John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings at John Hancock Investment Management. Today is February 3, 2025, and the talk of the day is tariffs. The goal of this podcast, as always, is to help investment professionals deliver better outcomes for their clients in their practice. Part of that goal involves around investment education.

So I decided to take a deep dive on the topic of tariffs to help me with that. I've invited Alex Grassino, chief economist at Manulife Investment Management. Alex is the chief economist and leads the macro strategy team, which forecasts macroeconomic and financial trends, and analyzes the economy and capital markets for potential opportunities and risks. He's also a key contributor to thought leadership, both within the firm and externally, and is an active participant in various internal investment and risk committees. Alex, welcome to the podcast.

Alex Grassino

Hey, John, thanks for having me on today.

John P. Bryson

You got it! Hot topic … certainly here in the States. I want to start basic, though. I want to start with what are tariffs and what are the primary goals of imposing tariffs?

Alex Grassino

Back to economics 101. Basically, tariffs are a tax that are placed on corporations for bringing goods into, in this case, the United States from another country. Usually there is pretty straightforward reason for doing it. It is to help with helping the industry usually provide a measure of competitive advantage within your country … if you want to support it. Sometimes, it's for national security reasons as well.

John P. Bryson

Okay. All right. So how do tariffs impact domestic consumers and businesses in both the short run in the long run?

Alex Grassino

Sure. Well, short answer is the prices go up. Obviously, if it costs more to bring something into the country, the price will go up for both the consumer, and to some extent, the business. Normally, what happens in this case is that the business will try to pass on as much of the price as it possibly can to the consumer. But in some cases, they will also accept compressed margins so that they can actually minimize the cost impact and continue to sell the good in question.

John P. Bryson

Is that it had the same impact short-term versus- long term, or other differences there?

Alex Grassino

Sure. Excellent question. So short term is a little counterintuitive because you might not actually see the full impact short term. What could happen over the short term is that, one, if they have stock of whatever good is being tariffed on their shelves, the price might be slower to move up because they're just going through their existing inventory.

And part of what you might have seen in the United States is a pull-forward of goods going into the country ahead of the tariffs being announced. So basically, get as much into the country as possible at the old price. And once you’ve work through that supply, and once you work through how much companies are willing to eat into their profits, that's when you see the prices start to move up.

Over the long term, what actually can happen, somewhat counterintuitively, is prices start to go down as demand for a specific good actually goes down as well. So, as people find other substitutes for it, you can start to see their willingness to buy it go down, and then you can start to see an actual disinflationary impact as the overall economy cools a little bit as a result.

John P. Bryson

Really insightful there. So let's talk about the international impact. How did tariffs affect international trade relationships and how do they impact global supply chains?

Alex Grassino

Well, they're bad for trade relationships clearly. If you had … you know, in the case of USMCA, a pretty clear cut agreement that is currently in question, tight trading partners certainly start to eye each other with suspicion. So over the short term, it can be damaging to relations between countries. As you're probably seeing with some of the saber-rattling you see at this point. Longer term, you know, when you look at North America specifically, I would suspect that the relationship will repair itself.

You know, I view this as a spat between siblings instead of something more pervasive. Longer term, the other thing that can happen, though, is supply chains start to realign. For example, if you know that … when you look at what happened with the United States and China a couple of administrations ago when Trump was in office the first time, you started to see a lot more activity in other areas that were able to benefit.

So the idea of  friend-shoring popped up. Another thing that's important. When you look at the United States specifically in this case, is the volatility around what trade relationships are, is potentially beneficial for the domestic manufacturing sector because if you're a company and you're trying to decide where you want to put your next plant and you're not quite sure what the tariff situation is going to be like for a place like Canada or Mexico. If the cost is close, you might just decide, you know what, I'll put it in the United States instead because then I don't have to worry about this stuff.

John P. Bryson

And I think that's a big part of the current plan right now. Okay. So let's, let's talk about the … the impact. You mentioned the impact on relationships. How do retaliatory tariffs impact economic growth and inflation?

Alex Grassino

So what you're going to start seeing is―if you're talking about retaliatory tariffs specifically―what you'll see is weaker demand for goods that come out of the countries that has them imposed on them. So, basically the same thing, just in reverse. And then what happens is demand for the good goes down. Inflation goes up initially, but after… after the initial shock, you sort of start to see it roll off after a year.

So you model in the impact of tariffs, if you assume that it's a one-time deal. So if you assume that … say what happened over the weekend happens once and you don't see cascading or rolling tariffs going on and ad infinitum, what you'll see is a sudden move up in inflation and that then the inflation goes down about a year later as the base effects start to roll off.

And that's really important from the central bank reaction function because it allows the central banks leeway to look through the initial price shocks in a higher inflation. They get to use the “T” word, transitory, which I'm sure everybody got fed up of hearing during the pandemic and sort of look at the actual growth impact, which is negative. So somewhat counterintuitively, you could see inflation go up a little bit, and then you could actually see central banks start to ease more.

And you see this very explicitly with the Bank of Canada. Sorry for talking about Canada. I am Canadian, so, you know, I'll focus on that for a minute. But the idea there is even against the backdrop of potentially much higher inflationary pressure in Canada, the Bank of Canada's decision last week talked a lot about easing, and they came off as very dovish as they prepare for the growth shock instead … because the more permanent shock than the one-off move higher … and then sort of corresponding move down and inflation growth year later.

John P. Bryson

So really interesting. Commentary on Canada. Can you apply the same concept here in the States? I'm interested specifically around if inflation rises but settles down, we'll call it in a year. How would the U.S. Fed kind of factor that into their rate decisions going forward?

Alex Grassino

It's an excellent question and it's something that everybody is asking right now. If we hadn't had the pandemic, I would have said the answer would be pretty straightforward, which is basically they looked through it, they'd use the “T word “that I talked about, and they just say, “look, this is going to be hit on growth. We're going to get slightly weaker.” We're going to see unemployment rise a little bit. So let's move. The question on the United States, what's really important, though, is how much of an impact these tariffs will have on the country. And when we look at the models we've done, you can see it very clearly hurts Canada, but the effect on the United States is negative but a little more ambiguous. So in that case, is a slightly weaker growth profile and the risk of more lasting inflationary pressure something the Fed is willing to look through? We suspect that ultimately, they do. But there's certainly going to be a lot more rumbling around potential hikes, which we don't think we're going to see at this stage.

John P. Bryson

Okay. Really insightful. Thank you. A couple more questions. What are some of the unintended consequences, potentially, for imposing, tariffs on key imports?

Alex Grassino

Well, I think one of the things you'll see is, first off, there is a confidence shock around,both the market from the producers’ perspective, and both … and also from what you would see … from the consumer. So one obviously … the expected consequence …reduced demand or, you know, generating money through these in, through these, inputs. The thing is though, that if the producer starts to think about this as a permanent situation where they're just not going to be competitive, they might start to look to other markets. So you might actually see a scarcity of product in that case as it comes through. That could be one. The other one is clearly, and I would suspect this is at least partly intended, but there is that confidence factor about being able to leverage your supply chain and get the goods that you want on time and at the price point you want. So that long term shock and sort of skepticism around just how reliable your supply chain is something that could probably affect companies’ ability to do business in general.

John P. Bryson

And then we mentioned kind of unintended consequences. What are some of the common myths around tariffs that investors might … might assume that we want to clarify?

Alex Grassino

Well, I think one of the most obvious things that, you know, people will hear is that Canada is paying for tariffs. You know, if you're looking specifically at what happened over the course of the weekend. The reality is that the end user is the person who ultimately pays. It's a tax on the person who brings the goods in. So the burden is effectively shared by both the company and the consumer. And then it becomes the consumer or end-users’ decision as to whether or not they want to use the goods, or maybe pivot to another place. So there is an inflationary dynamic. And the other thing I think that is important to remember is that people talk about tariffs ... They think about inflationary pressure just going up and to the right. The reality is that yes, over the short term that's probably true. But longer term, you can actually see disinflationary impacts from tariffs. If you go out far enough. And if you assume that’s a one-off shock. … So the qualifier on that I'll just get the qualifier on that.

That I just say as well is one of the things you don't want to see as a sort of rolling situation where more tariffs just keep getting announced, because at some point your ability to rely on, “well, it'll be over in a year” goes away. So, for example they announced tariffs now, in six months, and another six months, and another six months, after that it becomes more of a feature in inflation than just a one off shock that you can look through. So it's something to be careful with.

John P. Bryson

That's really helpful. One of the things we talk a lot about on this podcast is kind of separating, the nonsense from the real information, and you're really helping us parse what we should be paying attention to and what we shouldn't get too caught up on, so I appreciate that. You've touched on it a little bit, but I kind of want to give you your opportunity to talk about, you know, going forward, how do you see the current tariffs imposed recently by the U.S. and then the response we're seeing from Canada and Mexico. How do you see that, impacting investment markets?

Alex Grassino

Well, I think at the moment the answer is pretty clear. When you look at it, equity markets are off pretty sharply, although they've rebounded slightly, I think, on slightly less, aggressive rhetoric coming out this morning. Basically, you're going to see a weaker Canadian dollar, at least over the short term, you probably see yields move down, as you saw in Canada very clearly, equity markets are moving down because generally speaking, uncertainty is not a positive.

And I think really what will happen though is, over time, as people have more certainty around what you actually see, markets will be able to act in a more measured way, and you'll start to see people take clearer bets around what does and doesn't make sense from an investment perspective. I tend to use an analogy around this thing.

It is a bit tortured. I love tortured analogies. And it relates to poker, which is basically if you have a bad hand, you can still play it. The problem is, when you look at tariffs right now and the uncertainty around government, it's sort of like trying to play a hand of poker without actually being able to flip over the cards that you've been dealt.

If you don't even know the cards you've been dealt, it's really hard to make clear decisions, in which case you see a flight to safety, which is sort of what we're seeing at this point. But as that clarity starts to seep in, people will be able to make more measured decisions.

John P. Bryson

That’s a good analogy, certainly for these times, it's … it's tough to know what you have and it's tough to know what's coming at you. But what the good news is, we're always on top of this. Folks like you are on top of it, and you're updating your insights on a regular basis. Alex, I want to thank you for joining, the podcast.

Folks, I want to encourage you to follow Alex on LinkedIn. I also want you to check out his research on our website, JHinvestments.com, you can follow him and others, and you can also subscribe to the portfolio Intelligence, podcast here and wherever else you like to download your favorite podcast. As always, thanks for listening to the show.

Alex Grassino

Thanks for having me on, John. It was a pleasure.

John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is December 2, 2024. And as we round up the year—a year of exceptional equity returns, I've invited Sandy Sanders of Manulife Investment Management to the podcast. Sandy is a senior managing director and senior portfolio manager at Manulife, and he is the leader of the U.S. Core Value Equity Team, which manages large-cap value, large-cap core, all-cap core and global equity strategies. Sandy, welcome to the podcast.

Emory W. (Sandy) Sanders

Thanks, John. Great to be here.

John P. Bryson

All right. Hey, listen, you manage a number of portfolios for us. Give us an overview of your investment approach so we can set the stage for the audience.

Emory W. (Sandy) Sanders

Well thanks. We look at companies that have a sustainable competitive advantage. And we're basically a core investor in that we essentially can look at both growth and value stocks together to build a core portfolio. And that flexibility over the years has allowed us to, we think, have an edge because there's more flexibility. We're not essentially stuck in one style box.

And that essentially, coupled with … approximately 50-stock portfolio, so good active share and with a team that's completely dedicated to our philosophy and process. So it's more of a boutique structure. It's focused and that allows us to really rinse, repeat, and constantly trying to get better every day, honing the same investment process year after year.

John P. Bryson

Nice. So you mentioned process, you mentioned rinse and repeat. When our investment consultant team is talking to financial advisors, we often talk about having a definable, defendable, and repeatable process. Can you bring us deeper into your process?

Emory W. (Sandy) Sanders

Absolutely. So what we do is we first start with companies that earn above their cost-of-capital, say they have a good return on invested capital. So this is it. Basically focusing on the quality companies, no matter if it's a growth or a value business. And essentially think of us as avoiding the areas that are lower quality, like generally airlines, automotive, telecom, utilities, metals and mining.

We will shy away from those areas, but then we'll go out in the field. We'll do about 700 meetings a year approximately, meeting with company management teams. Then essentially we'll come back to the office and go through our seven-step process, and it takes a month of work … essentially starting with competitive advantage … understanding what is that business’s sustainable competitive advantage.

And then looking at industry and growth drivers. Financial statement analysis … a management team assessment. And really, the heart and soul of our process is really step number six. This is where we do four scenarios. We do a best case, base case, a bear, and a worst. And these are five-year minimum discounted cash flow models. The base case is what we think the stock is worth essentially today … or …that's the intrinsic value. Or in other words that's 100 cents on the dollar. So that essentially for across all four cases, we use a 10% discount rate. So no matter if it's a company like a consumer … large-cap consumer products company that's a slow, mature business, or it's a high software, a high-growth software business, it's the same discount rate.

So we're leveling the playing field. And essentially what we're doing is that allows us to understand the opportunities out there at any given time. So that base case essentially is that 100%. So let's just say we think a stock's worth $100 in our base case. And the stock this morning is trading at $70 …  so 70 divided by 100.

The stock's $0.70 on the dollar. So we're looking to buy stocks at 70 cents and then sell when we get to 100 cents. We do this with low turnover to approximately about 20% to 25% turnover per year. So we follow about 250 stocks that we vetted in our seven-step process. And every single morning we can look at our inventory of names that are actively vetted and they're ranked by cents on the dollar each morning. And that really essentially allows us to have a repeatable, we think, process that we can hone each year and continue to work on basically building a great portfolio. Approximately 50 stocks that has good margin of safety. At the time of entry, we’re buying stocks again less than 70 cents and selling when they get to 100 cents.

John P. Bryson

You know, it's really got the hallmarks of a classic actively-managed approach, you know. It's going out and meeting with managers, doing your homework, being very thorough. Repeatable process over and over again and then taking a more concentrated portfolio to … to deliver active share and active return. So it's great. It's consistent with a lot of things that we talk about with investors.

So let's, let's dig in a little bit, dig deeper into the portfolio. You’ve basically been overweight consumer discretionary stocks. What do you like about that sector right now?

Emory W. (Sandy) Sanders

When you look at consumer discretionary it really starts with the health of the U.S. consumer. And essentially what we have here basically is, in a U.S. economy that's growing quite nicely, approximately 2.5% to 3% in 2024. And we think it maintains that healthy level of growth next year. But essentially that is being driven by the underpinnings of the economy … s yet two thirds of our GDP is from consumer-related spending and that we are the largest, generally, the largest developed economy growing at this rate.

Other areas like, Canada, Europe, Japan are definitely not growing at the rate we are. So it's a fairly healthy setup that we have with the consumer. Then, we do think that there is growth in the consumer's, wallet. So essentially what you have is full employment, and you've got a, you know, demographic where if you look at the wage earners by quintile, basically the bottom 20% of wage earners, approximately, only represent about 8% of total retail sales.

So the bottom 20% of wage earners, you know, while you get all the bad headlines on, on the television regarding, you know, what's happening out there, paycheck to paycheck and, but the overall impact is fairly modest to the size of the economy. It's only 8% of total retail spending. So, the bulk of folks who have jobs actually have good balance sheets.

They have, wage growth and that essentially that demographic, they essentially think of it as the middle three buckets, that 60% of wage earners in the middle, they represent approximately 75% of all retail spending. So that's where the tonnage is. And that's what keeps me constructive here. For the last couple years, actually. And that's, you know, the market's done well 2024, 2023.

And we've been there at the stress points adding to some of these names when essentially the market panics. But we've fallen back on … say look, the consumer is in good shape here. I don't see any reason why we're going to go into a hard landing. And so that seems to be playing out. So we like online retail. We like some of the home builders, and some of the more, consumer discretionary-related stocks. So that essentially is the crux of it is the strong health of the strong U.S. consumer today.

John P. Bryson

All right. Well, Sandy, I want you to know the Bryson household is doing its fair share. Over the last weekend with Black Friday we have been spending! So we're here to help. Excellent. Hey, listen, let's talk about a couple of other sectors or industries that you find interesting. What else is getting you excited about today?

Emory W. (Sandy) Sanders

When you look at the … where we are in the cycle, we think that the essentially with now Trump, having been, you know, reelected, we do think the overall capital market cycle is likely to kick into a higher gear next year. And that essentially whether it's IPOs, secondaries, mergers and acquisitions, essentially there's been a drought in this activity, essentially in 2022 or 2023 and 2024, you know, as the Fed raised rates aggressively in 2022, they really shut off the capital markets.

And so we do like the investment banks, the large ones, based here in the U.S., seem to be very well positioned. We also like the private equity companies as well. Also, when you think about technology, software and semiconductors continue to actually gather market share in general. So when you think about the way things have … in your daily life, everything that you're doing now is more digitized.

This requires software and semiconductors. And so essentially, even the car today, the cars are becoming much more advanced. And that's, not … not only digital semiconductors, but also analog semiconductors that can sense temperature, noise. And so things like you'll be able to sit in the back of your car in a few years and they'll be a separate music sound.

You know, these are the types of things that I'm sure, you know, when our kids were younger, these were definitely a nice feature or a nice upgrade. But those types of technologies are coming to the market and that really requires software and semiconductor. So we do like technology. In addition to financials, consumer discretionary, and lastly, comm services, digital advertising really is continuing to grow.

You know, there is risk out there basically from the, you know, the government with regards to big tech, we do think some of that noise will start to die down in 2025 in general. But you know certainly is a risk out there. But overall I would say those are the four sectors we'd like. Yeah. Today. And … and that's where we're spending most of their time with this portfolio now.

John P. Bryson

All right. Hey you mentioned technology. I want to hit a couple of things. We've certainly seen large-cap growth perform well. We've seen the market be really narrow in the tech and tech-related companies. If you think about that and you think about high equity valuations, where do we go from here?

Emory W. (Sandy) Sanders

Well, you know, this this is a, you know, a very strong as, you know, market because what's happened is that … that Magnificent Seven essentially, you know. We are at basically 33%, the top names represent, you know, a third of the market today. And what's happened is, is that these companies are producing more free cash flow per dollar of revenue than their peers when the market was this concentrated back in the 1970s with the Nifty 50, as well as in the industrial area back in the 1950s.

So, basically they're twice as or more profitable than their predecessors. And so that's why, you know, with these companies, they're earning these premium valuations because of this enormous profitability. You know, just think of the devices that you use every day and how much margin there is in those devices and how, predictable they are with regard to getting you to upgrade to the next version, you know, every couple of years.

So that's what's different, I think, is that these companies are just extremely strong, extremely high barriers to entry, very difficult to dislodge them. And they're enormously profitable. However, with that being said, we do think that there is a nice set up here with regards to the market broadening out. And I do think that, while these companies—I don't see them collapsing—the Magnificent Seven, I do potentially think they could take a little bit of a breather as you start to see rotation into some of the smaller-cap size companies. And we think more performance is likely to come in a market that's broadening out versus, the domination of this top seven names. So we do see that likely to occur, in general over the next 18 to 24 months.

John P. Bryson

Okay. And then if you think about, new Trump presidency and the Federal Reserve going forward, what are your thoughts on that for the overall markets as this where they from where they stand?

Emory W. (Sandy) Sanders

Well, you know, I think that, it's basically a bullish signal. Honestly, when you look at Trump's agenda, it's essentially for the markets. It's in a matter if you like him or you don't like him. You know, what I see as an investor, looking to allocate capital with an investment process and a team, as we see that the markets go to view this favorably, essentially lower tax rates on the corporate side, is a direct benefit to earnings.

And we were bracing, for this if the … if the presidential election went the other way, we were going to have to reduce our numbers, as you know, basically on higher tax rates, but we don't have that. So that's bullish. Less regulation potentially is also another bullish indicator. And I do think that you're going to see a pickup in mergers and acquisitions.

And so in general … and what we're seeing is that this earnings growth likely, next year, remain strong. We do think potentially a double-digit earnings year in 2025 for the S&P. And that clearly, is a you know, is a positive indicator. And then, you know, when you just take a step back, right.

Trump is you know, he's … he's judging himself by how the market does. You know, that's his report card. And you know, and it's interesting though, when you look back at the various presidents, you know, the performance under Biden as well as under Trump, you know, approximately was very similar with regards to the S&P per year annual return.

So we do think that, you know, we'll see how this shakes out. But as of right now, all the signs are that the bull market is likely to continue.

John P. Bryson

Excellent. Well hey, Sandy, really appreciate an overview of your process, how disciplined it is, how, repeatable it is. And it's really interesting to hear about your enthusiasm around the consumer and the opportunities going forward. So, thanks for joining us on the podcast. We always appreciate hearing from you.

Emory W. (Sandy) Sanders

Thank you. John, thanks so much for having me on.

John P. Bryson

You got it. And folks, if you want to hear more, as always, please subscribe to the Portfolio Intelligence podcast on iTunes or wherever you download your favorite podcast. You can also visit our website JH investments.com to read our viewpoints on macro trends, portfolio construction, alternatives, business building ideas and much, much more. Thanks as always for listening to the show. Have a great rest of 2024.