Friday, 26th of April 2019
“Let China sleep; when she wakes, she will shake the world.”
– Napoleon Bonaparte
________________________________________
Welcome back from the Easter weekend break and, if you also call Europe home, we hope you enjoyed the balmy spring weather. Easter Sunday itself was tarnished by yet another appalling terrorist incident, this time in Buddhist-majority Sri Lanka. More than 250 people have died so far in what was a highly sophisticated attack. Bombs were detonated simultaneously across the capital city of Columbo, hitting international hotels and churches crowded with worshippers to maximise the sectarian carnage. Islamic State were quick to claim responsibility through their Amaq News Agency outlet, releasing images purporting to show the attackers swearing allegiance to IS leader Abu Bakr al-Baghdadi. With the physical caliphate in Iraq and Syria having been defeated by US and allied forces, the Sri Lanka bombings are a reminder of the organisation’s enduring strength and global reach.
Markets have been trending higher for the past two weeks, with the S&P 500 hitting a new cycle peak on Wednesday. European stocks are yet to climb so high but have rallied strongly since the sell-off in Q4 and despite concerns about growth in core countries and the ongoing Brexit uncertainty. Crucially, some more positive data out of China has allayed fears that 2019 would witness a hard landing for the Middle Kingdom, with negative consequences well beyond the country’s borders. Meanwhile, quarterly earnings season is well underway with most of the big US banks and tech companies having already reported strong results. Among banking giants, JP Morgan remains top dog popping +4.7% on the news that its core consumer and community banking businesses beat consensus growth estimates in Q1. For its major rivals, less sustainable revenue sources such as fees from investment banking and trading explain their success with most down on results day. Nevertheless, the overall picture from financials was one of recovery, supported by healthy US consumers. In the tech sector, Facebook (+5.9%), Twitter (+15.6%) and Microsoft (+3.3%) all managed to beat expectations for Q1 sales and earnings. Valuation multiples often appear stretched relative to those of other sectors, but consistently impressive earnings do seem to justify the premium. Offsetting the positive news for tech and financials has been a slump in industrials after manufacturing conglomerate 3M (-12.9%) cut guidance citing slower growth in China and logistics company UPS (-8.1%) reported weak sales and earnings growth. However, disappointing results from cyclicals merely confirms what we already know: that a global economic slowdown and a tough international trade environment are weighing on growth and export-dependent sectors.
Overall, therefore, earnings season has been encouraging (so far). The string of positive results chime with our view that fears of an imminent US recession were overdone heading into the New Year. The latest GDP print shows the US growing at +3.2% Q-on-Q in Q1 which is much higher than the growth rate of any other large developed economy. At the same time, unemployment is at its lowest level since the 1960s and a programme of sweeping tax cuts and de-regulation has spurred an energy sector boom in Texas and elsewhere. Internationally, the US and China are edging closer to a deal to end the damaging Trade War that they have been fighting since early 2018 and, although enforcement remains a sticking-point, an agreement is likely to unleash pent up animal spirits and boost growth in both countries this year. As such, we believe that 2019 growth should come in closer to trend than the bears would have you believe. Despite looking expensive on a PPP basis, this would be supportive for the greenback, which also benefits from the substantial rate differential with other currencies. With inflation below the 2% target, a chastened Fed wary of an inverted curve and keen to not stifle the domestic economy when there is little evidence of it overheating is unlikely to return to its rate hiking cycle just yet. As such, although it is our currency of choice given the risks to EUR and potential volatility in GBP, we do not expect big gains for the dollar this year outside a risk-off safe haven rally.
Chinese telecoms equipment manufacturer Huawei has been in and out of the news ever since its CFO was arrested by Canadian authorities in December. Detained at the request of the US DoJ, she has been charged with defrauding US financial institutions into doing business that breached sanctions on Iran. However, the company’s other activities have also become the subject of intense criticism in the West. US intelligence agencies are concerned that giving Huawei a role in developing 5G networks in allied countries will open them up to cyber security threats and infiltration by Chinese spies. Moreover, 5G networks will one day connect a whole host of devices across the economy and involving Huawei in building the necessary infrastructure would make its maintenance dependent on a firm from a potentially hostile foreign power. As such, it could undermine a country’s ability to confront China if relations sour in future, even if system vulnerabilities are not being exploited directly by the Chinese military and intelligence services. For its part, Huawei denies that it is involved in collecting telecoms data for the Chinese government – but it would, wouldn’t it. The US is therefore leading a pressure campaign to exclude Huawei from bidding on 5G contracts, threatening to limit intelligence-sharing with any countries who fail to do so. Australia and New Zealand have already acquiesced, and Canada are likely to follow suit. This means that probably only the UK among the America-led ‘Five Eyes’ alliance (who have a very deep intelligence-sharing relationship) will allow Huawei to work on their 5G network, and only on non-core components and under close supervision. How countries can benefit from China’s rapid growth and technological prowess without jeopardising their national security and involvement in global alliance networks is a complex balancing act, particularly in an era when great power competition is returning, and the US is progressively shifting in favour of containing China.
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.