, the cheapest I have ever seen for a large cap gold company.

Siemens, our European industrial conglomerate, has re-rated consistent with our thesis of closing the valuation gap with its US Capital Goods peers, but its small cap European cousins have not, allowing us to buy a basket of these companies on what looks like 10 to 12 PE’s

One investment thesis where our thoughts have changed is oil. With a “drill baby drill” edict from President Trump, we are not so sure about the upside for the oil price and thus, may sell our investment in SHELL, a little earlier than previously expected. Having said that, management is doing exactly what we want, and valuation is still only 8 times earnings.

Fox Corporation in hindsight was a big mistake, the mistake being not buying a bigger position. At the time of purchase, we believed it was selling at a PE adjusted for non-earning assets, of approximately 6 to 7 times earnings. Earnings have been very strong on the back of the presidential election advertising bonanza and Fox has increased its dominance in the News segment significantly. It turns out we were buying the business on 5 times adjusted earnings. Our costly mistake.

Two recent additions to the fund also sell at PE’s almost half the market multiple.

First, Heineken, one of the great global beer brands, was most recently purchased at near ten times 2026 expected earnings and second, Sanofi, a European Pharmaceutical company with an interesting pipeline of potentially blockbuster drugs that the market does not appear to give a lot of value too, given the stock is trading on a subdued 11-12x earnings.

And a quick word on something we don’t own in our portfolio, data centres. Capital expenditure on data centres is booming as the cash generating technology franchises of Apple, Amazon, Facebook, Google and Microsoft all race to be leaders in the AI race. Technology is not my area of expertise, but typically, when record amounts of money are being spent on fixed assets in what is essentially a commodity product, trouble often follows, especially in industries that can be disrupted overnight as they may have been by DeepSeek.

Reflect on when everyone bought the China growth story only to see a collapse in stock prices over the next ten years, much like the internet mania of 2000. So make sure you are buying an attractive return and not the hype of future growth, especially when leverage and high fees are involved.

In conclusion

There is no change to our inflation thesis and the structural forces that are causing it are becoming more obvious. Donald Trump has put global trade and geopolitics in flux. It is impossible to work out how it will play out and Risks are probably higher than you think. My focus is on where I want to invest my capital over the next 5 to ten years and there are 3 big valuation extremes that are becoming more apparent which will no doubt be reflected in our portfolios over the next couple of years. As always, the best way to navigate the trials and tribulations of the investment journey is to think long term, focus on valuation and above all, be patient.