Javblog

Javblog

Tuesday, April 10, 2018

Trade & twitter


2017 was a year in which markets were seemingly able to focus on the positives of a US economy that seemed business and investment friendly - reduced regulation, tax cuts and and interest rate environment that promised continued gradual moves by a Federal Reserve with new leadership in the face of continued steady growth.

2018 has so far seen not much change in that core narrative: the economy continues to grow steadily and the Fed remains on track with its long stated programme of gradual rate increases in line with that. The Trump tax cuts have injected a bit of extra fuel to the corporate sector, such that we're now looking at earnings growth this year of 16% or so, with this being evident in the soon to be released Q1 earnings numbers.

If all that is steady as she goes, why then have markets been notable since February for a big jump in volatility?

Trade policy, announced on Twitter.

Whether or not this is a reflection of a real change of strategic tack away from free trade to one which is much more unilateral is still to be seen: one school of thought suggests that this is merely a negotiating tactic and that once some sort of publicity friendly "win" has been secured, we'll all go back to something approaching normality.

At present, the response to the Trump administration's trade belligerence has been measured and proportionate - especially on the part of China. Any damage done so far has been relatively modest and mostly confined to hurt feelings since the threatened tariffs have yet to be implemented since they are subject to a period of review and negotiation.

We assume that some sort of reason and logic will prevail, but as Trump's main leadership characteristic seems to be the embrace of government by chaos, there is always the possibility that this will not happen. 

If so, then the effect on market sentiment will go from the existing one of day to day volatility, but with an underlying strength based on a healthy global economy, to one  which marks move to a more "risk off" mentality, as investors gauge the effect of globally more restrictive trade. If that happens, then the risk averse investment approach could stay in place for an extended period.

The next month will give an indication of likely direction.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.


Monday, January 1, 2018

That was the year that was

At the start of 2017, market forecasters were either cautious or cautiously optimistic. Precisely no-one was predicting a 25% gain in global equities, but that, now has been the end result. If you were a USD based investor, you'd be happy since the weaker dollar boosted your returns. You would have been a bit less so if you'd invested in most other major currencies which generally saw gains of between 8% and 10%.

There were a few major themes to focus on:

(1) The Trump Bump - Trump managed to scrape through with his tax plan before the end of the year, and without the feared trade war with China (or anyone else) breaking out. There remained an uneasy calm over the latter, despite Twitter based rhetoric promising something more aggressive. In that environment, corporate earnings remained solid and underpinned by a Fed which maintained a stance of gradual, but very transparent, tightening.
(2) Emerging Markets Back In Vogue - Proving that a stable US and a weaker USD were supportive of growth, Emerging Markets had a strong year, with a 38% gain in the MSCI EM Index. EM currencies rallied too. Our favoured picks of Vietnam and India did well on the back of continued reforms, even if the implementation of some of them - notably India's replacing of high value bank notes - caused significant short-term stress.
(3) Politics produced surprises - Politics produced some significant surprises for markets notably in France, (Macron beating the two established parties in both presidential and parliamentary elections), Germany (Merkel's previously unquestioned dominance being undermined by weak support), the UK (Theresa May's disastrous performance in the General Election resulting in a hung Parliament), and Japan (Abe being returned with a strong majority). 
(4) What global order? - With Trump's "America First" agenda in place, there was much greater uncertainty over global geo-politics than has been the case for a decade or more. Tensions with North Korea remain high and still have the potential to produce short-term shocks (although despite this the South Korean stockmarket still rose by more than 20% in KRW terms).
(5) Companies are doing fine - Perhaps proving the point that everything else is just noise, the global corporate sector had a good year. Earnings growth remained solid and more predictable than it has seemed for some time: this was prompted by the fact that major global economies all produced some of their fastest growth rates in a decade. The icing on the cake - for US companies - was Trump's year end tax cut which looks likely to boost earnings growth in 2018 by more than 8%. Helpful too was the 18% spike in oil prices as major oil producers proved more successful than previously in maintaining production cuts.

So - is it "More Of The Same" for 2018...?

On the face of it - yes. At least for the first half of the year:

* Trump's tax cut will be a positive influence for US companies this year and help to underpin otherwise high valuations. This pre-supposes, of course, that the protectionist leanings of his administration remain restrained.
* The "New Fed" under the new chair Jerome Powell seems likely to continue to policies of the "Old Fed", even if it will be the first time in a number of decades that the senior Fed leadership is made up of non-economists. Gradual interest rate increases which are well-telegraphed seem likely to continue, barring any inflation shocks (our number one risk for 2018).
* Emerging Markets still seems at the beginning of a secular up-trend on the back of both strong external and domestic demand, coupled with continuing focus by many governments on economic reforms and productivity improvements.
* Politically, we have the ongoing discussions on the mechanics of the UK's Brexit from the EU. This looks as though it will be characterised by the appearance of steady progress in the first half, but with the potential for a real blow-up later in 2018 as we edge ever closer to the March 2019 exit deadline (now only 15 months away). Politics in the EU could still be difficult, led by Italy's forthcoming election and by Germany's still unresolved government talks. Later in 2018 we also have the US mid-terms where Trump will be gunning to hang on to majorities Congress, whilst the Democrats will be looking to overturn them....
* ....and in the background, companies will just carry on. Earnings growth still looks solid, boosted by rising domestic demand across most economies and continued low interest rates.

On that basis, equities continue to look the preferred asset of choice (and other assets continue to look relatively more overvalued). Much the same as 2017. Happy New Year!

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth

Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.