25.07.2018–Made in America?
The complicated nature of global trade and trade wars in one picture.
Some Wall Street commentators have already declared that the US has won the trade war because the US stock market has gone up and the Chinese market has gone down. It is still a skirmish and no one can predict the outcome of a war after the first shot has been fired. Of course, there may be an element of patriotism here but I would remind people it was Voltaire who once mused that "It is lamentable, that to be a good patriot one must become the enemy of the rest of mankind."
Of course, one could simply conclude that because China does not export USD200bn of goods to the US victory is assured. Once again this fails to take into account subtle nuances like holding up approvals for US companies to do business in China or discouraging Chinese inward tourism in to the US.
At the moment we are effectively playing a game of chicken with both the strong men of the US and China unwilling to back down. The cars are heading closer towards one another but a head on collision is not imminent. There is still plenty of scope to find a face saving compromise that both can take back to their countries with the usual declaration of victory. Assuming stupidity, stubbornness and grandstanding does not get in the way.
We are perhaps now at a crucial crossroads for mankind.
Do we pursue selfish goals to the detriment of all others or take a more magnanimous route?
There is a real danger that sensible reasoned voices are trampled over by bullying tactics. We have seen the movie in Europe before (and it didn’t end well) where mass hypnosis and false truths were used to fool the masses. It is my belief that the average American is hard working, generous and friendly. Sometimes in life you have to stand up and make your voice heard no matter how uncomfortable this is.
If enough people do this than self-serving politicians will be forced to change course.
“Speak softly and carry a big stick” - was US president Theodore Roosevelt’s approach to foreign policy.
We now seem to be in the era of scream loudly and carry a pea shooter.
Guess that’s what happens when you appoint a TV reality star to the position.
It has been said in life you get what you deserve.
With the USA having raised interest rates last night and indicating that 2 more rate hikes are to come this year many are worried about tightening financial conditions- not us.
The US economy is doing better, inflation is close to the Central banks goal and the job market is strong.
These are reasons to celebrate not worry.
With 3 expected rates hikes next year and one the year after this would put the terminal US FED funds rate at 3%.
If we assume inflation runs at 2% than the real interest rate is only 1%.
Hardly restrictive. Given the terminal FED funds rate in previous economic expansions has been around the 6% level we feel pretty confident that the economic expansion will carry on much longer than many expect benefitting risk assets.
Hawks- generally negative people who are always worried about the next impending disaster- typified by the German Central banker who believes self-flagellation and suffering is good for you
Doves- hippy types who believe in free love and always expect the best outcome
Hawkish doves- the former types who have perhaps suffered some kind of personal tragedy to make them a bit more negative
Dovish Hawks- people from the first category who have mellowed with age or discovered recreational drugs.
One of the most common questions I have been asked recently at meetings is will the USD ever stop going down versus the EUR and should I convert my USD to EUR now. My simple answer has been to hang tough as when the move comes it will be vicious and quick. Low and behold the USD has bounced by over 6% versus the EUR in a very short space of time. I am not a currency guru because actually I have never met anyone who can predict currencies consistently. Of course there may be some partial give back of this move (that would be normal and healthy) however I would not be surprised if the USD upsurge continued afterwards.
What lessons can be learned:
Normally the best returns are made when you reach the point of maximum pessimism and self-doubt. These are the times when it pays to be brave and think in contrarian manner.
Sounds easy yet 99% of investors are unable to do it!
Whilst markets have reacted in knee jerk fashion to the recent tariff announcement by the US administration, we prefer a more measured approach and our upbeat view for risk assets remains.
By some calculations the recent tariffs on US50bn in goods sounds large (25% tariff rate) the impact on Chinese GDP will actually be rather minimal actually pretty much close to 0% given that China shipped USD505bn in exports to the US last year.
Nothing has taken effect yet and there is a period of consultation (read negotiation). I expect the end game to effectively result in some tariffs on China being imposed and vice versa for the USA but the overall economic impact to be negligible whilst both sides have a victory to take home to their electorates.
- Peter Ahluwalia
10 years after the financial crisis all major economies are growing in a synchronised way. However, they are hardly on fire given the long recovery period. We expect and need further improvement over the coming years so that the distribution of wealth becomes more even.
Out of the 7.5bn world population over 5bn are located in developing countries (emerging markets) and of this amount over 50% are located in China and India. According to McKinsey Global Institute, annual consumption in emerging markets will rise to a whopping $30 trillion by 2025 compared to $12 trillion in 2010. If wages increase by another USD per annum in developing markets that would effectively produce another USD10bn + of consumer spending power. This is the most powerful investment theme of our time but many are playing it wrong – we will give you a clue - this newly created disposable income is not going to be spent on locally produced washing powder! - Peter Ahluwalia
European GDP growth outpaced that of the USA last year but we seem to be the only ones who noticed it or care. No this is not fake news. There is a significant chance that European GDP growth exceeds 2% this year (PMI`s are already suggesting this). This is not priced in by markets and could cause significant upwards volatility. - Peter Ahluwalia
We know that you are a big picture guy and others take care of the details but we think you might have made a serious mistake.
The name of the Mexican president is Pena Nieto not piñata.
The possible war (trade) with Mexico should perhaps not be taken at face value. Just like the gladiators in the colosseum in ancient Rome kept the mob happy an “easy” target such as Mexico may placate voters, honour election promises and avoid a trade war with China that the US is unlikely to win. - Peter Ahluwalia
Now I don't mean to be offensive here - I have the highest respect for Chihuahuas and the US democratic process. Rather I am referring to the analogy is his bark worse than his bite and does he have limited biting power? Looking at the analogy of Dr Jekyll and Mr Hyde I think we have seen Mr Hyde (bad cop if you like) first and now we are likely to see Dr Jekyll (good cop). Essential to the whole thing is figuring out whether he wants to be a one term or two term President - I am pretty sure it is the latter. This means that there will have to be some delivery on his campaign promises in terms of economic growth and prosperity (fiscal stimulus, deregulation and smaller government ). A small majority in the Senate and a somewhat split Republican Party could very well keep some of the more controversial promises at bay. What about the wall? Well it could be one foot high and made of marshmallows! He didn't go into specifics. - Peter Ahluwalia
The US election is beginning to look like a Hollywood script with 3 players Batman, the Joker and Two face - I let you figure out which is which. Markets which have been bruised by the BREXIT result are having a sense of déjà vu and in the US have been declining since early September. They needn`t worry! We currently see a Clinton victory (remember many have voted early) with her being blocked in Congress and maybe also the Senate – a very market friendly outcome. Even if we are wrong (and we only have a 50% chance of getting it right) than Trump we believe would be reigned in quite hard by the Republican party. No matter what happens things are getting better both on a global economic basis and a corporate profitability level and this is what really matter. Any short term turbulence should thus present an opportunity. - Peter Ahluwalia
Despite the risk aversion we are seeing in markets due to the upcoming FED decision and US elections investors panicking in the short term may be missing the bigger picture. After 5 consecutive quarters of negative earnings growth in the US and 5 years of negative earnings in Europe we seem likely to have positive earnings for both regions this quarter and beyond. This is a big deal along with strengthening manufacturing data (which seems to have been completely ignored) and is likely to be a driver of better market performance going forward. Pre US election jitters should be used as a buying opportunity of selected risk assets. - Peter Ahluwalia
As expected rates were left on hold by the FOMC however it now seems clear that unless we see some substantially weaker data there will be a rate rise in December and markets have been prepared for it. If we carry on at this pace it will take 10 years for interest rates to reach normal levels. In fact the growth projections for the US economy were lowered to below 2% and the future interest rate forecasts were lowered as well. Every central banker knows that it is easier to fight inflation rather than deflation (just look at Japan). Lower for longer is the mantra that will likely continue for the foreseeable future. With the advent of fiscal stimulus which we expect and easy monetary policy inflation will return perhaps in 3-5 years and will be allowed to overshoot. - Peter Ahluwalia
Despite the slight difference of opinion over taxes Apple and the EU have more in common than one might think. Expectations for new features and sales of the upcoming iPhone 7 are low as are expectations of anything happening at the EU leaders summit in the middle of this month. Chance of a significant upside surprise for both is high. - Peter Ahluwalia
“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton
Given the painfully slow progress we have made since the great recession- it has taken 17 years for the Nasdaq, Dow Jones Industrial and S&P 500 to reach simultaneous record highs (the last time was 31st December 1999) and European equities are 40% below their all-time highs my guess is that we haven`t even reached the optimism stage yet.
Recent fund flow data show the 29th consecutive week of outflows from European equities and the 19th week out of 21 weeks that money has flown into bond markets.
My gut instinct tells me that we are probably at the optimistic stage for bond markets (Japan is considering buying foreign bonds which could push us closer to euphoria) and that given subdued optimism for equity markets we are probably in the greatest secular bull market of my career.
If I am right this means that we are not even at the halfway stage of this up cycle and the trend (there will be some dips along the way) will be firmly upwards over the next decade. - Peter Ahluwalia
Graph: Euphoric fund flows to assets tied to 'zero-rate' expectations
Source: BofAML Global Investment Strategy, EPFR Global
A fishing guide dropped a man and a woman off to fish two different bits of a river. When he returned for hours later he found the man was already two miles downstream whilst the woman had hardly moved at all! You maybe struggling to make the financial connection?
Women are more thorough and cautious then men.
A rate hike in the US is unlikely in our opinion until the FED funds futures contract prices in a 75% - 100% probability of a rate hike ie. they do not want to surprise the market. At this point in time a 40% probability for September is priced in so unless this changes drastically we expect no hike. Interestingly June 2017 has close to a 100% probability. - Peter Ahluwalia
They say that absolute power corrupts absolutely.
When looking at investment markets it important to be wary of absolutes and extremes.
Two months after BREXIT Armageddon didn`t happen for either the UK or Europe and the for horseman of the apocolpyse did not arrive. Conversely the UK did not overnight turn into the land of milk and honey.
The sharp fall in GBP has increased shopping tourism (don`t expect tax revenue to increase as most will be doing their VAT refunds). Companies which export mainly in the FTSE100 index have benefitted – just look at stocks like Rio Tinto and Burberry. On the flip side of the coin some major projects planned by companies have been put on hold, the UK Government debt level is rising and cost of imported goods has risen.
Basically we are pretty much where we were before BREXIT (it hasn`t actually really happened yet) except with a cheaper currency which has helped take the sting out of the BREXIT tail.
European data just released (purchasing managers index) showed signs of expansion with limited BREXIT effect. - Peter Ahluwalia
I was putting my seven year old daughter to bed and out of the darkness came two questions:
1. What is a soul - I am not going to get into this one here!
2. How come there are poor people- before I could answer this morphed into why do children in some of these poor countries die? I tried to explain that the world is not a fair place and in these countries medicines we take for granted are not available whilst assuring her that where we live these kind of things don't happen. I then tried to explain that some of these children don't even have toys and perhaps it would be a nice idea for her to give some of her old ones away. Her reaction was to keep all of the toys she had since she was a baby and not give anything up.
Looking at the state of global politics ( I won't name countries) but we seem to be moving towards a me type of philosophy. Perhaps if we were all less inward looking maybe just maybe the world might be a better place. - Peter Ahluwalia
European stocks see USD2.8bn in net outflows for the week to August 17th marking the 28th straight week of redemptions and the longest losing streak ever.
Money is going to emerging market stocks where allocations are neat 2 year high but the majority is still going to bonds.
Guess nobody wants to buy low and sell high! - Peter Ahluwalia
Having just renewed my UK passport at Her Majesty`s Passport Office the cover clearly says at the top European Union.
Will Mr. Juncker (or friends) be waiting at passport control with a red pen to cross this out. Will the UK recall all passports and have to replace them. Why are the issuing passports with European Union on them – because the UK is still a fully-fledged member and is likely to be so for quite a while.
We had the vote and now we have the mess. It will take longer than many think to clear up! - Peter Ahluwalia
Nach dem Entscheid des britischen Stimmvolkes zum Austritt aus der EU (Brexit) geht die Angst in London um.
Die Finanzmetropole fürchtet um Tausende von Arbeitsplätzen und dies nicht unbegründet. Dabei dient die Schweiz als negatives Beispiel, was auf London zukommen könnte. Der Binnenmarkt der Europäischen Union erlaubt es Aussenstehenden wie der Schweiz nicht, aktive Finanzdienstleistungen anzubieten. Nun gibt es zahlreiche Exponenten, die bei einer Finanzdienstleistung immer von einem Aktivismus ausgehen und passive Dienstleistung per se gar nicht existieren. Zumindest sind Dienstleistungen im möglichen Graubereich gefährlich und können zu drakonischen Strafen führen.
Schweizer Banken lösen dieses Problem, indem sie Onshore (vor Ort) ihre Finanzdienstleistungen anbieten; sei dies in London, Luxembourg oder Frankfurt. Hauptsache aus einer Metropole innerhalb der Europäischen Union. Den Finanzdienstleistern, die bisher aus London operieren, droht also als Aussenstehender den gleichen Spielregeln wie die Schweizer Finanzinstitute zu unterstehen. Und ihre Lösung könnte Dublin heissen. Nicht um sonst ist Dublin der europäische Hauptsitz von amerikanischen Firmen wie Google, Facebook, Dell, Microsoft, Intel, Apple, Pfizer oder Johnson & Johnson. Sie profitieren von drei Vorteilen, die keine andere europäische Metropole bieten kann:
1.) Englische Landessprache
2.) Mitglied der Europäischen Union und damit uneingeschränkten Zugang zum europäischen Binnenmarkt
3.) Tiefste Unternehmenssteuer aller OECD-Länder (12.5%)
Dublin könnte für die Finanzdienstleister aus London folglich eine mögliche Alternative sein, um weiter uneingeschränkt ihre Finanzdienstleistungen anbieten zu können. - Ralph Weidenmann
USD 17.5trillion in govt debt now carries a negative yield. Likely to increase as Bank of England is forced to cut interest rates. Swiss 30 year bond yield has now gone negative. - Peter Ahluwahlia
Deutsche Bank and Credit Suisse likely to be from Eurostoxx 50. DB is now only 1/10th the size of JP Morgan. - Peter Ahluwahlia
European equities on sale due to BREXIT and global growth worries. Valuations now at nonsensical levels even for European companies that do very little European business. The baby has really been thrown out with the bathwater. - Peter Ahluwahlia
We have a political crisis aggravated by a lack of leadership crisis. All the work is once again down to central banks. - Peter Ahluwahlia