Global Trade, Local Groceries: Brunner’s Investment Lens

In this episode, Brunner Investment Trust’s Julian Bishop and James Ashworth unpack the economic and political forces shaping global markets – from US tariffs and trade tensions to the rationale behind one of their 2025 portfolio additions, Tesco. Tune in for a discussion on protectionism, inflation, and why cash flow still reigns supreme

Julian Bishop: Hello and welcome to the podcast from the Brunner Investment Trust. I’m Julian Bishop, co-lead manager, and I am joined today by James Ashworth.

James Ashworth: Hello, Julian.

JB: James, my colleague, the Joe Rogan of investments, as I like to call him.

JA: Is this a compliment or a criticism?

JB: Whatever it is, it’s completely untrue. So, we’re here to talk investment matters; first a bit about what’s happening in the United States and then about one of the new investments for the Trust. I’ve just spent a couple of weeks in New York, meeting probably 50 companies, and a topic on everybody’s mind at the moment is tariffs, so, ‘Liberation Day’ in April, when Trump announced very high and wide-ranging tariffs on all sorts of goods imported into the United States, put the fear of God into markets and businesses’ modern supply chains. The US imports an awful lot of products from overseas and increasingly the Trump administration sees this as a problem. A couple of books give a good insight into the administration’s thought process in concluding that the US trade deficit is bad, that reliance on imports from China in particular, is bad – the first brought now Vice President JD Vance to prominence called Hillbilly Elegy, which is the first time he.

JA: And to Netflix fame as well; it was later turned into a film.

JB: I’ve not seen it, but it’s a good read; he’s a very clever man and Hillbilly Elegy is essentially his autobiography growing up in Ohio, in the Appalachian Mountains – the Rust Belt of the United States. So, he grew up amongst the losers from globalisation, the deindustrialisation of America – at least that’s how it is seen – an area lacking decent jobs for working-class men. An area where diseases of despair, you know, opioid addiction, etc. are common. There’s been a hollowing out of manufacturing, coal mining as well, where there’s a resentment of elites, and Vance himself was brought up by an addict mother, Marva. No father present, but he did very well academically, against the odds, got into law school and now he’s Vice President. This background explains why he’s such an asset, to MAGA, but also explains the backdrop that exists today. Another book I was advised to read, and James, I know you’ve read it too, is by a man called Robert Lighthizer, called No Trade Is Free. Lighthizer was Trump’s trade representative during his first term, and somebody said read this book to help you understand the administration’s trade policy; James, do you want to talk us through it?

JA: Yeah, it’s important in understanding the actions that Trump has taken. Around Liberation Day there were three decision makers driving Trump’s decision to impose tariffs. Peter Navarro, a well-known China hawk, Howard Lutnick, and, Jameson Greer, the US Trade Representative. Greer was the Chief of Staff to Robert Lighthizer, so we get an insight, into how he thinks about trade, dismantling conventional wisdom about trade, arguing manufacturing jobs are critical to America’s long-term prosperity. For many high school leavers, manufacturing jobs paying $25, $30, $35 an hour, are the best jobs they can get – they’re the highest paid and the stickiest, and the loss of these jobs in Rust Belt communities has led to hollowed-out communities. The workers who had these jobs can’t be retrained as software engineers, and the services jobs that they might get instead are low-paid and insecure. His book, subtitled ‘Taking on China and helping America’s workers’, comes from an American first perspective; he argues that China is the US’s major geopolitical adversary and that it doesn’t make sense to open its market and rely on China, worrying it is monopolising key capabilities like batteries, which will be critical for future generations. By imposing tariffs, Trump planned to level the playing field.

JB: It’s interesting, if you believe America and China are geopolitical adversaries, they’re incredibly reliant upon each other in a way that certainly wasn’t the case in the Cold War. The book made some good points, but it’s slightly protectionist and ignores the role that imported goods have in reducing prices for American consumers.

JA: Stretching back to my training as an economist David Ricardo wrote the theory of comparative advantage, and the gains from trade 200 years ago; people know that trade is generally a good thing.

JB: Yeah.

JA: Although there can be winners and losers within that trading exchange; I guess that’s really the issue that lots of American politicians are worried about.

JB: Economists tend to look at the sort of net aggregate gain, but that ignores the human costs on the losing side; Liverpool in the 1980s had high unemployment and deindustrialisation while the Southeast was flourishing. There’s a focus on trade deficits, and America does import more than it exports, but there’s various views on whether bilateral trade defecits actually matter.

JA: Yeah, there’s an apocryphal story of a US politician going to see an amazing magic factory. It takes in all the things the US produces really well – aircraft, processed plastic, wheat, corn, and spits out iPhones, cheap TVs, cheap plastic toys; the politician thinks, wow, this factory will solve all our problems, but it turned out not to be a factory, but a port. The US is trading the things that it does best for cheap imported goods. The gains from trade are enormous and exist even if one country is better at everything than another country. Ricardo’s original example had a very simple model of two countries, England and Portugal, and two goods, cloth and wine. Portugal was better at producing both cloth and wine. It needed less labour to produce cloth than England did, and less labour to produce wine than England did. But Portugal was relatively better at producing wine than cloth, and England was relatively better at producing cloth than wine. He showed, mathematically, there were still gains to be had from trade to happen, even though Portugal was better at producing both goods. There’s a clear parallel here where China has very low labour costs and highly automated factories; it can produce iPhones, and other goods, much cheaper than the US, but there’ll be something that the US is relatively better at producing. Nobel Prize winner, Paul Samuelson, said this result is undeniably true, but not obvious even to very clever people, and I think that’s a great summary of where we are, right? We worry about trade deficits, we worry about how cheap it is for China to produce goods, but this proof from over 200 years ago, shows ultimately that doesn’t matter, there’s something that you’ll be relatively good at – my wife is better at cooking than me, and she’s better at washing up, but we’ll share those tasks, I am relatively better at washing up, and she’s relatively better at cooking, so … there’s gains from trade and specialisation, it’s one of the few free lunches in economics.

JB: Yes, but that’s sort of under threat by tariffs and uncertainty; it looks as though tariffs will settle at a lower level and markets are assuming that.

JA: With Brunner in mind, what do we expect, and do we have many businesses directly affected by tariffs?

JB: Surprisingly few companies we hold physically import into the United States, we have a lot of service-related businesses, software businesses and so on, but we do have Amazon, and a lot of what they sell is imported. Elsewhere, Asa Abloy springs to mind.

JA: This is the Swedish locks and entry systems business.

JB: Exactly, they do quite a lot of business in the United States and import from Mexico, but their peers have a similar manufacturing footprint, and would pass tariffs through to the consumer in the form of higher prices.

JA: So, is the net result of all these tariffs inflationary for the consumer?

JB: Yeah, it’s hard to conclude anything but that – a seemingly well-intentioned policy, but I think it’s indisputable that the price of goods will go up, reducing living standards for a lot of ordinary Americans.

JA: Maybe we should talk about Tesco.

JB: OK. We’re always looking for a good equity outcome; equities exist because they generate cash, and they can return it to shareholders. We’re always happy to consider more mature businesses where we think the cash flow yield is high, safe, growing and everone knows Tesco as the UK’s leading grocer. It has about 28% market share, twice the next largest player, normally Sainsburys. There’s real benefit of scale in this industry both in procurement and from leveraging corporate overheads, so Tesco consistently has the highest margins in the sector at about 4% – 1% higher than Sainsburys – and from 28% market share, makes 50% of all profits in the UK grocery market.

JA: The UK grocery market has changed a lot in the last few years with the rise of the discounters, Aldi and Lidl, as well as others like Asda and Morrisons; what’s the competitive front for Tesco?

JB: We generally avoid companies in really competitive markets, but I think it’s a stable environment. You’re right, Aldi and Lidl have been winning share, and Asda and Morrisons have become consistent strugglers. Owned by private equity, highly indebted, and unable to buy market share because of their low margins, retailers do get into death spirals of this nature. So that’s part of the argument for owning, but the market is growing and since COVID people are eating out less because of the spiralling costs; Tesco’s Finest Range is sort of, you know, posh, ready meals, essentially…

JA: Dining out at home, premium meals, absolutely.

JB: Exactly, it’s going really, really strongly – a reasonably mature business, stable competitive environment and some growth. When we bought in April, if you looked at the trailing 12-month free cash they generated – essentially what they could pay as a dividend if they decided to distribute 100% – it was a 8% yield.

JA: So, 8% of the current share price could be returned to shareholders each year, if the company decided not to increase investment in the business?

JB: Exactly; well, after capital expenditure.

JA: OK, so they’re already growing, but they need to keep the stalls fresh, to keep it an attractive place to shop and 8% yield is after this expenditure.

JB: Exactly. It’s what’s available to distribute to shareholders – half comes back as a dividend, and the rest in buybacks – a sort of dividend reinvested. If the number of shares between which the profits of the company is divided, goes down, the profit per share for remaining owners goes up commensurately. So, yeah, a good port in a storm.

JA: The timing was interesting – it is a business we know well, and have watched for a long period of time. What was the catalyst to do something in April? We talked about tariff concerns, about uncertainty, and the stock market did fall quite markedly when Tesco was a bit of a safe haven. But it had its own worries around competition, so maybe touch on what the opportunity was at the moment we bought it.

JB: So, there was a bit of a sell-off in Tesco shares because Asda announced that they were going to be investing in price; take prices down…

JA: Yeah, so cutting costs.

JB: So, fear of a price war. Our view was Asda was in no position to reduce prices, because they’re just too close to being a lossmaker, and whatever they did to win back market share, probably wouldn’t have much impact on Tesco’s business which was resilient and in a good position. 8% cash yield when we bought in is why we buy shares – for the cash that businesses, can return to shareholders.

JA: It’s a great summary of a type of investment we might look for in an all-weather portfolio. We have some of these businesses – more mature, very defensive, good cash yield to shareholders. Good ‘sleep at night’ business, with some positive dynamic with Asda and Morrisons struggling, and a little bit more growth than in recent years, with some inflation and volume growth. That’s a good summary. So, it’s a business where we get jam today. I like those types of businesses. Yeah, so maybe we’ll wrap it up there then.

JB: Yeah, I think we’re done here. Thanks for listening, everyone. I’m Julian Bishop, joined by James Ashworth. For further information, please visit Brunner.co.uk. Thanks again and see you next time.

Inside Brunner Investment Trust: A Conversation with Julian Bishop

What are the stories behind The Brunner Investment Trust’s portfolio?

Stock Stories brings you closer to the heart of our investment strategy. In these short videos, Co-lead portfolio manager Julian Bishop discusses Brunner’s top holdings and how they contribute to our overall strategic objectives of delivering growing dividends and capital growth for our shareholders by investing in a diversified portfolio of high-quality companies from around the world.

Global Trade, Local Groceries: Brunner’s Investment Lens