Transcript:

Hi, I’m Dennis Li, Associate Portfolio Manager at Morningstar Investment Management. Welcome to the Morningstar Market Minute, a video series every Friday, where we take a quick look at what’s been happening in markets, the economy, and other key trends.We’ll kick off by discussing key market events, the outlook from Morningstar, and how we position our portfolios for the current environment.

This week, the headline of the financial market was President Trump announcing a new set of tariffs after the deadline of 90-day pause since the Liberation Day. The new tariffs, from what we know so far, is targeting goods from Japan, Korea, and some emerging market countries. But global equity market reaction has been fairly muted this time, because the effective date of these tariffs is on August 1st. Even Japan and Korea seem taking a firmer stance, and the market is hoping that some deals could still be negotiated in the next few weeks.For the upcoming reporting season, it’ll be interesting to see how companies navigate the trade conflicts and impact on their financial statements.

While it seems like the share market has not priced in any downside scenarios on trade talks, the bond market is telling a different story. We saw the US 10-year treasury yield moved back up to 4.4% this week, showing some concerns about the return of inflation. And the latest FOMC meeting showed that the Fed still prefer a wait-and-see approach, and there are mixed opinions on the future path of rate cuts.

Coming back to Australia, the RBA decided to keep the cash rate on hold at 3.85. Since a cut was largely expected, the decision to hold came as a surprise and caused bond yields to rise. The next important data will be the Q2 CPI to be released in 2 weeks time. The situation is quite fluid around the world, and it feels like everyday we’re waking up to news pointing to different directions. For investors, we believe the key is to stay focused on long-term fundamentals and valuations, and not getting caught up in short-term speculation. We can assign probability of inflation, rate cuts or trade policies, but it’s very difficult, almost impossible, to predict exactly when they’ll happen, or to try your luck to time the market.

At Morningstar, we do see some concentration risks due to expensive large-cap valuations in some assets. For example in the US. In our portfolio, we like the undervalued European luxury sector, including names like Burberry (LSE:BRBY), Kering (XPAR:KER), and LVMH (XPAR:MC). Consumers have been cutting back on discretionary shopping due to the cost-of-living pressure. At the same time, the luxury brands are feeling the impact of a sluggish Chinese economy. And tariff news has also added another layer of uncertainty. But we think most of the risks are priced in, the fundamentals remain intact, and the implied expectation seems a bit too harsh. As a value investor, we see a compelling opportunity to own quality companies at a discount in the European luxury sector, and there could be upside once consumer sentiment improves in the US or China.

That’s it from me this week. Thanks for watching the Morningstar Market Minute. Have a great weekend and we’ll see you at the same time next week.