Market Musings -
Around the World in Three Days: Part Three
Travel around the world in just three days to find out from our Co-CIO, Gregory Perdon what the biggest global trends shaping the financial markets are just now. In this short three-part Q&A series, read our thoughts on the five economic blocs which matter most for markets (USA, Europe, UK, China and Japan) and what it means for portfolios.
Q: Japan has an aging and shrinking population, do you think PM Abe’s recent resignation was the nail in the coffin – will Japan be relegated?
It has become fashionable to criticise Japan but despite their aging population, their inability to generate inflation and the loss of their Prime Minister to health issues, we think that doesn’t tell the whole story.
Q: What trends are you seeing and how are they impacting your investment decisions?
Over the past eight years, we have witnessed significant changes and there are good reasons to be optimistic if you are a shareholder in listed Japanese stocks. For example, dividends, share buybacks, capital expenditure and return on equity are all materially higher than pre-Abe and this has been supported by real changes in corporate governance via stewardship programmes. Yes, it’s been slow, but it’s been consistently moving in the right direction and that’s good for Japanese equities.
Q: What about the recent change in PM?
Suga appears to be cut from the same cloth as Abe. Yes, there was a bit of uncertainty when Abe stepped down but it appears that the new leader is even more committed to the principles of quantitative easing, encouraging fiscal spending and engaging in structural reform - all critical ingredients needed for further growth.
Q: What about your thoughts on China?
A lot of ink has been spilt on the origin of the virus, the US-China trade war, Hong Kong… But the main takeaways for me on China at the moment are around the different policy responses to the health crisis and the changing tone with its trading partners.
Q: What has been different about their recent policy responses?
Many central banks around the world have focused on slashing rates and bond buying whereas it appears that the People’s Bank of China (China’s monetary authority) has adopted a less aggressive stance on interest rates and has focused more on initiatives to support banks which in turn support companies in exchange for agreements to keep employment steady. This makes sense because much of the political narrative in China is around preserving social harmony and nothing damages the social fabric more than a spike in unemployment.
Q: What about relationships with its global partners?
China will be one of the only countries to have nailed the V-shaped recovery and President Xi deserves a victory lap but at what cost? It appears that China is slowly alienating many of its trading partners which is a big change. Even countries such as Germany, which tends to prefer political correctness, has joined the chorus expressing disappointment and has launched protectionist campaigns as it relates to technology. Will this develop into a mega trend? Only time will tell but the flight path appears to have been set.
Q: To close off this series, what are the most frequent questions you are receiving from investors or journalists?
My top four right now are:
- Is all this quantitative easing (QE) or monetary stimulus inflationary, yes or no?
- Does gold have more legs to go higher?
- Will negative rates hit the UK?
- Can we still buy FAANG (Facebook, Amazon, Apple, Netflix and Google) at these levels?
QE: Let’s take a step back for a moment and compare the Global Financial Crisis (GFC) with Coronavirus. During the GFC mega QE took place, but most of the fresh money was just hoarded, so the money supply didn’t rise to the degree it was expected. This time, money supply has shocked upwards, but the volumes of transactions and demand has been muted (as measure by the velocity of money), so we are not seeing this upward pressure in prices (inflation) and I don’t suspect we will over the next 12 months. There are also other factors such as lack of wage pressure which is contributing to this dynamic. We are publishing a detailed report on this question later this autumn, so please keep an eye out.
Gold: The Fed announced their new framework at my favourite ski resort, Jackson Hole, and basically we’re looking at lower for longer: low interest rates mean bonds are less attractive against gold because unlike gold, bonds tend to pay a coupon (but those days are numbered). Also, QE is not great for USD, and when USD drops, gold tends to do well. Separately, the gold mining industry has been through a large transformation in recent years focussing on reducing costs, cutting capital expenditure and paying down debt. Having made these changes, gold production costs for most of the industry are some way below current gold prices which has made us bullish on the gold miners.
Negative rates: Some academics argue they are productive because they ease financial conditions, but I am not convinced. If they are such a ‘hole in one’, why didn’t the Fed go negative? My bet is that the BoE passes on negative rates because they know it’s not brilliant for the banking sector and the banks are the plumbing of the economy. Furthermore, there is a reason why the European Central Bank is ‘paying banks to lend’ probably because they appreciate the damage negative rates can have on the income statement.
Can one buy Tech at these levels? Fresh money into FAANG at these levels feels a bit reckless, but equally I wouldn’t feel comfortable shorting them either. That’s the risk of investing in markets, they can stay solvent longer than you, so be careful about betting against the biggest trends.