Identifying opportunities amid dislocation

Marc Pinto: Hello everyone. This is Marc Pinto from Janus Henderson Investors to talk about some of the volatility we’ve seen in the markets recently as a result of what was being called Liberation Day on April 2nd. And I think it’s fair to say that the extent of the tariffs announced by the Trump administration were probably higher and more dramatic than the market had expected. So even though the market had been a little bit weak going into this day, the reaction as a result of Liberation Day has been probably a little more severe than we would have expected.

I think the market has a couple of concerns, which have been well highlighted in the press and shouldn’t be anything that surprises you. But the first one is that the imposition of tariffs not only disrupts the global supply chain, but will have an impact in terms of prices that American consumers pay for goods. And we’ve already seen some weakness in consumer confidence. The February numbers for example were a little bit on the weak side. So this I think will heighten concerns about inflation, cost of goods, and could be a further negative pressure on consumer spending, which is a significant part of the economy. So we’re clearly watching that very closely.

The second concern is that these tariffs are inflationary. And I think it’s very hard to dispute that higher prices will have to be passed along at some point to consumers. Companies can only absorb the price increases that they’re going to pay as a result of the tariffs for so long because it will impact their margins and profitability. So we will see this translate into some inflation, and there have been some pretty significant estimates in terms of inflation growing.

I think the other concern of course is how the European markets and how are our trading partners going to react, and that remains to be seen in in the days to come. There’s a school of thought which we think is very possible, in that this is the beginning of a negotiation between the Trump administration and a lot of our trading partners. If you look at where they have placed the highest tariffs, it’s with countries where we have a significant trade deficit. And I think it’s trying to get some equilibrium back in those situations where we don’t have as large a trade deficit and hopefully bring those countries to the negotiating table, because there are cases where tariffs on American goods are extremely high.

In terms of the markets, you know, the markets have reacted rather dramatically, and we’ve seen certainly and it’s, but it’s not been consistent. We’ve seen sharper reactions in consumer-oriented sectors and companies that rely on the global supply chain. So the [initial] movements in Nike, Amazon, Apple, you know, to name a few, have been more severe than the market as a whole, because they source a lot of their goods outside of the U.S. But we’ve seen other sectors where there’s been a more muted response. Interestingly, in the automobile sector, there’s been less of a reaction among the U.S. automakers because one could argue this is quite positive for them.

So where are the opportunities in all this? When markets get dislocated, you know, sometimes, as we like to say, the baby gets thrown out with the proverbial bathwater. And in situations like that, this is where our portfolio managers and analysts are really looking for those high-quality companies that maybe we haven’t owned because their valuation historically has been a little high. But companies that fit all the right, the criteria of quality in terms of having consistent earnings and cash flow, having high visibility on their future and prospective earnings and revenues are strong or dominant in their industries, and [companies that] really set the agenda for the industry and are in control of their own fate. That’s probably the most important thing.

So, there’s certainly a lot of attention being paid to replacing perhaps some of the holdings more impacted by the tariffs and replacing them with higher quality companies that if they are exposed to the tariffs, which you know, most companies are, are in a better position to negotiate that.

And remember, in difficult times and uncertainty and when margins are being compressed, as they will be if these tariffs continue to go through, the stronger companies in whatever industry it is will come out stronger and better. The companies that don’t control their destiny, that have more challenged business models, will be the ones that suffer disproportionately. So, as you know, we’ve always had a focus on quality, and I think that quality theme is as important now as ever.

We entered this year, or at the end of last year, we felt 2025 was going to be a year where the broader market would outperform the concentrated indices. And, you know, we talked about how we thought the S&P 500 equal-weighted [index] would outperform the S&P 500 [index]. We talked about the opportunities for small caps, we talked about the opportunities for international. And I think one of the themes of a broader market is that concentrated indices, especially in the S&P 500, where there’s a lot of technology, there’s a lot of large consumer-oriented companies, like an Amazon, they’re going to be … they’re going to have a disproportionate impact on the index.

And as active managers, you know, we certainly pay attention to the indices, but we have the latitude to go where we think we see the best risk-adjusted return opportunities. So we’ve maintained that a broader market bodes well for active management as we have the opportunity to find companies, that we think will outperform over a long time period, that aren’t significant constituents of a given index. And by virtue of the fact that we can look across the markets and look at a wider spectrum of companies, we think that gives us an advantage in terms of finding companies that we think will outperform the market and that give us more attractive risk-adjusted returns.

You know, a final thought I’d like to leave with you is, as unsettling as the market reaction over the last two days has been, I think it’s important to remember that we do see dislocations in the market from time to time. And while they’re not that often, when they do happen, they’re pretty dramatic, and they’re unsettling. And whether it’s the 2008 financial crisis, whether it’s the end of the dot-com era in 2001, whether it’s the credit crisis in 1998, we’ve seen the market recover very nicely from these downdrafts. And it will take time. But over the long term, investing in these periods of extreme fear and dislocation have proven to be beneficial.

Of course we can’t predict when the markets will recover and when this will get settled down, but history tells us that these uncertain times can be good buying opportunities, and our portfolio managers are seeing that in terms of some of the companies that they’re finding much more attractive as a result of the dislocation.