Welcome to Market Musings – a lighthearted commentary issued from time to time, summarising recent economic data, the drivers of stock and bond markets along with other key global developments.
All-time highs on the US equity markets yet paradoxically we have global foreign direct investment (FDI) plunging during the first half of the year as trade tension rose between US and China. Ladies and gentlemen this is what markets are all about. The ebb and flow of good and bad news in a battle for influence over asset prices. Brokers and traders in the US refer to this as markets climbing the ‘Wall of Worry’. Worry?! Yes indeed, as your investment managers, we do spend a lot of time worrying on your behalf, but rest assured we are watching events closely.
So what are the specifics? FDI into the US declined to $151bn, representing a reduction of 25% from the second half of 2018 to the first half of 2019. During the same period, flows into the EU dropped by 62% to $107bn. This against an increase of flows into China by 5% to $82bn. FDI flows from China to the US peaked at $16bn in 2H of 2016 and have since declined to less than $1.2bn as Chinese firms allocate less and divest their holdings, this, all according to the OECD, the Paris based think tank.
But of course the big news last week was out of the US Federal Reserve as they put the US economy in the operating theatre for its third ‘nip and cut’ of the year amid concerns of a global economic slowdown and pressure from the White House. The interest rate range is now 1.50% -1.75%, which is still low by historical standards, but high relative to other developed markets. And did all those on the committee agree? No, but there was enough support to push through the cuts. And what was the messaging from Chairman Powell? Well probably a pause in the cycle along with the usual sales pitch designed to calm us down as he pointed to some sunny spots including strong US employment, respectable consumer spending and the announcement of a phase 1 US-China trade deal. He is indeed a smooth operator.
Growth rates have not been brilliant (1.1% annualised), but it appears that the decline has been arrested, defying expectations that the single market would suffer a further slowdown due to the trade wars and Brexit uncertainty.
We spoke about Christine Lagarde (incoming ECB chief) at Arbuthnot Latham’s Home Stretch Client Talks around the country (please see our Market Musings dated 14 October 2019) and it appears her narrative of calling on Germany and the Netherlands to ‘use their budget surpluses to fund investments that would assist in stimulating the economy’ has begun. For reference, Germany and the Netherlands accumulated budget surpluses of 2.0% and 1.5% last year. She also defended the negative interest rate policy, suggesting that people should be ‘happier’ to have employment than a higher savings rate. I do like Christine’s style!
And speaking of employment… EU unemployment stood at 6.3% as at September, the lowest reading since 2000. But dispersion exists with Germany at 3.1% and Greece at 16.9%. Youth unemployment continues to trickle downwards registering 14.5% (across the EU28) – an improvement from 15.0% a year earlier!
And finally, the dark horse trade… who would have thought!? France outstripped analysts’ expectations by growing 0.3% in the three months to September. I guess those Gilets Jaunes are now back to work – Incredible!
So 12 December it is, the general election after which we might get Tax Cuts for Christmas or Coal as Stocking Stuffers… it wouldn’t be sensible to grow overly confident, so this co-CIO remains unexcited, but a touch more optimistic on the UK market. It is true no one knows the Brexit outcome but it does not feel like 50/50 anymore. So our Investment Committee has been active. Now, we don’t make outright political calls and we don’t believe in star culture, but we do look at the probabilities and they are shifting. We have been underweight the UK for some time now which has been the correct positioning. But, we have been slowly adjusting portfolios, moving to at-weight (neutral) and that trend continued this last week as we reduced FTSE100 (large cap) in favour of FTSE250 (large to large/mid) and increased our GBP positions. This way, if the UK markets snap back to the upside, we will participate in the rally.
If you’re looking for exciting news out of Japan… you’ve come to the wrong place. The Bank of Japan took no policy action at its recent meeting. But if they did cut interest rates further, the team at S&P Global Ratings, signalled that some of Japan’s regional banks could see their profits drop – which would not be encouraging. We keep saying, watch for the fiscal trigger, because it’s going to happen eventually.
Inflation in Japan was lacklustre, but consumer spending rose ahead of the VAT increases (as expected). Factory output smashed expectations. But let’s move on to bigger fish.
Got to love the announcement out of China…. Trump says the deal is ‘looking great’, but then Chinese officials came out to cast doubts – in a move perhaps to call his bluff?
We have said it again and again, don’t speculate against the Chinese currencies. Last week, the government conducted operations to make it more expensive to bet against the Yuan. Our investment committee wouldn’t take positions against the Chinese currency, we just believe it’s not prudent in these circumstances.
Arbuthnot in the Press
Gregory Perdon, Arbuthnot Latham’s Co-Chief Investment Officer, will be appearing on Bloomberg on Wednesday 6th November to discuss global markets and investment opportunities. You can find him on Bloomberg TV at 8:00 am and Bloomberg Digital Radio at 8:40 am.
We are also delighted to announce that Gregory was included in Citywire Wealth Manager’s Top 100 fund selectors across the UK and Channel Islands. Find out more here.
Finally, it’s your last chance to hear about the New Silk Road
What is the New Silk Road all about? How will the largest infrastructure project of Modern times impact global trade, trends in economic growth and the battle for global hegemony? If you missed Gregory’s New Silk Road roadshow this year, you can watch the TedTalk styled presentation he gave in the main auditoriums at the Dubai International Financial Centre (DIFC) here and you can download the investment report which supported the Talk here.
Co-Chief Investment Officer
Arbuthnot Latham & Co., Limited
Co-Chief Investment Officer
Arbuthnot Latham & Co., Limited