1️⃣ After China, The Next World Factory Is Still China?!
Donald Trump plans to impose tariffs on Mexican, Canadian and Chinese goods on his first day in office. This aims to address what he calls a surge in undocumented immigration and the influx of drugs, especially fentanyl, into the US. Specific measures include a 25 percent tariff on all goods from Mexico and Canada, and an additional 10 percent on goods from China.
Concerns from Global Trade Leaders
Republican Congressman French Hill believes that Trump's tariff threat is an attempt to get Canada and Mexico to make concessions on border security and the US-Mexico-Canada Trade Agreement. Of course, there are still voices in the market that Trump is just ‘bluffing’, in order to force other countries to take his tactics seriously. It is possible that Trump could backtrack on his decision to raise tariffs as soon as he receives concessions from certain countries.
Many are still taking Trump's tariff plans seriously and expressing concern, including DHL Group CEO Tobias Meyer, who is particularly worried about the tariffs on Mexico. He pointed out that the Mexican economy is closely linked to the US, and many components are shipped from Mexico to US factories, and the tariffs will have an impact on these supply chains. He says, “especially the Mexican economy being so closely tied to the US, it's a big topic what will happen...”
The Shift in Supply Chains
With regard to the trend towards multiple supply chains and de-globalisation, Meyer observes that there has been some ‘nearshoring’ activities between Mexico and the US. Nearshoring refers to the shifting of production lines away from their original offshore outsourcing locations, for example China, to countries closer to the US with friendlier relations. But, more customers are choosing to shift their production lines to Southeast Asia.
Contrary to popular belief, he claims that many DHL customers are shifting their production lines back to China. These customers explain that China offers the most efficient supply chain and significant production capacity.
He remarks, "Many people still believe that the next big thing after China is still China, when it comes to manufacturing."
Uncertain Trade Outlook
As for the trade outlook for 2025, Meyer sees a great deal of uncertainty. In an optimistic scenario, continued US investment and post-election political stability in Europe may boost market confidence.
However, if international support for Ukraine diminishes and new tariffs are imposed—especially on the already fragile European automotive industry—market anxiety is likely to rise. Meyer warns companies that the global trade landscape is constantly changing, and they must be ready for any circumstances that may come their way.
2️⃣ Can Bessent Keep Trump in Check?
Scott Bessent is a seasoned financial executive with extensive experience in global markets. He previously held the position of Chief Investment Officer at Soros Fund Management. The reception to his appointment as the new U.S. Treasury Secretary has been mixed, leading us to consider the possible effects of his nomination.
Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, has suggested that Bessent’s appointment might help stabilize the market, especially regarding inflation management. Let’s take a closer look, at the main elements of the Bessent plan.
Bessent and the " 3-3-3"
First, we have the objective of reducing the fiscal deficit. Wilson quoted Bessent, stating, “Part of the Bessent plan is to get the fiscal deficit down to 3 percent. If we can achieve that, it will be a much more sustainable position.” Wilson suggests that this fiscal policy could lead to lower long-term interest rates, which may, in turn provide a boost to the stock market.
The second objective is to boost economic growth. Bessent aims for a 3% GDP growth in the United States. Wilson believes this goal aligns with the objective of reducing the fiscal deficit, as increased economic growth typically results in higher tax revenues, further aiding deficit reduction.
Third, Bessent plans to increase US crude oil production by 3 million barrels per day to enhance energy independence. This initiative could have significant impact on the global energy market.
Balancing Trump’s Influence?
However, it is important to note that Wilson has pointed out Bessent’s familiarity with financial markets, which may enable him to counterbalance Trump’s policies, particularly regarding interest rates and the fiscal deficit. Nonetheless, skepticism remains about whether Bessent can effectively manage Trump’s influence and whether the new administration can streamline government operations.
Maxine Waters, a senior member of the House Financial Services Committee, has expressed doubts about Bessent’s ability to serve as a counterbalance to Trump. She argues that Bessent’s appointment appears to be driven more by loyalty than by competence, raising concerns that he may prioritize Trump’s directives over the interests of the American public.
During the rally, Bessent has also indicated that Trump possesses a “deep understanding of the financial markets” and wishes to be involved in Federal Reserve Board decisions. He believes Trump has “good reason” to participate in these discussions and will serve as “a voice” in the Fed’s decision-making process.
This raises questions about potential interference with Federal Reserve decisions. If Trump, with Bessent’s assistance, attempts to exert political pressure on the Fed, it could undermine the Fed’s credibility and erode market confidence in the U.S. economy.
In summary, Scott Bessent is an ambitious nominee, but the lack of concrete implementation details in his plan leaves the market uncertain about its feasibility and potential impact. Investors will need to closely monitor Bessent’s policy direction and his interactions with Trump to assess the implications for the market.
3️⃣ The Resurgence of The M&A Market — Is This a Flash in The Pan?
After a prolonged period of quiet, the market has suddenly sprung to life, with recent M&A activity reaching new heights. But the question remains: Is this a genuine market resurgence or just a fleeting flash in the pan?
Key Drivers of Increased M&A Activity
To help us understand this phenomenon, we turn to Doug Braunstein, Vice Chairman at Wells Fargo, who identifies several key factors driving this increased M&A activity.
First, we have a positive economic outlook. Braunstein points out that the market generally expects a soft landing for the economy, with optimism surrounding GDP growth in 2025. This positive outlook lays a solid foundation of confidence for M&A activity.
Next is ample liquidity in capital markets. The debt markets are currently flush with cash, and credit spreads are at multi-year lows, creating a favorable financing environment for businesses. In fact, several debt issuance records have already been set in the capital markets in 2024, demonstrating this ample liquidity.
Another factor is the strong equity markets. Seller company stock prices are performing well, particularly among small and mid-cap companies in the Russell 2000 index. This strong performance makes more companies willing to sell, and high stock prices facilitate smoother acquisition negotiations.
Additionally, buyers have strong financial positions. Buyer companies are experiencing strong stock performance, combined with a favorable financing environment, which provides them with ample capital for acquisitions.
Braunstein also notes the anticipation of regulatory easing. He believes the market expects the new administration to implement policies that promote economic growth and reduce regulation. This alleviates regulatory uncertainty for CEOs, encouraging them to pursue M&A opportunities.
Braunstein asserts that the active M&A market reflects CEOs' confidence in the future economy. He emphasizes that the fundamentals remain strong, and that the market believes the regulatory burden will decrease. This combination indicates that CEOs are optimistic about both economic growth and the regulatory environment, making them more willing to engage in M&A.
He states, “The underlying backdrop for fundamentals remains really strong... the market believes there’s going to be a decrease in the regulatory burden.”
How Well Is Wells Fargo Positioning Itself in M&A?
Turning to Wells Fargo's business development in the M&A market, Braunstein highlights the bank's extensive commercial banking operations, which have allowed it to build long-term relationships with many mid-sized companies. These companies are crucial clients for Wells Fargo's M&A and capital markets businesses, providing a stable revenue stream. However, he acknowledges that Wells Fargo's influence in the large-cap market still needs to be strengthened. He hopes to see the bank participate in more large transactions, such as Quikrete's acquisition of Summit Materials, to showcase its ability to execute complex deals and attract larger corporate clients.
Braunstein emphasizes the importance of establishing a strong presence in both the mid-cap and large-cap markets for Wells Fargo to build a world-class M&A and capital markets business. He believes that the client needs of these two markets differ significantly, necessitating tailored strategies to meet these varying needs.
To conclude, Braunstein believes that the current M&A market activity is not a fluke but rather the result of multiple factors. A positive economic outlook, robust capital market support, and the anticipation of regulatory easing are all boosting CEO confidence in the future economy and driving this M&A resurgence. However, market participants should remain vigilant about potential policy risks and closely monitor the M&A landscape for any signs of a bubble.
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