Friday, 8th of March 2019
“Kites rise highest against the wind, not with it”
– Winston Churchill
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Stock markets have fallen back this week, with US indices down every day so far. For the S&P 500, it is only the second time weekly returns have been negative since December. The issues remain the same: a global growth slowdown (led by China and Europe), an aging US expansion, and uncertainty over global trade and Brexit. But they weigh increasingly heavily on sentiment. According to Bank of America’s most recent investor survey, the gloom has translated into the highest equity fund cash holdings since 2009 with a third of managers now predicting that the S&P 500 has peaked in this cycle. Bearishness is fast becoming a herd mentality, with career risk influencing forecasts and the crowd offering a comforting embrace. However, we believe that investor concerns are overdone given the underlying strength of the US economy, a cyclical upswing in several large emerging markets like Brazil, and accommodative central banks around the world. In the US, slower growth does not signal that a recession is imminent: it was previously unsustainable after an aggressive fiscal stimulus, while the Fed has put the brakes on any future rate hikes and data shows productivity accelerating at the fastest pace since 2010. In Europe on Thursday, a downbeat ECB announced another round of ultra-cheap financing for European banks (a stimulus dubbed the TLTRO) pumping liquidity into markets that ride high on the stuff. Meanwhile, the US and China are edging towards a trade deal that would give a boost to the latter’s faltering economy. Finally, with so many bears stalking the wilderness there must be few bulls left to convert – and even fewer to precipitate in any impending market crash; that said, there are no straight lines in finance and volatility is to be expected. Use protection.
New data out this week shows that the US trade deficit for 2018 reached $621bn in December. This is a 12.5% rise to a 10-year high and an embarrassing outcome for President Trump. In 2016, the Donald made addressing the country’s persistent trade deficits a central pillar of his election campaign and since then it has become a personal mission. He has expended heaps of political capital at home and abroad renegotiating a host of trade agreements struck by previous administrations and has started a damaging trade war with China to narrow the deficit. However, sweeping tax cuts approved at the end of 2017 have boosted demand more than de-regulation, job creation and investment have lifted supply. This has forced companies and households to look abroad for goods and services, while slower growth in Europe and China has left exporters feeling the squeeze. Disappointing export orders reported by US companies suggests little room for recovery in the early part of 2019. This will likely dent GDP for the year. In theory, a wider trade deficit driven by domestic success should not be cause for too many sleepless nights, but political and economic calculus are rarely aligned.
Despite the wider US trade deficit, and its strong run in recent years, we expect the greenback to stay firm or even strengthen in coming months. Economics textbooks invariably perpetuate the myth that deficits are self-correcting because they precipitate domestic currency depreciation which in turn boosts a country’s export competitiveness. The logic goes that domestic firms must transact in foreign currencies to purchase imports and this creates additional demand for foreign currencies and supply of domestic currency in turn. Well, maybe those effects dominate in the long-run. But, to paraphrase Keynes, by then we may all be dead. In the interim, US growth, the US interest rate differential with other major currencies, and the dollar’s safe haven status should attract carry-hungry and risk-averse investors and drive the USD higher. This will add to Trump’s frustration – expect angry tweets.
Brexit day is fast approaching, and negotiators remain at loggerheads over the so-called Irish backstop: a form of customs union with regulatory cooperation where the UK and EU will end up if, after the transition period, no trade deal sufficiently deep to eliminate the border in Ireland has been reached. UK MPs are unhappy because there is no mechanism for the country to leave the backstop unilaterally and PM May suffered a heavy defeat when they voted on her plan in December. The EU, for its part, is hoping that the UK eventually settles for the deal on the table rather than face a no deal exit. On Tuesday, the UK Parliament will vote again on the Withdrawal Agreement (including any changes that the UK Attorney General manages to bring back from Brussels). If it fails to pass, another vote will be held the next day on whether to delay Brexit or leave with no deal. At this point, a delay seems likely with some form of May’s deal eventually passing a few months from now, probably with the grudging support of Brexiteers worried about a softer exit becoming policy. The UK economy and sterling are likely to bounce if and when any deal is signed while UK stocks, which are currently undervalued, should also benefit once the impact of any exchange rate moves has been fully absorbed. Caution is warranted, however, given the potential for the Brexit process to unravel. You have been warned.
In March's news roundup, we look at some of the big deals and trends in the London office market, which has seen a very active month driven by the return of private equity (PE) buyers seeking to take advantage of discounted pricing. We highlight some of the biggest deals and what these mean for the capital.
As families expand, diverse perspectives, voices, and expectations emerge. Each generation brings unique dynamics and values, shaping the family business's future. We offer three key considerations for grooming future leaders within the family business context.
In this market update, we discuss the strength of the equity rally this year, the end of ultra-easy monetary exceptionalism in Japan, and the investment case for gold.