As the first half
limps over the line, dragging us behind it, Ciaran Mulhall of our Global Total
Return Fund considers home and how the US macro scene will evolve in the second
half and beyond. Markets as we know are a discounting mechanism, so what we see
now is reflecting an endlessly rebased future.
"Back at home base this week looking out at Dublin bay it occurs to me, while watching the reality TV show that is the G20 meeting in Japan (starring Donald Trump of course), that US voters next year might well pivot back to less drama and less unpredictability.
Do the Democrats have a chance?
Trump’s label for
Democratic front runner Joe Biden is "Sleepy Joe” – I wonder by this time next
year if voters will be craving a world where politics doesn’t seem to play such
a dominant role, so that "sleepy” might be a positive not a negative.
Outside of periods of armed conflict most Americans historically took relativity little interest in what went on in Washington. While it was a convenient scapegoat for their ills, in reality it played a small role in their daily lives (good or bad). They tended to become more engaged around the election cycle, but that would generally be it.
Although it has been coming for a long time (primarily driven by social media, but also US cable news) rising engagement, across the political spectrum, has again increased dramatically since 2016. We may well reach a peak in electoral engagement and to some extent the polarization of the US political system, with next year’s presidential election.
Assuming the Democrats decide to put forward a "moderate”, our sense from this distance is that Trump is facing an uphill challenge in terms of being re-elected next year.
It doesn’t have to be Joe Biden, but needs to be someone whose beliefs around healthcare and immigration are closer to the middle, than some of the more extreme left views that received a lot of attention at this week’s Democratic TV debates.
The core Trump vote base - what was delivered, and how?
While Trump will
likely hold on to his diehard base – the most generous measure of which is
about 35% of US voters – that still leaves a strong middle ground of about 15%
of Americans (who voted for Trump in 2016) who seem to be growing weary of the
helter-skelter of the Trump White House.
Interestingly this seems to be driven in part by the business community, who while delighted with last year’s tax cuts and some reduction in post global financial crisis regulation burden – have become increasingly concerned by the role which trade wars have played in the Trump agenda.
The focus is China, but there is also concern at how it was misused to leverage Mexico, to increase its military presence on its southern border, in an attempt to reduce the migrant flows reaching the US.
The impact of Trump's actions on business investment
Looking at this week’s
final adjusted reading of Q1 US GDP, it is obvious that business investment has
been slowing since H2 last year – right around the time when Trump turned his
attention to China. Creating a dual impact with the precautionary rises in US
interest rates, which we now know were not needed to quell inflation.
The business community needed to see some visibility on US trade policy, before being able to commit resources. The decision takers in the real economy want to be reassured that this period of uncertainly won’t tip the US back into recession. We don’t see this as a high risk at the moment, but if I was running a mid-sized US service based business, I am not sure if I would be quite ready to open that new office just yet.
After another torrid week in the markets and disruptive Twitter feeds, Ciaran Mulhall shares his views from the Far East, for a different perspective.
Writing this week from Singapore – one of Asia’s financial and economic hubs - walking around the National Museum of Singapore this afternoon, I am struck by how focused the Asian economies remain on the promotion of economic growth. Singapore like most countries in the region is playing the long game and has been for many decades building up top class infrastructure, improving communications and promoting the quality of life of its inhabitants – this is in stark contrast to Europe and the United States, where we seem to have stepped into the Twilight Zone.
Late Thursday night, the US President announced, to the surprise of most if not all his closest advisors, that the US will be imposing 5% (and rising) tariffs on imports from Mexico. This is a response to what the US President feels is the lack of action by Mexico, in stemming the flow of migrants coming from Central America through Mexico and arriving at the US border.
While we can debate the scale of the current problem at the US southern border, there is no doubt that the numbers arriving at the border have picked up in recent months. Partly we suspect driven by Trump’s own words about stopping the flow (which possibly leads to a rush to ‘beat the ban’) and partly as a result of the continued deterioration in economic conditions on the ground, particularly in El Salvador, Guatemala and Honduras.
Equally we can say that it has been in Mexico’s interest, not to add to its own problems, but to let the migrant flow from Central America move easily (and naturally) through Mexico and on to the US.
So does the US President have a point? He might have half a case, if the US unemployment rate was at 8% (not 3.6%) and US companies weren’t reporting a shortage of both skilled and more recently even unskilled workers.
For nearly a year now, the number of open jobs each month has been higher than the number of people looking for work - the first time that’s happened since the Department of Labour began tracking job turnover two decades ago. At the end of March, the US economy had 7.5 million unfilled vacancies, but only 6.5 million people were looking for work, according to data released last month by the US Department of Labour.
The hardest-to-find workers are no longer computer engineers (though they are still very much in demand). They are home health care aides, restaurant workers, and hotel staff. The shift is happening because more and more Americans are going to college and taking professional jobs, while working-class baby boomers are retiring en-masse.
Granted the work force participation rate is nowhere near as high as the job vacancies suggest, although it too is rising. In any event that will include some who can elect to participate in the labour market or not, never the easiest group to entice into work.
The simplest answer is that he is playing politics – once more blaming migrant workers for the ills of Middle America. Be it security fears or wider cultural ones or about depressed wage rates, which all worked well for him in 2016 and despite playing poorly in last year’s Mid Term elections (we all remember Trump sending troops to the border two weeks before the election), he obviously feels this is a card worth playing.
He has also found both the trade deal with Mexico and any action on immigration, either internal or external, hopelessly mired in the venomous partisan stand-off with the Democrats. It has become clear that they see obstruction as the best political game too, or fear that any sign of acting in the National interest will lead to an onslaught from their hard core base, pulled inevitably to the extremes, by a very wide primary field of their own, who are frantically competing for media attention by growing ever more absurd. I wonder where they learnt that trick?
So Trump is playing the shortest of short games here – risking the long term growth prospects of the US economy for a political agenda, that if the Mid Terms are anything to go by, most likely won’t even prove to be that successful.
Global equity markets on Friday took a dim view of the announcement (most major markets were down circa 1%), although it was (yet again) a shortened week in the markets. Volatility has been oddly relatively docile under the battering from the stalled China trade talks, at least compared to last December, but we are not sure how long that will hold, in the face of a feeling of growing chaos.
As we meet potential investors in both Singapore and Hong Kong in the coming days, we continue to articulate a cautious stance. It may be too early to talk of the summer lull, but most major asset managers seem to be sitting on their hands already. If they end up doing so for the long summer we see no reason at present, to step in to the markets aggressively, either.
Solus Capital Partners Ltd
It has been a baffling and perhaps not that comfortable a week for investors again, as big market movements seem unrelated to actual events; rather more linked to media stories. Ciaran Mulhall considers that and how at times like this, outperformance comes from the more technical and often invisible skills a fund manager must bring to bear on your behalf. Centred on portfolio construction and risk management issues, he explains why sometimes, even when the sun is shining, we carry an umbrella; that’s our role.
"This week we continue to grapple with managing money with the backdrop of an American president conducting both trade (Chinese and European tariffs, threatened or otherwise) and foreign policy (potential armed conflict with Iran) through the medium of Twitter.
While Donald Trump’s Twitter feed has (for good or ill) been part of our lives for the last two or three years, we would point out that geo-politics may now play an even greater role in the daily performance of asset prices. That is because the market seems broadly comfortable that global interest rates will stay subdued for the foreseeable future (with a possible cut from the Federal Reserve if the economic data were to weaken). This largely eliminates the markets’ normal fixation with the twists and turns in yields and inflation, for a while.
Having underperformed the market in sunny March and April, the Global Total Return Fund entered May with our core portfolio well hedged with downside protection – this in turn has led to some welcome outperformance so far in the storms of May, but we continue to grapple with what comes next.
Will the market look past the US China trade war and find some comfort that global Central Banks have investors’ backs, or are we heading for a rerun of the 2019 Q4 selloff, as the market moves to price in a further slowing down in global growth expectations?
While we ponder these ideas this weekend, I am also reminded of how important investor psychology is to what we as fund managers do day in, day out.
Something that we have seldom mentioned in terms of how we approach investing, is that ideas, must be carefully linked to risk management and portfolio diversification, in generating outperformance. It’s the checks and balances that let you achieve your aim, and which we seek to provide.
So risk management and how we construct our portfolios play a very important role in our investment returns.
Picture summarising article on durable portfolio construction – see rest of article here.
So to bring it back to Mr. Trump and his Twitter feed – while the risks around a global trade war have increased and there seems at least some chance that we will get an armed conflict over Iran – the likelihood of these events having a material long term effect on our returns, comes alongside how competent our risk management is and how we construct our multi asset portfolio.
So rather than speculating too much on those, when the market seems conflicted, volatile and not making a lot of sense, we focus on the basics, on having an all-weather performance and keeping a close eye on risk.”
Ciaran Mulhall, Solus Capital Partners Ltd
This week Ciaran Mulhall looks at two key areas for our Global Total Return Fund and how green shoots are starting to show in those economies. He notes an interesting asymmetry in how markets have reacted, running ahead of the Asian promise but perhaps lagging behind the European delivery.
While the most recent China equity market performance has been somewhat disappointing, after a brisk start to the year, we remain committed to our core long position. Chinese policymakers confirmed in mid-March, at the annual National People's Congress meeting, that they will provide meaningful fiscal stimulus in 2019.
The combination of a VAT tax cut and a boost to infrastructure spending (via an increased quota for financing through a "special bond" issuance) should add up to roughly a 2 percentage point widening in China's "augmented fiscal deficit" this year. This fiscal stimulus is now beginning to show up in the underlying macro-economic data, particularly with improvements in both the public and private measures of business activity.
On the monetary policy side of the ledger, the recent effective easing is probably more in the later stages of the process, although we still expect the bank reserve requirement ratio to be brought down further this year. Housing finance policies may also be loosened in certain Chinese cities but probably not nationwide.
All in, Chinese government stimulus (fiscal & monetary) perhaps looks modest compared to the response following the 2015 downturn and certainly compared to 2009. How effectively this stimulus will now be transmitted into the real economy remains to be seen, particularly with respect to private companies, which still face tight credit conditions.
But it is also very important to remind ourselves (as the high profile China bears continue to bang their drums to tell us otherwise) that the goal of stimulus is also more modest this time, so at 6-6.5% real GDP growth in 2019, versus 8% in 2009 and 7% in 2015. Policymakers are also not contending with the equity/forex market volatility and capital outflows, which they had to react to in 2015.
The external backdrop for China is also likely to improve as major developed markets begin to grow faster in the second half of the year. This should help the export backdrop for Emerging Asia to improve from anaemic to merely soft. The geo-politics around the Pacific looks a little less hostile too, but that as ever remains unpredictable.
That brings us on nicely to our other core long position, in Germany, through the DAX, where just when you thought that the U.S. economy was the only game in town, Europe delivered a nice one-two punch for our case, last Tuesday.
Not only did euro-zone GDP growth numbers beat expectations, but Germany’s Consumer Price Index reported 2.1% year on year growth -- above both market expectations and of course the ECB’s policy target.
One can imagine Mario Draghi (Head of the ECB) heaving a sigh of relief as that key European data hit the tape. Not only did growth outperform expectations (including in Italy!), but that German inflation number was surprisingly perky. An upward tilt to the nominal growth trajectory would be a welcome development in Europe, and raises an interesting question. With U.S. equities at all-time highs but the Euro STOXX 600 languishing below levels seen last year (and 2015...and 2007...and 2000), is now the time to rotate into Europe and elsewhere in the world?
While it is the case that a few segments of the U.S. market have run ahead of themselves, the value proposition for many other markets does still remain littered with pitfalls – selection as always, will still be key.
Having discussed a few weeks back our preference for European risk assets later this year – that point might actually be coming sooner than we thought.
RJMG Asset Management Ltd
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