Henry James International Management December Market Commentary

Market Overview 

Whoever first articulated ‘no pain, no gain’ was probably talking about weightlifting or long distance running, but little did this word-smith know that this maxim would perfectly capture what investors experienced in 2019: soaring equity prices in spite of persistent economic threat, raging volatility and nagging market anxiety. 2019 was generally very good for investors; indeed, on December 31 the S&P 500 was up 724 points (28.88%) from where it was 12 months earlier. Such gaudy, portfolio pleasing figures, however, entirely fail to account for the true story of 2019: it was a year in which there was always at least one major (often multiple) geopolitical or economic issue seemingly poised to bring markets to their knees. For example, the MSCI EAFE index’s returns of 3.27% in December, 8.21% in the 4th Quarter and 22.66% in 2019 entirely obscure the pessimism with which 2019 began, not to mention the realities of the government shutdown and the feud between President Donald Trump and the Federal Reserve over monetary policy. Indeed, by looking at the MSCI Emerging Markets index’s return of 7.53% in December, 11.93% in the 4th Quarter and 18.9% in 2019, one cannot see the very real economic scars left by the US – China trade war, nor can one recall the way in which it constantly threatened to boil over. Looking at the returns of the MSCI World ex USA Small Cap index of 4.65% in December, 11.45% in the 4th Quarter and 25.94% in 2019, there is neither evidence of the uncertainty caused by Brexit and the disastrous prospect of Britain leaving the European Union (EU) without a deal, nor any indication of how Germany’s manufacturing recession further stifled Eurozone’s anemic growth. And yet, markets muscled through these very genuine headwinds and delivered impressive gains on the back of what clearly was a fundamentally strong US and global economy and Jerome Powell’s willingness to be flexible with the Fed’s monetary policy by lowering interest rates by 75 basis points. And yet, so persistent were 2019 economic threats that the slightest hint of positive news on a topic like the US – China trade war or Brexit generally resulted in a market bounce, something that highlights the discrepancy between the terms ‘markets’ and ‘economies’ and how positive returns for the former does not necessarily indicate robustness in the latter.

We believe in 2020 the US and global economies are likely to continue to boast the fortitude that saw them safely navigate the stormy waters of 2019, which we believe could set them up for another year on a steady upward trajectory. Despite cause for optimism it would be naïve to believe that the problems that dogged us last year have simply faded away. Indeed, a matter of hours into 2020 we saw as much when a US drone killed Iranian General Qasem Soleimani (the Islamic Republic’s de facto number two), which prompted somewhat hysterical fears of an impending World War 3, not to mention the price of Brent Crude spiking above $70 a barrel. Some may argue the virtues of pursuing a particular foreign policy agenda, but one thing is clear: markets dread the instability and chaos caused by even the suggestion of war. While tensions have apparently deescalated, and the price of oil has returned to a more reasonable price, a US-Iran conflict could flair up at any moment, which would knock the wind of out of the current optimism for the new year. To make matters even more precarious, though the US and China are inching towards a détente, it is pretty much a given that this trade war will plague markets in 2020 just as it did in 2019. While markets can take comfort in the knowledge that the United Kingdom (UK) will Brexit in a smooth and orderly fashion on January 31, 2020, time is short to work out an actual trade deal with the EU, the deadline for which is the end of 2020, which puts the possibility of a  ‘No Deal’ Brexit back on the menu. Moreover, while Germany appears to be bouncing back, failure for the global manufacturing bellwether to recover and begin growing again will be an albatross for the EU and global economies.

Investment Outlook

According to James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, ‘We are looking at stable global GDP growth above 3%, with 2% in the US and a modest 1% in the EU.’ He is anticipating a slight increase in growth in the UK through a so-called ‘Brexit Bump’ and the resulting economic stability markets have been craving. O’Leary also sees an increase in Japan’s growth with greater exports, but believes that we will see China’s growth drop below 6% for the first time in a long time. ‘We are anticipating a return to long-term market trend returns for developed markets and possibly above market trend returns for emerging market economies,’ says O’Leary.

In O’Leary’s view, the x-factor for the US economy in 2020 will be the forthcoming elections. ‘If the Democrats win the White House, take control of the Senate and maintain the keys to the House of Representatives, we would expect a raise in both corporate and personal income taxes.’ This, he believes, would result in a reduction in corporate earnings, which would negatively impact markets. However, if Trump is re-elected, says O’Leary, the US economy should be in an excellent position to thrive. In the build up to said election, however, O’Leary does not expect to see any large movements in US interest rates in 2020. ‘We expect the current 1.75% rate will remain steady with the possibility of a 25bps cut.  This is because if the Fed Funds rate were cut by too much it would look partisan during a Presidential election.’ Moreover, significant interest rate reductions would cut even closer to zero percent, which would leave the US and global economies with minimal defence in a recession scenario.

O’Leary welcomes a thawing of the US-China trade war and believes this is a big step in the right direction; however, he does not believe that anything substantive is in the so-called Phase 1 of the deal. ‘It does not address intellectual property theft, corporate governance or a method for penalizing China for violations. Instead it appears to be a deal that freezes tariffs and compels China to buy a lot of US pork.’ The existing tariffs, says O’Leary, will continue as a ‘tax’ on US consumers that will hurt the lower end of the consuming public. It will also hurt China, he continued, and pull down its 2020 GDP to below 6% for the first time since 1990. Moreover, the trade war has inflicted serious damage on China’s economy and will continue to do so until it is fully resolved. But one country’s loss is a gain for others. ‘The trade war is moving US supply chains from China to other Asian countries and, notably, to Mexico, too,’ O’Leary said.

O’Leary is hopeful that Germany will begin to recover in 2020. ‘We are looking for Germany to stabilize and move to positive growth in its manufacturing sector, which on a relative basis is two times larger than that of the US and therefore really important for their economy.’ He continued: ‘With global growth intact Germany and the Eurozone should benefit; and with the exception of France, Italy and Spain, the Eurozone has a relatively low unemployment rate, increasing inflation of 1% to a more targeted rate and positive GDP growth. Moreover, with Brexit uncertainty as a thing of the past there are fewer unanswered questions and therefore more certainty, which should result in better markets.’

With Brexit virtually guaranteed to happen at the end of January, O’Leary is forecasting continued low UK unemployment, stable GDP growth (with an increase in 2021) and an easing in fiscal policy; he also expects PM Johnson to fulfil his planned stimulus promises. O’Leary said: ‘The great Brexit versus Remain battle is over as the UK will leave the EU. It is in both Europe’s and the UK’s best interest to make a bad situation work for both. If both parties act reasonably, Brexit should work for both and their respective economies should benefit as a result.’

O’Leary is delighted that the US and Iran have managed to deescalate tensions and though the price of oil skyrocketed it has come down again as fears over oil supply disruption have abated. The question remains, how sustainable is this relative calm and does Trump see conflict with Iran as something that will help or hurt his re-election campaign. O’Leary said, ‘If it hurts him, the episode will subside and if he thinks it will help, we may see renewed tension.’ O’Leary’s clear preference is peace and tranquillity so markets can continue to thrive.

While geopolitical risk and headwinds are ever-present for the year ahead, they are perhaps less threatening than they were in 2019. What is more, the US and global economies appear to be in a better place, too. This combines to create positive mood music for markets in 2020, and yet, much like how it was last year, the question will be the extent to which markets will be able to resume their resilience and trample over present and future threats desperate to derail them and diminish investor profits.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management November Market Commentary

Market Overview

 Perhaps the best thing about November’s market performance is that at least it did not damage the 2019 gains that seemed a rather far-fetched prospect a year ago. The MSCI EAFE index dramatically zigzagged up and down all month, and it appears that the month coincidentally happened to end while it was up an uninspiring 1.14%. The MSCI Emerging Market index followed a similar roller-coast path, but unfortunately finished the month down by -0.13%. The MSCI World ex USA Small Cap index posted modest gains that most will gladly take given the geo-political and economic conditions with which markets have been faced, up 2.28%.

November was set to be a turning point in the United States (US) – China trade dispute until a certain President was apparently moved to announce his support for the Hong Kong protestors. On November 27, 2019 President Donald Trump signed two bills on Hong Kong human rights, one that put sanctions on Chinese and Hong Kong officials who abuse human rights and another that prohibits the sale of nonlethal munitions to Hong Kong police. Despite Trump admitting that he signed these bills out of ‘respect for (Chinese) President Xi, China and the people of Hong Kong’, his actions incurred Beijing’s ire and the summoning of the US ambassador to communicate that the move would undermine trade negotiations.

November watched the Hong Kong local elections with unprecedented interest. Generally rarely anyone outside of Hong Kong gives a hoot about them as the election winners will ultimately manage municipal tedium like bus routes and garbage collection and will have zero ability to meaningfully push Hong Kong toward the democracy the protestors (along with the West) apparently crave. Nonetheless, in light of the elections taking place during the most heated anti-Beijing protest Hong Kong has ever experienced, the elections became a proxy-referendum on the status quo and Communist China’s political stranglehold over the Special Administrative Region. The pro-democracy camp won its biggest ever victory, taking 17 of Hong Kong’s 18 district councils. While this will have severely undermined the already beleaguered Hong Kong Chief Executive Carrie Lam and her viability as head of government, the truth is that her position is as tenable as President Xi’s autocratic whims say it is. Furthermore, while the election results in themselves can and will do nothing to achieve the democracy for which so many Hongkongers are demanding, the decisiveness of the pro-democracy’s victory will have sent shock waves to Beijing. The question is which is the more likely result: President Xi listening to and fully accommodating the protestors’ wishes or bringing forth Tiananmen Square 2.0?

Henry James International Management November Market Commentary
November saw the largest anti-Beijing protest in Hong Kong’s history.

After the hubris inspired by the surprise spike in German manufacturing orders in September and the hope that this signified a bottoming out, October saw the biggest downturn in a decade. According to the Federal Statistics Office, German industrial output fell by -5.3% in October versus the same month in 2018. This is horrible news for a German economy that thought it had turned a corner, as well as for the European Union (EU) who has been dealing with the impeding effects of Brexit; of course, an economically weak Germany holds dire consequence for the global economy. Germany’s political situation does not offer any help as the junior partner in government with Angela Merkel’s Christian Democratic Union (CDU) party, the Social Democratic Party (SDP), recently elected new party leaders that are hostile to the Chancellor and will vote on whether to remain in coalition. If the SDP chooses to abandon the coalition either the CDU will form a minority government or there will be a snap election, two options that will not offer Germany the short-term economic stability it may crave.

British Prime Minister Boris Johnson’s dramatic election victory on December 12, 2019 has given a strong indication that Britain’s three and a half years of Brexit limbo will finish on January 31, 2020. Johnson’s catch phrase of ‘getting Brexit done’ apparently appealed to British voters who gave the Conservative Party the largest Parliamentary majority enjoyed by any United Kingdom political party since the 1980s. When the exit polls revealed the likely extent of Johnson’s victory, the price of Sterling shot up to its 12 month high versus USD. Moreover, despite the fact that Brexit is generally not seen as market friendly, pundits have predicted that a Conservative victory might see Britain’s economy enjoy a short-term growth spurt in Q1 of 2020, though it would seem unlikely that it would be sustained throughout the year.

Federal Reserve Chairman Jerome Powell struck and optimistic chord about the economy when he said he saw ‘the glass as much more than half full’. According to Powell, his ever-flexible monetary policy that lowered interest rates by 75 basis points since July 2019 is maintaining the strength of the US economy and is protecting it against a serious downturn; moreover, it is subduing the damaging effects of trade and tariff uncertainty. The Fed Chairman confirmed that his monetary policy is helping to improve both consumer and business sentiment and to catalyze spending in interest-rate sensitive sectors such as housing and consume durable goods. Despite the already robust US labor market adding 266,000 jobs in November – a figure that smashed expectations – along with the joblessness-rate at a 50-year low, Powell indicated that he believes there is still plenty of room for growth on these impressive gains. He suggested that elected officials can build on the momentum through implementing the policies that will support and reward the labor force to get the training and education required to meet the challenges of technological innovation and global competition.

Henry James International Management November Market Commentary
Getting trade back on track is vital for Presidents Trump and Xi’s political survival, says O’Leary.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management sees the beginning of a US-China trade truce on the horizon, the recent tension resulting from Trump’s Hong Kong protest bills, notwithstanding. ‘ Presidents Trump and Xi have mounting incentive to bury the hatchet and to work together to resolve the trade dispute. Firstly, Trump’s re-election begins and ends with a strong US economy; secondly, one of the few items that can undermine President Xi’s lifetime term in office – not to mention the Communist Party’s complete control of China – is a weakened economy.’ He continued, ‘As such, a prolonged trade conflict between the world’s two largest economies is not just something that isn’t in anyone’s interest. Getting trade back on track is vital to political survival.’ Moreover, according to O’Leary, a fair and balanced trade deal should not only go a long way to balance US imports and exports with China, it will create American jobs and mitigate Chinese intellectual property (IP) theft, something for which Beijing has already increased the penalty and on which it has promised to crack down. While O’Leary remains dubious about whether China will carry through with its efforts to mitigate IP theft given that it is widely believed that it is state-sponsored, he is encouraged that other countries – Germany, in particular – are becoming aware of the seriousness of the situation. ‘A multi-lateral approach to stopping Chinese IP theft may be the best way forward,’ says O’Leary.

O’Leary was shocked by the recent German industrial output figures as he was under the impression that its manufacturing sector was back on track. ‘German large manufacturing equities have seen their stock prices rally over that past three months and based on the fact that stock performance is generally an indicator of future GDP growth, 2020 appeared set to be a good year for Germany.’ However, not only have October’s figures thrown this in doubt, Germany’s political situation will likely only make recovery and improved business confidence even more difficult.

O’Leary agrees with Federal Reserve Chairman Powell’s assessment of the US economy is in a good place; and he believes that Powell has done a good job managing the sugar high of the Trump Tax Cuts as well as issues created through tariff and trade uncertainty. O’Leary says that the sustained economic growth is starting to benefit lower earners, but he agrees with Powell that more can be done on a policy front to invest in workers both to ensure that American prosperity benefits a wider breadth of society, but also so that the American economy is ready for the challenges of the 21st century.

In many ways, November has been a microcosm of 2019: volatile, complicated, filled with economic headwinds but also reasons for optimism. Indeed, much like the year so far, the many causes for concern, notwithstanding, markets are generally delivering positive returns for investors. While it remains difficult to be 100% optimistic about 2020, we believe that many institutional investors will be more than delighted the US and China are likely on the brink of a trade deal and that the US economy is fundamentally strong (despite inflation lower than 2% and interest rates being too low for comfort). Of course, threats to markets remain – namely a prolonged German economic downturn, a Brexit that is messy despite Johnson’s election victory and Trump continuing his policy of weaponizing tariffs. From our perspective, we see the forces for economic growth capable of subduing those of contraction and remain hopeful that 2020 will be positive for investors.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management October Market Commentary

Market Overview 

October was a good month for markets, and not just in the ‘growth despite raging volatility’ way that has become the 2019 norm. We believe we are seeing evidence of an economy that has resiliently chugged along despite being burdened and destabilized by a range of geopolitical and economic issues. Market performance spiked encouragingly in the month of October: the MSCI EAFE was up 3.60%, while the MSCI Emerging Markets and MSCI World ex USA Small Cap indices jumped by 4.23% and 4.12%, respectively.

While nothing is official, there is good anecdotal reason to believe that trade tensions are thawing between the United States (US) and China as both sides have either overtly or under conditions of anonymity (in the US’s case) admitted that the sides are working towards a phase one trade deal that would see the beginning of a tariff roll back. Of course, if this does not come to fruition in the short term that would be the par for course for this unpredictable trade dispute and would hardly be surprising, particularly as US President Donald Trump’s Trade Advisor Peter Navarro denied the report and indicated that it was nothing more than ‘Chinese propaganda’.

There is renewed optimism in German manufacturing – the global bellwether – due to the recently released figures showing a rebound in German factory orders. Demand rose by 1.3% in September, or 30 basis points higher than the predicted gain, which optimistically suggests that the euro-area economy has passed the worst of its recent troubles.  Indeed, as demand from outside the Euro area provided the biggest boost, Germany’s success will be good news for global manufacturing, too.

Henry James International Management September Market Commentary
It is difficult to see how Britain would ever Brexit without a deal at the very least.

While Brexit can be considered nothing more than a complete mess and the bringer of British, European and global economic headwinds, there is perhaps reason to be somewhat positive. Despite the fact that the continued uncertainty will only wreak further market havoc, there does not appear to be an appetite for a ‘No-Deal’ Brexit on any front, particularly now that we have passed the October 31, 2019 deadline; i.e. the time in which it was a distinct possibility. After ‘No-Deal’ cheerleader Nigel Farage indicated that his Brexit Party would not stand candidates against Prime Minister Boris Johnson’s Conservatives in more than 300 key seats, it is difficult to see how Britain would ever Brexit without a deal at the very least.

If there were any doubt about the green shoots of economic success poised to burst through the dried, rocky soil of 2019, Federal Reserve Chairman Jerome Powell set the record straight at his October 30, 2019 press conference when he said that monetary policy is in a good place to achieve moderate economic growth, a strong labor market and inflation near 2%. In other words, the US economy is in a surprisingly strong place and despite Trump’s vexations with the Fed’s chief, the latter may have helped the former’s chances at re-election.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management is hopeful that the US and China will make progress on a trade deal in the short term, but that the more serious issues will only be dealt with after the US’s 2020 General Election. He said: ‘I think that there will be some sort of an initial trade deal which will not include harder topics like trademark and patent protection.’ As a portfolio manager, O’Leary is excited by the prospects of the tariff certainty that a deal would bring and the related benefits for markets. ‘If there is a deal, while all securities will benefit, we believe that Chinese equities will do particularly well,’ he said. While O’Leary welcomes the possibility of a trade deal, he believes that Trump must hold his nerve and properly handle the problem of Chinese intellectual property theft as he is not certain that Xi Jinping can be trusted on this issue. A resolution to the US-China trade war that has hampered markets for well over a year would be a big boost to not only the economy, but also to President Trump. ‘A strong economy always favors the incumbent,’ says O’Leary; moreover, he believes a Trump re-election would likely compel China to address US IP theft concerns.

Henry James International Management September Market Commentary
We believe that Trump must hold his nerve and properly handle the problem of Chinese intellectual property theft.

Quite apart from any possibility of a resolution to the US-China trade war, O’Leary agrees with Fed Chairman Powell that the US economy is in a good place. He said: ‘The US consumer remains strong, as does America’s growth. We feel that US equities may be fairly valued given the current economic environment.’ O’Leary also believe that the upcoming 2020 US General Election will provide an added boost to both US and global markets. In O’Leary’s view, the seeds of economic resiliency were planted more than a decade ago: ‘I believe the strength of the US economy is in part a result of the plans that were put into place at the end of the Bush administration, which were continued by Obama and boosted by the Trump tax cuts.’ O’Leary continued: “Along and in conjunction with global leaders – including and especially China that has seen its economy rapidly grow from $4,600bn in 2008 to $13,605bn in 2018 – the US has greatly helped drive the global economy and its recovery.’

O’Leary sees Germany’s recent manufacturing data as a clear indication of a bottoming out of orders:  ‘It appears that France and Germany’s manufacturing is starting to improve as clarity in global trade disputes, including Brexit, start to become apparent.’ O’Leary indicated that economic growth remains positive in the European Union and that the European Central Bank (ECB) has cut interest rates and reactivated its bond-buying stimulus program to help shore up growth and get inflation back to its goal of just below 2%. ‘If manufacturing growth continues, I believe European and Chinese equities will be the big winners,’ says O’Leary.

Though O’Leary is delighted that the chances of a ‘No Deal’ Brexit are looking remote, he is less enthusiastic about the economic uncertainty emanating within and from the world’s 5th biggest economy. O’Leary hopes that the December 2019 General Election will bring clarity to Brexit and the economic stability Britain craves, but he believes this may be wishful thinking. Perhaps the clearest way out of the mess would be the Conservatives securing a majority in Parliament, which would likely see Boris Johnson’s Brexit deal take affect by the current January 31, 2020 deadline; however, the Parliamentary math isn’t necessarily in Johnson’s favor. The only other viable party to win the election is the Labour Party, a scenario that – while carrying with it the market-friendly possibility of reversing Brexit altogether – would see Brexit uncertainty spill over beyond the current deadline. With British voters never less loyal to the two main political parties, O’Leary sees a hung Parliament as the likely outcome in this election which would mean yet another impotent minority government who simply lacks the power – to use Johnson’s campaign slogan – to Get Brexit Done.

While we remain aware of the likelihood that the investment outlook can change for the worse at any moment, we currently have a positive outlook without too many qualifiers or caveats. With the stimulus that a US General Election will bring the world’s GDP, the improving trade relations between the US and China and the ECB’s stimulus package, we see the potential for increased global growth in 2020 and believe a recession in the short term is unlikely.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management September Market Commentary

Market Overview

As 2019’s third quarter came to an end, the salient thought in our mind at Henry James International Management was ‘growth’, despite raging political, economic and market volatility. The trend evident across markets is that while 2019’s 3rd quarter was a downer, positive September growth partially offset the quarter’s losses. Despite this disappointing quarter, Year-to-Date (YTD) markets are up significantly. MSCI EAFE was +2.92% in September, -1.00% in the 3rd Quarter and +13.35% YTD; MSCI Emerging Markets +1.94% in September, -4.11% in the 3rd Quarter and +6.23% YTD; MSCI World ex USA Small Cap was +2.6% in September, -0.19% in the 3rd Quarter and +13.01% YTD.

Just keeping up with the news has presented enough turbulence to make even those with strongest constitutions feel motion sickness. Some of the prominent market influencing headlines continue to be the US-China trade conflict and a range of other tariff scrums between nations, Brexit, Iran’s provocation of the West and United States (US) President Trump’s subsequent saber rattling. The pro-democracy riots in Hong Kong show no sign of abating and one assumes it is only a matter of time before we see a version of Tiananmen Square again with China’s using its military to put the Special Administrative Region firmly under its thumb. Staying in Asia, North Korea is getting antsy and has resumed missile testing again at the expense of the Sea of Japan. Domestically any chance of short-term political stability was derailed when US Congressional Democrats launched an impeachment inquiry on the back of accusations that Trump encouraged the Ukrainian president to interfere on his behalf in the 2020 US General Election.  Germany, the bellwether of global manufacturing, has seen its output continue to drop; American and Chinese manufacturing has followed suit.

Henry James International Management September Market Commentary
Global Manufacturing is slowing.

And yet, somehow markets – despite personifying the before-mentioned volatility – have pressed forward in a mostly unperturbed fashion. Of course, there is some reason for optimism. The Fed lowered interest rates again by 25 basis points to between 1.75% and 2.00%, which should give domestic and global markets (particularly emerging markets) an excellent spark of positive momentum. Also noteworthy is a new US-Japan trade deal that is set to take effect on January 1, 2020; while it will technically have to be approved by Japanese lawmakers before it is official, it is expected to be ratified without difficulty.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, sees self-inflicted political turmoil as the main factor impeding global economic growth: ‘It seems that politicians globally cannot sit back and enjoy a stable and slowly expanding global economy,’ he said. According to O’Leary, the economic slow down, that we discussed at length in our August Market Commentary, will continue as long as Brexit is uncertain and continues to pull both the United Kingdom and European Union down, the US is mired in political turmoil, the US and China fail to achieve a mutually beneficial trade resolution and Iran continues to destabilize the Middle East and threaten oil through its support of regional terrorism.

Henry James International Management September Market Commentary
Markets have so far push through Iran’s destabilizing influence.

Despite the volatility, O’Leary sees markets as resilient, but to a point. ‘Markets took Iran’s bombing of the Saudi oil processing facility in stride, and were unaffected by Trump’s United Nation’s speech where he lambasted Iran and China,’ said O’Leary. Of course, the world remains awash with oil despite the actions with which Iran has been accused and, in spite of the US President’s bellicose rhetoric, shooting-from-the-hip style, and apparently being ‘locked and loaded’, he has made it very clear that he does not seek war.

At this point – around mid-September – O’Leary believed that markets were cautiously hoping to find some element of terra firma at their feet to use as a sturdy platform to reverse the global slowdown. What they were greeted with was what O’Leary views as Congressional Democrats who could not leave well enough alone and took impeachment action against Trump. Not only does this tremendously damage US-China trade war negotiations before the 2020 General Election – as a distracted, politically impeded President will not be able to negotiate from a position of strength in the face of Chinese Premier Xi Jinping’s absolute rule – it will also push the required robust domestic economic agenda to help stimulate the US economy to the back burner. When combined with the Chinese debt crisis, Hong Kong riots and Brexit taking yet another turn for the worst and paralyzing British business, one wonders how much more markets can take before the global slowdown becomes a global recession. Thankfully, the global economy is still expanding and is projected to grow just below 3% in 2020, though new International Monetary Fund Chief Kristalina Georgieva’s October 8th speech could certainly erode some optimism.

O’Leary is hopeful that the international economy will shake off the political uncertainty and that we will see a globally coordinated fiscal and monetary response. The ray of good news for the US and global economy is this: as pressure turns coal into diamonds, so may Trump’s ardent desire to get re-elected drive him to achieve a trade deal with China and get his own economy back on track with the help of falling Fed interest rates.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management August Market Commentary

Market Overview

 August was not a positive month for markets. The MSCI EAFE index fell by -2.58%, the MSCI World ex USA Small Cap dipped by -2.30%; the MSCI EM index shrunk by -4.85%. Dramatic though these losses may be, they are arguably slight given the scale of market-influencing political volatility August witnessed on a global scale. The main protagonists were the United States (US) and China, whose trade conflict has escalated to dangerous heights in terms of new tariffs and fiery tweets. Worse yet, the path to a resolution is not nearly as obvious as many may have deceived themselves into believing only a matter of months ago. Brexit continues to impede both the United Kingdom (UK) and European Union’s (EU) economies and there is no end to the uncertainty on the horizon, despite new British Prime Minister (PM) Boris Johnson’s insistence that Brexit will happened, come what may, at midnight on October 31, 2019. August also presented markets with a range of worrying facts: 10 year US bonds fell below their 2 year counterparts for the first time in a decade (a telltale sign of imminent recession), the US economy is slowing, China is also in the midst of an economic slowdown as well as a serious debt crisis, Germany is in a fully-fledged manufacturing recession and Britain appears headed for their first recession since the financial crisis (July’s positive UK economic growth, notwithstanding). Despite all of this cause for genuine concern, there is some reason for optimism. Firstly, low US interest rates – despite making markets defenseless in a recession scenario – should help catalyze the US economy; furthermore, they should help Emerging Market (EM) economies who are already benefiting from Chinese supply chain disruptions. Indeed, we believe that the Federal Reserve will lower rates at least one more time in 2019, with possibly more reductions in 2020. Secondly, the World Bank is anticipating global growth of just below 3% for both 2019 and 2020, which would suggest that there is still a range of underpriced opportunities available for investors. Lastly, as we saw when Sterling surged in early September when UK PM Johnson’s bold Brexit plans were frustrated by the UK’s Parliament, in a world burdened by such troubling politics, any news that is even vaguely positive will create market optimism, however ephemeral.

Despite the projected growth that cushions markets from international recession, we believe we are experiencing a global growth slowdown. The US enjoyed tremendous short-term benefit in 2018 (GDP growing 2.9%) through the Trump tax cuts, which flooded the economy with corporate and consumer capital. However, it came at a big cost of adding more than a Trillion USD to the fiscal deficit, which a cynic might think is not necessarily symptomatic of the fiscal prudence for which Republicans are famous. Beyond that, a range of non-political voices, including that of the International Monetary Fund, were transparent in their view at the tax cuts’ inception that 2018’s turbo-charged economy would not only lead to an economic slow-down and recession, it would in fact hasten it. We believe we are experiencing this today, which has become even more problematic given the way in which the Fed was effectively coerced to keep up with 2018’s economy by raising interest rates to combat inflation. Today, with American growth stalling and further impeded by the US-China trade war, the Fed is really only able to stimulate growth by lowering the interest rates it – we think – unnaturally hiked up only last year which will leave it without any tools to combat the recession which many believe is on the horizon.

China and Germany – and certainly the two nations combined – corroborate our view that we are in the midst of a global slowdown. China has arguably been the main driver of global growth since the financial crash of 2008 and any reduction in its GDP is felt throughout the world. Part of China’s economic overdrive in the past decade has been heavy borrowing and loans that stand little chance of ever being repaid. Moreover, Chinese consumer debt is also worryingly deep. China has tried to rein in corporate and consumer lending, but each instance has led to a global economic stumble, which compelled Beijing to loosen lending again. China is currently at a 30-year industrial production growth low (4.8%), which may be part and parcel of its desire to shift its economy from manufacturing to services, but this will be a painful transition not only for China, itself, but for a world economy that is dependent on Chinese growth.

Henry James International Management August Market Commentary
Despite the projected growth that cushions markets from international recession, we believe we are experiencing a global growth slowdown.

Germany, meanwhile, saw its economy shrink by -0.1% in the second quarter of 2019 and a deeper drop is predicted in the third quarter. Its fate is largely in the hands of China as Germany exports nearly $100bn of goods to the Communist state and a slowing of Chinese consumer and corporate spending will hit hard. The Chinese buying fewer German products – chiefly cars, machines tools and manufacturing equipment – will continue to damage Germany’s manufacturing which is currently at seven consecutive months of decline. It must also be said that Germany imports more than $100bn of Chinese goods, and an economically declining Germany spells bad news for China, particularly given its trade war with the United States.

Brexit is not just bad for Britain, whose best-case scenario appears to be recession – it is also dangerous for Germany. Germany exports nearly $100bn of goods to Britain and a Brexit that imposes any element of trade friction and uncertainty will make this number fall; and possible tariffs will make the cost of business significantly higher. Indeed the uncertainly and chaos caused by Brexit are likely partially to blame for Germany’s recent poor GDP and manufacturing figures. With the October 31st Brexit deadline quickly approaching, the projections of economic Armageddon as well as food and medicine shortages are becoming less abstract and more tangible (particularly since the release of information pertaining to Operation Yellowhammer). Markets reacted positively to the news that Parliament managed to thwart a ‘No-Deal’ Brexit (for now) as well as possibly extending the deadline beyond Halloween. But when markets wake-up, they will realize that an end to the deadlock remains illusive and until a market-friendly resolution is achieved the British, European and World economies will continue to suffer.

Of course, among the largest contributors to US and Chinese market woes is their trade war, the stakes of which rose considerably this past month. August kicked off with Trump announcing a 10% tariff on over $300bn of Chinese goods, citing a lack of progress in trade negotiations. A couple weeks later, the US President did a partial about-face, saying that he would delay the tariff on cell phones, video games and apparel until December 15 to mitigate the damage it would have on US consumers in the run-up to Christmas. Trump hoped this gesture would impress Chinese counterpart President Xi Jinping and make him more dovish. This was not realized as the Chinese increased their hostility by ordering all companies to stop buying US agricultural goods (worth up to $20bn) and new tariffs on $75bn of US goods, which went into effect on September 1st along with the new US tariffs. Trump’s response was ordering US companies to no longer do business in and with China (an order that does not command legal weight) and set the preexisting 25% tariffs on $250bn of Chinese goods to go to 30% on October 1, 2019 and the newly introduced 10% tariff to rise to 15% on December 15, 2019. As of September 2019 we are at the high water mark of this trade war and markets will hope that hostilities begin cooling immediately.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, believes we are starting to experience a global growth slowdown. ‘Germany is the bellwether of global manufacturing and their manufacturing sector has slipped into recession,’ he said. Due to uncertainty that has negatively affected the Chinese economy on the back of the trade war and their debt crisis, says O’Leary, China simply has neither the need nor the money for German manufacturing machines and luxury cars. According to O’Leary the German and Chinese economies are co-dependents and their respective woes and uncertainty will drag the other down. Closer to home, German trade with the UK has slowed down simply because the British economy is shrinking, which will likely continue to be the case until a market friendly Brexit is achieved, says O’Leary.

Henry James International Management August Marketing Commentary
‘The German and Chinese economies are co-dependents and their respective woes and uncertainty will drag the other down.’

Regarding Brexit, ‘Who could possibly consider investing in the UK right now? It is not even clear whether they will be able to import food in a few weeks,’ said O’Leary. He continued, ‘Uncertainty breeds consumer anxiety, and this inevitably results in consumers tightening their belts and spending less money.’ While the likelihood of a No-Deal Brexit will have gone down considerably after Parliament wrested control from PM Johnson, the longer Britain and the EU kick the can down the road, market pessimism will persists and people will choose to save and not spend their money. The result: further economic slow down in Britain, Europe and the rest of the world.

O’Leary is not averse to the concept of playing hardball with China, particularly in relation to their recent history of intellectual property theft; indeed, he is even open to some element of ‘necessary’ market pain that may result. However, in his view IP theft is not a uniquely American problem. ‘Multilateral action against China that incorporated the likes of Germany, Britain and Japan would have worked far better in terms of actually getting China onside and limiting market volatility.’ What is more, says O’Leary, while the Obama administration’s Trans-Pacific Partnership (TPP) was not an effective way to subdue China, there is no reason why the US could not have remained within the robust trading block and still go after China in a multi-lateral fashion. The US-China trade dispute has put uncertainty into both countries manufacturing, says O’Leary, because tariffs automatically reduce the number of people on either side of the divide who will be open to buying the other’s products. ‘If one is going to produce goods, better be sure there will be somebody who will buy them,’ says O’Leary. Of course, a positive side-effect of the trade war has been disrupting Chinese supply chains, which makes the world economy less reliant on Chinese manufacturing and also gives Asian EM economies like Vietnam a big boost.

According to O’Leary, one of the most worrying elements of the global slow down from a US perspective is that the Trump Tax Cuts, despite boosting the economy in 2018, added significantly to its public debt. Indeed, much of this debt is foreign, which means that it actually has to be paid back, he says. Of the US’s $6.2tn foreign debt, $1.18tn is owned by China and $1.03tn is by Japan. O’Leary also laments the way in which Trump’s Tax Cuts effectively coerced Fed Chairman Jerome Powell to combat inflation through raising interest rates through gritted teeth.

At Henry James International Management our investment strategy bears the full range of these market issues in mind while it ‘quantamentally’ locates opportunities while minimizing risk. ‘We use a very disciplined country-weighted system that is based on equally weighted equities in each country based on their 52-Week Sharp Ratio,’ says O’Leary. He continued: ‘So when a country’s relative strength decreases the weighting in our portfolios for that country also decreases.’ He points to the UK, Germany and China, whose equities have decreased proportionally in our portfolios. Conversely, our portfolios are over-weighted in India, which has seen excellent growth during the past several years, and Russia, which is exhibiting growth in several sectors. Sector-wise, our ‘quantamental’ strategy has seen our funds naturally reduce investment in iron ore and, of course, manufacturing, while we have increased investment in biotech, internet retail and pharmaceuticals.

As we head into 2019’s homestretch, we are grateful that the year has mostly defied analyst predictions from back in 2018, in so far as markets have delivered for investors thus far. And yet, far from the political volatility abating, it has only increased. We would like to see world economies turn away from the tit-for-tat that has seen countries use tariffs to exploit others’ vulnerabilities. Moreover, we would like to see a world of inclusive economic relations for everyone’s mutual benefit, as using trade as a substitute for war is reminiscent of the politics of the Smoot-Hawley Tariff Act that arguably made the Great Depression both deeper and longer. As O’Leary puts it, ‘Let’s hope wiser heads prevail!’ Thankfully for investors in the medium term there is some global growth and lower US interest rates should help impede the global slowdown.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management July Market Commentary

Market Overview

July’s lackluster market performance stands in contrast to the volatile political and economic forces we have experienced the past month. The question we have is what – in the grand scheme of things – will July’s numbers mean for markets short, medium and long term performance?  In July the MSCI EAFE was down -1.26%; the MSCI World ex USA Small Cap dropped by -0.43%; and the MSCI Emerging Markets index fell -1.14%. Given the extent of market uncertainty, one might say that such small dips in these indices are no big thing. Indeed, that may be a worthwhile view in light of the increased volatility caused by trade disputes, China’s less robust output, Brexit (possibly) drawing to a conclusion on October 31, 2019 and Germany (and maybe the European Union) slipping into recessions with the United States (US) also possibly joining suit with the news that 10 year bonds fell below 2 year bonds for the first time in more than a decade. And yet we see positives including the US’s low unemployment rate and the confidence inspired by the World Bank’s global growth forecasts of 2.6% in 2019 and 2.8% in 2020, figures that suggest we are no where near a global recession.

While we were happy to take the market victory a month ago when US President Donald Trump and Chinese President Xi Jinping agreed to a trade truce and recommitted themselves to working out a mutually beneficial trade deal at June’s G20 summit, we always believed that it was hype over substance as it did not repeal either sides’ crippling tariffs. Furthermore, judging by Trump’s erratic disposition and self-admitted fondness for tariffs it was evident that a mere truce would do nothing to stop the administration from further hostilities the moment the negotiations failed to go to plan. July largely enjoyed relative quiet on this front, but on August 1 the temporary calm gave way to a fresh wave of market rocking angst. After two days of trade talks with little progress and China failing to fulfill its promise of buying more US farm products, Trump announced that the 10% tariff on $300bn of Chinese goods was back on that table and scheduled to be enacted September 1, 2019. On Tuesday August 13 a change of pace was announced and markets reacted jubilantly to the news that Trump would be delaying the new tariffs on items like cell phones, video games and apparel, until December 15, 2019 in an effort to minimize the effect they would have on US consumers getting ready for the upcoming holiday season. Market joy notwithstanding, there was actually really no cause for genuine market excitement as not only will existing tariffs persist (as was the case a month ago) but also as things currently stand some items will see a new 10% tariff slapped on them on September 1. Moreover, far from China responding favorably to Trump’s partial climb down on new tariffs, the Communist giant has responded bellicosely by stopping all plans to buy more US agricultural products, with fresh tariff threats of its own and intentionally devaluing its currency. Despite the hostility, both sides are due to resume negotiations at the end of August.

Henry James International Management July Market Commentary
What does the 5G revolution have to do with the US-China trade war?

On July 31, 2019 Federal Reserve Chairman Jerome Powell announced a 25 basis point interest rate reduction. As a result US equities fell sharply with investors disappointed that rates were not slashed more aggressively, or at the very least were not accompanied by promises of future rate cuts. According to Powell the cut was the result of the Fed moving to a more accommodative stance due to mid-cycle adjustments. ‘Trade tensions seem to be having a significant effect on the economy,’ he said, adding that, ‘global manufacturing slow down is a bigger factor than expected last year.’ Given Trump’s apparent disregard for the Fed’s independence and his vociferous lobbying of Powell to aggressively lower interest rates which has included threats of firing him, some may many wonder if the rate reduction was effectively Powell succumbing to the President’s pressure. Even if Powell is not explicitly obeying the person who appointed him to his post, one may wonder if Trump is using tariff threats to dictate the Fed; if so, will he use them again?

 Investment Outlook

James O’Leary, CFA, our Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, is braced for on-going trade negotiations between the US and China through the 2020 elections. He believes there will be a range of smaller agreements along the way which may include Chinese concessions with respecting intellectual property and purchasing US agricultural goods (e.g. soy beans) but that the resolution that markets are craving will prove illusive until the 2020 election is decided. If a Democrat wins, one imagines a somewhat less hawkish stance against the Chinese, which President Xi would lap up; if Trump is re-elected O’Leary believes that Xi will be coerced to bow down to Trump’s demands, the Chinese President’s de facto life-long premiership, notwithstanding. While O’Leary is not particularly a fan of the market volatility that the trade dispute has inflicted upon markets, saying, ‘tariffs and the threat of tariffs have slowed down and damaged the global economy and will continue to impede growth,’ he believes that some battles are necessary in light of China’s brazen disregard of respecting patents and its unbalanced trading relationship with the US. Moreover, according to O’Leary, at the base of this trade disagreement is far more than mere trade: it is the battle for 5G technological supremacy. He believes that China is aggressively pursuing a plan of developing and disseminating its 5G tech throughout the world – through US blacklisted company Huawei – while the US government is putting its full support in Ericsson and Nokia not only to ensure that US-made chips are at the forefront of the 5G revolution but also to make sure that the West continues its domination in this tech sector. As a result of this tech battle, O’Leary believes that the tech sector is poised to grow positively as chips and software will be the major drivers in the 5G revolution. Consequently, says O’Leary, Henry James International Management will expect to be over-weighted in tech.

O’Leary agrees with Trump’s pointed assessment that China overtly manipulates its currency; yet, in his view, it is not necessarily a bad thing for the world. On the contrary, it may provide an element of economic stimulus for the world as it will make Chinese goods that much cheaper for consumers. This of course will keep Chinese goods relevant in the US market despite the negative intentions of Trump’s tariffs. And yet, devaluing the Yuan will likely impede China’s own economy because it has decreased the value of their own stock market – relative to the US’s – by 10%. While many Chinese companies who import to the US and other countries may be partially shielded from this negative side effect, the value of non-exporting companies will have gone down considerably in virtually one fell swoop. O’Leary also suggests that China devaluing its currency so brazenly has damaged the Yuan’s long term dollar independence and its ability to act as a major stable currency internationally.

O’Leary did not believe that the US economy needed a rate cut and that Powell lowered it as a precautionary measure and maybe even as a nervous attempt to undo his December 2018 rate increase. In light of trade disagreement escalations, O’Leary believes that we will see another rate cut by the end of 2019 to help stimulate the global and US economies. Of course, a consequence of lowering interest rates is that that EM economies – including China’s – will benefit because of their dollar denominated debt. As result, says O’Leary, Henry James International Management will hope to increase its EM exposure; however in light of China’s volatility there are no immediate plans increase exposure there.

Henry James International Management July Market Commentary
Was the Fed’ s 25 basis point rate reduction Powell succumbing to Trump’s pressure?

In so far as O’Leary is happy to combat the economic headwinds presented by trade disputes and even Brexit, which appears set for a no deal outcome on October 31, 2019, he will cautiously welcome the Fed cutting interest rates; however, he views interest rates being so low for such a long time as a rather dangerous game. ‘Cutting interest rates will stimulate the economy – but you can only play that card while there are still rates to be cut,’ he said. O’Leary added, ‘The Fed needs to the tools to control inflation when we have a recession, which many believe is on the horizon, but with rates so low there will be little wriggle room to make further cuts to mitigate the effects.’

We see July’s overall figures showing small dips in the face of raging uncertainty the result of a range of market forces battling themselves into a stalemate. In the medium term future we believe we can expect minor progress in the US-China trade dispute – with possibly some Trump-induced bumps in the road – until the next US general election; and we will look forward to the benefits of lower interest rates, despite our fear that unnecessary reductions may leave the Fed powerless should a recession hit. Ultimately, we remain hopeful that lower interest rates and a settlement to trade disagreements combined with the extra attention the Trump should give the economy in 2020 will result in continued global growth and that our concerns about economic headwinds will begin to fade.

 Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management June Market Commentary

Market Overview

There is a lot of turmoil facing global markets these days, but – despite a shaky May – two quarters into 2019 there is a lot to be positive about. So far this year, we have seen a great deal of drama involving the world’s two superpowers on the verge of a bare-knuckle trade war. Despite the many reasons to be pessimistic, Year-to-Date (YTD) markets have performed brilliantly: Developed Market (DM) equities are up a roaring 14.49% as measured by the MSCI EAFE index; Emerging Market (EM) equities stiffed armed 2018’s woes, up 10.76% and the MSCI World ex USA Small Cap is up an impressive 13.22%. For the Second Quarter these indices are in positive territory: the MSCI EAFE +3.97%, the MSCI Emerging Markets +0.74% and MSCI World ex USA Small Cap +1.97%. Both the YTD and Second Quarter figures have a stellar June to thank for such happy reading, as the month that just finished clawed back the devastation wreaked by May with the MSCI EAFE up 5.97%, the MSCI Emerging Markets +6.32% and MSCI World ex USA Small Cap +4.59%.

Just as 2019’s second fiscal quarter transitioned to its third, US President Donald Trump was behind the scenes at the G20 summit with his Chinese counterpart Xi Jinping banging out a shiny new trade truce. This was unveiled on July 1st and markets erupted in elation, but were brought back down to earth when everyone realized that ‘trade truce’ does not actually mean a sweeping resolution to the damaging trade dispute, nor does it end the costly tariffs both sides have enacted on the other’s goods. Moreover, Chinese tech giant Huawei remains a blacklisted company in the US and President Trump has not exactly signaled that he will back down from his desire to see his allies also eradicate Huawei technology from their borders. And yet, there were good will overtures galore, including Trump agreeing to ease restrictions on Huawei’s US technology purchases and to halt a fresh round of tariffs that would hit another $300bn of Chinese goods. President Xi responded with positive gestures of his own, promising to purchase an unspecified amount of US farm products and to resume trade talks immediately.

Henry James International Management June Market Commentary
Is trade between the US and Mexico stable?

It seems that Trump has frightened Mexico’s President Andrés Manuel López Obrado (AMLO) into submission through the threat of quickly escalating tariffs, the new free trade deal known as the United States-Mexico-Canada Agreement (which is agreed to but not yet ratified), notwithstanding. While early June was a worrying period for markets impacted by US-Mexico trade, normality resumed when Trump called off the 5% tariff on all Mexican goods on June 8th. As a result of this spectacle, trade along the southern US borders seems stable for both countries, but one wonders what the impact may be for such blatant disregard of this free trade agreement and if it may alter the way in which other nations (chiefly China) view the value of a trade deal with the US.

June saw the US and Iran on the brink of genuine military conflict when on Thursday June 20, 2019 President Trump called off an air strike on 3 Iranian targets. It is reported that the mission was aborted at the last moment as the President was advised that the strike would cause upwards of 150 casualties, which was deemed a disproportionate response to Iran shooting down a US drone. US-Iranian tensions had already been at boiling point even since an incident in the Gulf of Oman involving two oil tankers, which the US says were victims of an Iranian mine attack, which the Islamic Republic has vehemently denied. Far from being on the mend, since then US-Iranian relations have only worsened and Iran has taken dramatic steps to put pressure on the rest of the international community to re-embrace it: on Monday July 1st Iran declared that it breached the 300-kilogram limit for low-enriched uranium that was agreed in the Iran Nuclear Deal. Iranian President Hassan Rouhani warned on July 3rd that Iran would also be increasing its enrichment capacity to above the pre-agreed limits, too, and would not comply with the agreement unless it received relief from US sanctions provided by the other signatories.

Despite President Trump increasing pressure on the Federal Reserve to slash interest rates, Chairman Jerome Powell was unperturbed and announced that he would keep rates unchanged, between 2.25% and 2.5%. Trump has been a critic of Powell on Twitter and has apparently been privately threatening to fire him for failing to lower interest rates. Trump denies this rumor and Powell says he fully intends to serve his full 4-year term as the Federal Reserve’s Chairman; moreover, the President sacking Powell would be an unprecedented action that almost certainly does not have a legal basis.

Henry James International Management June Market Commentary
The EU has already confirmed that it is Prime Minister Theresa May’s deal or no deal at all.

In Britain the final two candidates for Conservative Party Leader and Theresa May’s replacement as Prime Minister (PM) are Boris Johnson and Jeremy Hunt. While both candidates appear to be lusting after the highest office in Britain, the winner will inherent a government that simply does not have the Parliamentary math to resolve the most pressing topic: Brexit. Johnson – who is by far the favorite – says that, while a no deal Brexit is not ideal, he will push Britain out of the European Union (EU) on October 31st, 2019 no matter what. His rival Hunt – who campaigned for Remain in the 2016 referendum – said he would deliver Brexit but would be open to extending the deadline if a deal was nearly complete. The EU and its Parliament are essentially closed for the summer, which means that when business resumes it will be very difficult for whoever wins the leadership contest to have the required time to renegotiate a Brexit Deal; besides which, the EU has already confirmed that it was Mrs. May’s deal or no deal at all.

Investment Outlook

According to James O’Leary, our Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, the trade sanctions of which President Trump has become so partial have become the greatest headwind to global markets, specifically the uncertainty it forces the US economy and its businesses and consumers to face. ‘When there is uncertainty, long-term investments are not made. This slows economic growth as investment into the future is not made and decisions are deferred,’ O’Leary says. Amongst other items, this has a significant effect on job creation and retention, which subsequently affects the consumer spending power that drives the economy. O’Leary points to two sectors that have been dealt unenviable blows by the tariff uncertainty: agriculture and technology. The former has been a victim of the US-China dispute as Beijing has dramatically reduced its purchases of soybeans and other items in response to US tariffs; the latter, namely Qualcomm and Intel, has seen it coerced to end selling computer parts to China by way of a Trump executive order.

While there is clearly much lasting damage that a prolonged trade dispute would do to the American economy, the positive news is that the sting will eventually subside as supply chains are moved away from China and to other EM economies like Vietnam, India and Myanmar. While China boasts the ability to manipulate its monetary policy in a way envied by Trump, O’Leary believes that China is in a more precarious situation than the US as once American businesses move their supply chains away from China there will be minimal incentive to move them back, even after a trade deal has been realized. ‘The problem for China,’ says O’Leary, ‘is that there is a chance that these losses will be permanent.’ He continues: ‘There is a positive for other EM countries who inherit this manufacturing as it may help increase longer-term economic growth. It is also a positive for the US in that production will have been diversified away from China.’ Despite this, O’Leary believes that President Xi will simply wait out the end of the Trump presidency to see if he can get a better deal from a less bellicose Democratic president who may well assume the keys to the White House in 2021 – as China does not suffer from the inefficiencies of party politics Xi and his party arguably have time on their side.

Despite the market anxiety of the eight-day period during which Mexico faced escalating US tariffs, both countries appear to have emerged on the other side of what could have been a fraught trading relationship. Mexican President “AMLO”came into office on the back of some bold and ambitious economic promises to his electorate; despite this, the economy over which he presides has been doing very poorly. Mexican Gross Domestic Product (GDP) shrank by 0.2% in the first quarter of 2019 from the previous three months, which was below estimates a panel of economists surveyed by Bloomberg predicted. Mexico is in dire straights and the threat of tariffs offered a layer of instability that AMLO could have done without.  Consequently O’Leary believes that AMLO will do anything – within reason – to stay on Trump’s good side to avoid any future tariffs.

The industry most affected by the threat of tariffs was the automobile sector, says O’Leary, which experienced plenty of equity volatility in June. European, Japanese and even American car manufacturers have opened up factories ‘south of the border’ to take advantage of the reduced cost of doing business in Mexico. While Trump’s tariffs were almost completely political in nature and focused squarely on immigration concerns, O’Leary is fascinated by a certain hypothetical: he imagines a scenario in which tariffs were enforced, which may compel car companies to bring their factories from Mexico to within America’s borders. Such a situation, which would no doubt be brilliant for the US economy, would face Mexico with one issue with which AMLO is not currently dealing; i.e. high unemployment. Historically higher Mexican unemployment means heightened illegal migration through the US-Mexico border so one wonders which political goal is the more salient for Trump: US manufacturing and jobs or thwarting illegal immigration?

Henry James International Management June Market Commentary
In June the automobile industry was extremely affected by Trump’s threat of Mexico tariffs.

Despite the roaring headwinds caused by tariff-induced uncertainty, at Henry James International Management our unbiased and disciplined country allocation system allows us to ignore the noise and focus on the facts with which our data present us. Our research is currently bullish on France, Germany and Sweden, as well as Latin America and Asia. According to our Senior Portfolio Manager O’Leary, our quantitative stock selection process will continue to flow in this direction.

The saber-rattling between the US and Iran has caught our attention, but only in so far as it is increasing our exposure to energy stocks. ‘The combination of reduced OPEC production and restricted supply from Iran has caused the price of oil to increase,’ says O’Leary. As long as the conflict persists, the price of oil will stay up, he says. While Henry James International Management is happy to enjoy the gains from rising oil prices, we believe the downside is that expensive energy will negatively impact global economic growth and pressure on consumers and businesses.

Despite Senior Portfolio Manager O’Leary closely monitoring the Federal Reserve’s near complete about-face when it comes to their projected monetary policy, he says that Henry James International Management has not had to change its own strategy as a result; rather, our quantitative growth strategy and targeted data analysis guides us safely through ‘bumpy stock market terrain’. According to O’Leary, this remains the case even in recession: ‘We generally underperform at the initial market drop and recover after a few months as valuations normalize. The portfolio naturally moves to a more defensive posture over time in a bear market while keeping its growth bias,’ he says.

O’Leary predicts that Powell will keep interest rates flat for the rest of 2019 and probably for 2020, too. While Republicans and President Trump will be keen to see interest rates lowered to spark the economy into high gear ahead of the 2020 election, according to O’Leary to see the effects of compromising the independence of a country’s national bank one only has to look to Venezuela and Turkey. ‘There seems to be a power struggle between Trump and the Federal Reserve Board,’ says O’Leary. ‘The Federal Reserve is supposed to be set up to serve the long term interests of the USA, whereas Trump wants it to serve his interests.’ O’Leary says that in 2018 the Federal Reserve’s medium term goal was to increase interest rates steadily so that when the next recession comes, they would have some stimulus tools; i.e. lowering rates, to deal with it. However, with such unstable market conditions, mostly due to tariffs and other trade issues, Powell may have to live with the existing cushion of 2.50%. O’Leary adds: ‘If the economy remains strong there will be an upward interest rate bias to hold inflation down while maintaining orderly growth.’ However, if future rising rates cause Trump to get into a battle with Powell, the American people will become the big losers, says O’Leary. In the event that rates are maintained at 2.50% – or are even lowered – EM economies may benefit tremendously as low interest rates allow them to borrow in US dollars (USD) at a low borrowing rate. Of course, this comes with a significant risk: strong USD against a weak EM currency can cause major problems in repaying loans which can result in defaults and bankruptcies.

Henry James International Management June Market Commentary
In the short term, there are no positive Brexit outcomes for investors.

Regarding Brexit, O’Leary says that he sees no good solutions on the horizon. ‘Once uncertainty entered the British economy prior to Brexit our system made us reduce our exposure to the UK and it has remained underweight relative to EAFE,’ he said. The UK equities to which Henry James International Management has exposed its portfolios receive a greater portion of their revenue from outside the UK rather than being domestic orientated companies. According to O’Leary, in the short-term, the question is not whether or not Brexit is a wise move for the UK as much as it is the case that it has created raging market uncertainty with dire consequences. He said: ‘We believe the UK will underperform until there is certainty; once there is certainty, UK equities will lag until it is clear whether or not the resolution to the mess that is Brexit is determined to be good or bad for the UK economy.’ In short, we believe difficult days lie ahead for UK equities.

In summary, with half of 2019 in the books there are clearly plenty of headwinds to keep investors up at night; but such anxiety belies the many reasons for optimism, not least of which markets’ apparent ability to breeze past the geo-political turmoil that can subdue them. Moreover, we believe that our quantitative strategy for growth gives Henry James International Management the ability to perform well relative to the benchmark in all market conditions.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James May Market Commentary

Market Overview

An Irish poet once wrote, ‘Things fall apart’. While William Butler Yeats’s words were illuminating the terror and awe of the second coming of Christ, it would be easy to see how investors might consider them rather apropos for the way in which May managed to thwart and consume 2019’s positive market momentum. Just as the S&P 500 reached its record high at the end of April, May saw the index fall by -6.35%. Developed Market (DM) equities were also victims to the blood-dimmed tide: as measured by the MSCI EAFE index their value tumbled by -4.66%. While such losses will trouble investors, particularly as most indicators point towards a daunting, uphill climb for markets for the rest of 2019 and beyond, it would be wise to remember that year-to-date the S&P 500 and MSCI EAFE not only remain well into positive territory, they are both exceeding the expectations set during the dismal days of December 2018. While American and DM equities have been left merely bruised, May brought Emerging Market (EM) equities to their knees. Their stellar 2019 returns were overrun and eliminated, falling by -7.22% as measured by the MSCI EM index, practically down to where they were at the end of 2018.

The main protagonist who pitilessly turned markets upside down in May was the United States (US)-China trade war. Just over two months after US President Donald Trump indefinitely postponed the tariff raise from 10% to 25% on over $200bn of Chinese goods, on May 10, 2019 he suddenly enacted them with no more than a few days’ notice. The following Monday, May 13th the Chinese retaliated with their own tariff increases on over $60bn of US goods. The freshly realized trade war had begun and its impact was swift and immense: the Dow fell 617 points and the S&P 500 and Nasdaq both dropped a shocking 2.4% in just one day of trading. Those hoping that Trump’s hard nose tactics would yield an immediate result and that the tariffs would be short-lived may well have been thinking naively: we are a lot closer to new increases than to a cooling of trade hostilities. More than $300bn of fresh Chinese goods – mostly consumer goods, including automotive vehicles, some of which rather ironically bearing the name ‘General Motors’– are only a signature away from being enacted by Trump. More tariffs would likely incur a further retaliation from China and suck both countries deeper and deeper into a trade war from which it will not be easy to escape. According to the International Monetary Fund the trade war will cost the US around $455bn in the short term, a round number that is more than the total size of the South African economy, which is the entire continent of Africa’s largest. While it will hit China hard, too, the one party-state has the greater ability to manoeuvre and pull levers to stimulate its economy through monetary and fiscal easing and by lowering taxes. Furthermore, unemployment is not an issue in China; but despite its resilience, China’s businesses and consumers will feel plenty of trade war-induced pain. Despite this being a bilateral issue, all international markets will feel the trade war’s strain and stress.

Henry James International Management May 2019 Market Commentary
More than $300bn of fresh Chinese goods – including automotive vehicles rather ironically bearing the name ‘General Motors’– are only a Trump signature away from being enacted.

Chinese telecommunications giant Huawei is currently stuck between its lofty capitalistic aspirations and ownership links to the Chinese one-party Communist state. On May 15, 2019 Trump banned Huawei products from the US through a national security order, claiming that Beijing is using the company to conduct international espionage. Both China and Huawei vehemently deny the accusations; it has also been suggested that this is a power play by the US to make the Chinese more pliable at the trade negotiating table. This accusation was first levied against Washington back in December 2018 when Huawei Chief Financial Advisor Meng Wanzhou was arrested in Canada at the request of the US on 13 criminal charges including conspiracy to violate US Iranian sanctions, fraud and obstruction; she remains in Canada under partial house arrest where she is battling extradition. According to the US, Wanzhou’s arrest and its banning of Huawei products are both completely unrelated to the trade war. In the meantime, Huawei is suffering as computer chip behemoth Arm has set them adrift and Google is on the verge of withholding its signature Android mobile and tablet operating system. At the same time, Trump is pressuring US allies to also ban both Huawei products and technology – which presents difficulty for countries like Britain and Germany who are using the tech company to build their new 5G networks. If Huawei were tempted to think that their plight could not get any worse and that it was only up from here, they would be crestfallen by the news that Britain has dropped the Huawei Mate 20 X from its forthcoming 5G launch and that – as long as Trump has his Chinese vexation aimed at Huawei – more disappointments are likely to follow.

After a brief and thoroughly restful April slumber, a reinvigorated Brexit is poised to join ranks with the US-China trade war and become a serious thorn in markets’ side. To the delight of investors, late March saw a ‘No-Deal’ Brexit temporarily averted; regrettably the new October 31, 2019 deadline is rapidly approaching. April and May hoisted a range of existential and practical questions upon Britons, their government and their Members of Parliament (MP): what kind of Brexit the United Kingdom (UK) wants, how it will get there and whether it still even wants to leave the European Union (EU) at all. While these introspections have resulted in plenty of discord in the main opposition party, Labour, the ruling Conservatives have manifested their unrest by forcing their party leader and the Prime Minister (PM) Theresa May to resign. Mrs. May is wildly unpopular among Brexiters for failing to arrive at the hard Brexit the more dogmatic among them desired; she is disliked by Remainers for her dogged pursuit of Brexit despite what they believe is copious evidence that remaining in the EU is the far more sensible option. As a result, very few people will be shedding a tear for the PM, and yet markets may be quaking in their boots. While equities have been tortured by the instability and lack of clear direction fostered by Mrs. May’s inability to successfully manage Brexit, it was none other than the PM who saved them from the ruinous ‘No-Deal’ Brexit by postponing the deadline to October 31. Furthermore, any deal under Mrs. May would have probably been an equity-friendly soft-Brexit – now that she is leaving her post it is a near certainty that her successor will come with the most robust of Eurosceptic credentials and could have minimal problem steering Britain and markets off a ‘No-Deal’ cliff to achieve Brexit by October 31.

As Mrs. May has abdicated, the Conservative Party is currently in the midst of a leadership contest and the result will bring the UK its next PM. Boris Johnson, MP, is the leading candidate and he has already declared he has no problem with a ‘No Deal’ Brexit if a suitable agreement cannot be made before October 31, 2019. While Johnson is bold, brash and prone to the occasional gaff – a bit like a subdued, British equivalent of President Trump – his words will likely prove easier to say than to effect: there simply is not a majority for a No-Deal Brexit in Parliament and Johnson will inherent from Mrs. May a minority government from which it is very difficult to do anything significant, particularly when so many members of his own ruling Conservative Party are dead set against a ‘No Deal’ Brexit. While leaving the EU without a deal remains the default legal position regardless of Parliamentary math, if it appears that the UK is headed in that direction it is a near certainty that a no-confidence vote in the government would be triggered, which would result of a new general election. In this very plausible scenario, unless things drastically improve for Johnson’s Conservative Party, particularly after the way in which it got hammered at the recent European Parliamentary elections, they would likely lose the keys to 10 Downing Street to Labour. As such, Johnson will likely have no interest in a fresh general election and will therefore be keen to avoid a situation that would see his government dissolved through a no-confidence vote. Therefore, it seems sensible that even with a Hard-Brexit PM all options remain on the table, including a second ‘People’s Vote’ referendum that could break Parliament’s Brexit deadlock and give the a final decision about what kind of Brexit is desired – or if it is still desired at all – back to Britons. While markets may optimistically decide to take this as a news teetering on ‘positive’, even with rose-tinted glasses it is clear that the raging political uncertainty that would accompany avoiding a ‘No Deal’ Brexit in this convoluted, dragged-out fashion would punish the British economy and equities within and beyond the UK.

Already a diabolical month for markets, there was more bad news for investors on its final day – on May 31st Trump announced plans for a 5% tariff on all imported Mexican goods to begin on June 10, 2019 as a way to pressure Mexico into taking action to help manage the illegal migrant crisis. As discussed in last month’s Market Commentary, the Mexican economy is already in bad shape and tariffs would have been a crushing blow, particularly as they were scheduled to increase incrementally:  up to 10% in July and possibly as high as 25% by October. Thankfully Trump announced on Saturday June 8th that he would cancel the tariff increase as Mexico agreed a host of new measures: to clamp down on migrants crossing its northern US border, to deploy its national guard to the southern Mexican border to thwart fresh migrants moving north and to work to abate human smuggling. The result of this drama – an 8 day period that saw American equities, consumers, businesses, investors and the Mexican economy all squirm in uncertainty and fear– may be painted as a political victory for Trump as Mexico obliged to his wishes without any tariff ever having been introduced. But the question must be asked, particularly in light of the on-going issue of the US-China trade war: is it wise to use tariffs in the way in which the President is quickly becoming a fan?

According to Trump, ‘Tariffs are a “beautiful thing when you’re the piggy bank,”– but what happens to this bold assertion when it is scrutinized? Investors and equities should all delight in the fact that President Andrés Manuel López Obrador (AMLO) recognized the genuine damage that quickly escalating tariffs would do to his country’s already fragile and floundering economy and acquiesced to the US President; the problem from an American perspective vis-à-vis Make America Great Again is that tariffs would have done arguably more damage to the US economy (and those who rely on it), its vastly superior strength, notwithstanding. Indeed, Mexican tariffs would be a blow for US businesses with supply-chains running through Mexico and the resulting products – from car parts to avocados – would bear what is effectively a sales tax that would be passed on to American consumers. As such it is no surprise that the Republican Party was unable to rally behind the President, with both Senators Mitch McConnell and Ted Cruz speaking out in opposition to the Mexican tariffs. Moreover, to view Trump’s thoughtless words on his love of tariffs through a historical prism, one need only look back to the Smoot-Hawley Tariff Act to see the effects of over-reliance on tariffs that saw them implemented on over 20,000 imported goods, which subsequently incurred punitive retaliatory measures, which resulted in American exports and imports being reduced by more than half during the Great Depression. There is near consensus that the Smoot-Hawley Tariff Act – effected in 1930 – greatly exacerbated the Great Depression; it is a bit of history that confirms that excessive tariffs have the ability to cause economic shrinkage, spiral out of control and cause a deep and painful recession. The President may wish to consider this if he is to stand a chance at re-election in 2020.

Henry James International Management May 2019 Market Commentary
Mexican tariffs would be a blow for US businesses with supply-chains running through Mexico and the resulting products – from car parts to avocados – would bear what is effectively a sales tax that would be passed on to American consumers.

Like Trump, the Federal Reserve would also like to see a recession avoided; indeed, we believe its Chairman Jerome Powell is all too aware of the likelihood of one barrelling towards the US. Not only has he spontaneously climbed down from a more-or-less set policy of increasing interest rates throughout 2019, he has even given signs that he is open to lowering them. During a speech on June 4th in Chicago, Powell said that he would be ‘closely monitoring’ trade negotiations and ‘other matters’ – that one might suggest could be tariffs – for the US economic outlook and to act appropriately to sustain its expansion. Naturally, lowering interest rates would not only be a trick to fighting back recession, it would also provide relief to US businesses and consumers from tariffs.

In the Middle East, US-Iranian tensions have flared up to the point where a bona fide war has become a genuine possibility. Since leaving the Iran Nuclear Deal, Trump’s administration has followed a policy of maximum pressure – apparently this has so far failed as Iran is not succumbing to sabre rattling or threats and they have even defiantly said they may soon cease complying with the Nuclear Deal. Moreover, according the US Secretary of State Mike Pompeo, Iran is using mines to attack oil tankers in the Gulf of Oman. In short, through Trump’s treatment of Iran, not only are we closer to a war, we are also closer to Iran choosing to resume its nuclear weapons program. Despite Trump saying that his only desire is to get Iran back to the negotiating table to prevent it from developing these weapons, in May the President deployed military assets to the region, which may suggest a somewhat more hawkish stance.

Ever since Brazilian President Jair Bolsonaro managed to get his ambitious and necessary pension reform through the Lower House Constitution, Justice Committee and subsequently on the doorstep of Brazil’s Congress, there has been little movement. However, as this was always going to be a long process, Bolsonaro’s administration remains positive. However, according to credit rating agency Fitch, while the pension overhaul is absolutely necessary, there is no scenario in which it will single-handedly stabilize Brazil’s public debt, much less kick its economy into the high gear the reforms supposedly promised. Consequently, it would seem that the market’s original enthusiasm for President Bolsonaro may have been unjustified.

In India, despite failing to realize his wide-ranging reform program in his first term and the disaster that was his currency redenomination, Narendra Modi won a decisive election victory to see him remain the PM for another 5 years. Indian equities enjoyed this tremendously, surging to record highs on the back of Modi’s new potent political mandate. Despite India’s Sensex’s recent success, there are concerns that the index is overvalued, with a forward PE of 18 compared to its EM Asia peers who average 12. Moreover, the Indian economy is facing high unemployment and its lowest GDP growth in 5 years.

A bright spot that stands in relief to the ruin of May is Vietnam, who is rather enjoying the US-China trade war. The Southeast Asian country is capitalizing on supply chain disruptions as more and more manufacturers move from China to within its borders to escape Trump’s tariff. In no small part due to this, its economy is expected to grow to just under 7% in 2019 and is poised to exceed 7% in 2020. While Vietnam’s economic success bodes well for other Asian EM economies, it is set to reap the most benefits from the US-China trade war given its proximity to China, well regulated and high quality labor conditions and affordable wages.

Henry James International Management May 2019 Market Commentary
Vietnam is set to benefit from the US-China trade war given its proximity to China, well regulated and high quality labor conditions and affordable wages.

Investment Outlook

No matter the direction from which you approach it, May was an appalling month for equities. Beyond its poor performance, a range of intimidating headwinds appear to be here for the long haul to stymie or at least frustrate positive market momentum. The only bit of lipstick we can put on this is really two fold: DM equities remain well above expectations so far in 2019 and they are in positive territory year-to-date. Secondly, despite EM equities losing all their 2019 gains in a single month, there are still fine investment opportunities to be had – one just might have to look a bit harder to find them.

We had repeated to ourselves ad nauseum that cooler heads would prevail in the US-China trade war. We were wrong and we are now immersed in a full-fledged trade war which – despite arguably some virtuous motivations – will damage both the US and Chinese economies and will cause pain for many others. While it is at best wishful thinking, we can only hope that there will be a somewhat swift resolution that will see all tariffs gradually rolled back while both countries work toward a new, mutually beneficial trade deal to mitigate the ways in which American businesses, consumers and the economy have to suffer. What is more, even without a trade war, both the US and China have been in the midst of worrying economic slow downs, so one wonders how much deeper the plunge will be now? Our lone hope is that Trump’s survival instincts will kick in and he will remember that he has an election to win in the next calendar year, which may be a tall order if he has single-handedly driven the US into a trade-war-induced recession.

We are delighted that Trump called off his Mexico tariffs at the last moment, something that equities at least momentarily enjoyed; however, we believe untold damage has been done to the American economy and its trading relations as a consequence of the 8 days during which the 5% tariff threat appeared to be an imminent and palpable reality. From an American business perspective, only the most optimistic persons will think that the trade hostilities are done and dusted and that we have emerged on the other side into a new stable trading relationship between the US and Mexico. In many ways, American businesses who rely on Mexico for their supply chains or materials are faced with a similar predicament as their UK counterparts with Brexit. The threat of future tariffs popping up again creates a most uncertain environment for businesses with links to Mexico, and such conditions impede the ability to make medium- to long-term business plans and also make it difficult to invest in new infrastructure and make new hirings; it also makes these businesses far less attractive investment opportunities.

We also wonder what damage the threat of tariffs has done to the North American Free Trade Agreement (NAFTA) replacement between United States, Mexico and Canada vis-à-vis the recently signed (but have not yet ratified) United States-Mexico-Canada Agreement (USMCA)? One may ask whether this new free trade agreement is worth the paper on which it is written if tariffs can be thrown into the equation whenever Trump is feeling trigger-happy. It does not just hurt the US’s reputation with its northern and southern neighbors, we believe it sends the wrong message to the Chinese about the potential value of a new US trade deal. Furthermore, the US brazenly devaluing the meaningfulness of its trade deals does not exactly encourage the Communist state to make any of the dramatic concessions that Trump is justifiably demanding.

Henry James International Management
Despite Brexit, Britain remains an economic powerhouse and is filled with some of the biggest, best and most innovative businesses in the world.

Our expectations for Brexit are not overwhelmingly positive. We see a ‘No-Deal’ leaning PM replacing Mrs. May, and we see this person (probably Mr. Johnson) being thwarted and frustrated by his lack of Parliamentary majority, the Remainers in his own party, the opposition parties and maybe even the House Speak John Bercow (who has been transparent about his desire to block Brexit). Britain is at a Brexit stalemate which means that markets should be braced for more uncertainty and any residual positive momentum may gradually evaporate and grind the UK economy to at best a halt, at worst, recession. If there is any hope, it is that Britain remains an economic powerhouse and is filled with some of the biggest, best and most innovative businesses in the world who may be able to keep the country afloat and heading in the right direction while Britons and their MPs duke it out over a Brexit resolution.

Regarding EM markets, while they will largely be victimized by the fall out of the US-China trade war – which is most worrying – it is not all bad. The Fed’s decision to freeze interest rates is very good news for EM equities; Powell deciding to lower rates would be an early Christmas present. Furthermore, while China is clearly in a worse place while embroiled in a trade war, its President Xi Jinping has the ability to manipulate his monetary policy in a way that can soften the damage through continuing a strategy of monetary and fiscal easing. China also recently delivered over $298bn of tax cuts and company fees savings, which will only help further. Of course, lowering taxes will not help Chinese businesses retain the manufacturing they will lose to other Asian EM economies to avoid Trump’s tariffs. Vietnam is already benefitting tremendously from this and will likely continue to do so; and Bangladesh, Myanmar and the Philippines will also likely enjoy benefiting from China’s manufacturing losses. We believe all these markets offer interesting opportunities for investors, but of course rising US interest rates and an even stronger US dollar could bear negative consequences. Lastly, while India’s market may be overpriced, it is likely that their equities may offer better value than US or other DM equities stifled by Brexit or stagnant EU growth.

In conclusion, May has not been a positive month for investors – a trade war is waging without an end in sight between the world’s two largest economies, Brexit is a disaster and is impeding both the UK and EU economies, Trump has a self-admitted weakness for recession-inducing tariffs and there are a range of other geopolitical issues that have destabilised markets. And yet, the many causes for concern notwithstanding, we expect the world economy to end 2019 with growth; what is more, we believe EM equities will presents investors with copious ‘diamonds in the rough’ opportunities which will be there for those willing and capable of unearthing them.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James April Market Commentary

Market Overview

In our last Market Commentary our delight with 2019’s first quarter returns was somewhat tempered by the view that widespread geo-political risks could send markets crashing down and undermine investor confidence. In so far as April was concerned, we were grossly out of step – April saw the S&P 500 end at its all time high 2,945.83 and up 4.05% for the month. Developed Market Equities (DMEs) were up 2.91% in April as measured by the MSCI EAFE; Emerging Market Equities (EMEs) followed suit, up 2.12% as measured by the MSCI EM Index. Unfortunately, as things stand at the time of writing this commentary, the early days of May have so far managed to wipe off April’s gains, leaving investors filled with uncertainty about the immediate future.However, it’s important to look at the longer view. Year-to-date most of the relevant indices have exhibited strong returns: the DMEs as measured by the MSCI EAFE are up 11.72%, the MSCI EM Index is up 11.75%, while certain regions have defied gravity and posted exceptional returns like the MSCI BRIC Index up 15.54% year-to-date and Chinese Large Caps, which have particularly defied the odds, posting a 22.6% year-to-date return.

All is relatively quiet on the Brexit front. Of course, that does not mean that markets are responding positively as a consequence of the calm or that an economy- and market-friendly resolution is in the pipeline. It does, however, mean that Britain and the Europe Union (EU) are caught in limbo and are blind to what kind of future relationship they might have with each other. While EU leaders are apparently desperate to avoid a damaging no-deal Brexit, if we take them at their word they are unwilling to offer UK Prime Minister (PM) Theresa May any more flexibility to make her much maligned deal more appealing to UK Members of Parliament. As result, the PM has been engaged in inter-party negotiations with the opposition Labour Party; but these do not appear to be going anywhere and both sides are calling on their respective leaders to abandon the talks. It is likely that May will bring her EU approved Brexit deal back to Parliament for a fourth vote, which might just offer equities the certainty they require to thrive if it were passed; and yet investors should not get too excited as Parliament’s first rejection of the deal was a record worst defeat for any PM in the UK’s long history. Of course, the second and third rejections were almost as decisive and equally humiliating for May. The topic du jour in the UK is the European Parliamentary elections; i.e. the elections that were never meant to come to pass which will see Britons and their fellow EU citizens visit the ballot box to elect their future Members of European Parliament. While nothing certain can really be determined or effected by the results of who wins the UK seats, it is easy to see how and why many view this election as either an unofficial referendum on Brexit and/or an opportunity to voice Brexit-related frustration.

It was only a matter of weeks ago when markets spiked on the back of the news that President Donald Trump would indefinitely suspend the promised tariff hike from 10% to 25% on over $200bn of Chinese goods and that a trade war seemed all but avoided. Yet suddenly – though, to be fair, not completely unexpectedly – in the week commencing May 5th Trump put his 25% tariff increase back on the table, which he said he would enact should significant progress in US-China trade talks fail to be achieved by Friday May 10th. Good on his word, The US President ordered the new tariffs, which were met by China’s own retaliatory tariffs on $60bn on US goods. Of course, American consumers will feel the brunt of this, but investors were hardly unscathed as on the first business day since the trade war spectacularly reignited, Monday May 13, 2019, that is, we saw the biggest sell-offs since the depressing days of December 2018 and January 2019: the Dow closed down 617 points, the S&P 500 fell 2.4% and the Nasdaq dropped a whopping 2.4%.

Henry James International Management April Market Commentary
As the American consumer will likely feel the result of the US-China trade war almost as a sales tax, Trump has urged the US Federal Reserve to lower interest rates to balance things out for consumers and help stimulate US business.

As the American consumer will likely feel the result of the US-China trade war almost as a sales tax, Trump has urged the US Federal Reserve to lower interest rates to balance things out for consumers and help stimulate US business. Citing that ‘China will be pumping money into their system and probably reducing interest rates to make up for business they are losing (as a result of the trade war),’ Trump has suggested that the Fed following suit would put America at a huge advantage over China. ‘It would be game over, we win,’ said the US President. While as investors we like the sound of lowering interest rates, not only are we ethically uncomfortable with a government’s executive branch blurring political boundaries, we are wary of Trump trying to make economics work for him and his policies – much like how Turkey’s President Erdoğan has done to great damaging effect in his own country – by turning the Fed into a puppet institution.

South of the border in Mexico, things are not going so well as Mexican President Andres Manuel Lopez Obrador (AMLO) is under significant pressure since first quarter economic data shows a 0.2% shrinkage. This is problematic for AMLO not only because his first quarter results are woefully short of the 4% annual growth he has promised, it is also worse than 21 of the fiscal quarters over which his predecessor President Enrique Pena Nieto – of whom AMLO has been so critical – presided. It will be a tall – perhaps impossible – order for AMLO to fulfil his economic ambitions as not only does Mexico suffer from widespread crime and weak rule of law, but he also committed the own goals of suspending oil contracts and cancelling a $13bn airport, which does not create the atmosphere of certainty private companies will desire to invest in Mexico.

As we travel down to South America, Venezuela exists in a hellish state with an increasing unemployment rate (currently over 35%) and astronomical inflation rates. Maduro remains in the Presidential Palace despite his country crumbling around him. Why and how is the question that the US-backed (amongst others countries, too) Interim President Juan Guaido must be wondering; and the answer likely has something to do with Maduro’s Russian backing, a sinister influence of drug money as well Venezuelans blind faith in so called Chavismo, or the way in which everyday Venezuelans once improved both their wealth and station under their former leader Hugo Chávez, in whose political tradition Maduro follows. Guaido is continuing in his protesting and campaigning in a steadfast fashion, but the look of weariness on his face is unmistakeable. In the meantime Venezuela’s oil production could be cut to zero by the end of 2019 as the US tries to oust Maduro, and despite fears of a tightened oil market, US reserve inventories appear more than capable of filling in for the shortfall left by the world-leading South American oil giant and by Iran, who have been forced to the oil market’s side lines through robust US foreign policy measures.

The expression ‘even a blind squirrel occasionally finds a nut’ was given reinvigorated meaning when Brazil’s far-right President Jair Bolsonaro succeeded in getting his essential pension reform bill past the first legislative hurdle. Bolsonaro managed to refrain from Twitter ‘war or words’ with Brazil’s most senior law maker, lower house Speaker Rodrigo Maia, just long enough to get the Lower House Constitution and Justice Committee to approve the bill so it can proceed to congress. Getting to this point involved more than eight hours of tense debate, as well as Bolsonaro having to submit to several bill alterations demanded by Brazil’s centrist party. Brazil’s President welcomed the success by paying tribute to Maia: ‘The government continues to count on the patriotic spirit of lawmakers.’ Of course, getting the necessary pension reform over the line is anything but a done deal – months of debate and at least another six votes in both houses of Congress must be endured before the bill can become a law.

In other news, South Africans recently went to the polls for their general election. As in all elections in Africa’s largest economy since the end of apartheid, Nelson Mandela’s African National Congress (ANC) won decisively, and yet it managed to reduce its majority. This is will be a worrying sign for party leader and South Africa’s President Cyril Ramaphosa as it suggests that his citizens are utterly fed up of the widespread corruption and economic impotence that marked the multi-term presidency of his predecessor Jacob Zuma. Despite this and South Africa’s dire economic situation marked by high inflation and unemployment, the majority of South African’s see Ramaphosa – one of South Africa’s richest persons as well as being famed for being an adept business leader – as someone capable of digging his country out of its current hole and putting it on the right track toward prosperity.

Henry James International Management April Market Commentary
For the moment Maduro continues to enjoy support from many Venezuelans, some of whom are blinded by their faith in so-called Chavismo, or the way in which everyday Venezuelans once improved both their wealth and station under their former leader Hugo Chávez, in whose political tradition Maduro follows.

India is in the midst of the world’s largest ever democratic election – a more-than 5 week exercise for which there are over 900 million registered voters. While much of Indian politics is local, the two national protagonists are incumbent Narendra Modi of the Hindu nationalist BJP party and Rahul Gandhi of the so-called Congress Party of which Mahatma Gandhi was once a leading member. Which way it will go is not particularly clear at this point, particularly as Modi failed to enact the full range of the promises and reforms that saw him elected in 2014 after the Indian electorate was fed up of the failings and corruption of the Congress Party.

For many of the reasons mentioned above, and more, EMEs have recently taken a beating. Among the most at risk have been countries with USD denominated debt whose own local currencies have been battered either through political miscalculations or geo-political risks and/or threats.

Investment Outlook

So far, 2019 has exhibited a great deal of market volatility.  Although recent market reactions to the escalating trade war and bellicose US-Iran posturing have been severe, it bears noting that most major indices generated strong returns for investors this year through the end of April. 2019 remains a difficult year to forecast, with many reasons for continued optimism tempered by caution. If anything personifies this, it is Brexit. Britain will almost certainly kick the can down the road until October 31, 2019, the new Brexit deadline, which will cast an ominous and uncertain shadow over British and European equities for virtually all of the fiscal year. What will happen after this deadline is most unclear and all options remain palpable realties including a new Prime Minister of a hard Brexit pedigree (e.g. Boris Johnson) taking over from May to crash the UK out of the EU without a deal; equally possible is a scenario that would see a Britain cancelling Brexit on the back of a second ‘People’s Vote’ referendum. If these are both viable and realistic outcomes, so is the veritable infinity of options in between. Of course, there is a way out of this – at least a couple actually. May’s deal remains an option, but – as it satisfies neither Brexiteer nor Remainer – it is unlikely it will be passed. A second option is Parliament getting its act together to come up with a compromised, mutually agreeable solution, but that would involve a degree of cooperation, communication and understanding that has so far proved illusive. If the two sides find reasonable compromise it would likely generate a great deal more investor confidence in the EU. Of course, even with the UK making a nice and cosy home in the liminality that is neither in nor out of the EU, the likely result is still positive economic growth for Britain, but below that of the EU, hovering at or just above 1% for the rest of 2019 and 2020. Of course, if the UK does Brexit without a deal, all bets are off.

As far as a positive outcome for the US-China trade war is concerned, we can only hope that Trump knows what he is doing and that his game of high-stakes poker will result in China coming back to the table, willing to offer the necessary concessions. But if Trump needs the Fed to commit the unorthodox and even inappropriate step of bending to his wishes just to attempt to shield Americans from the trade war’s negative impact, it would seem that the President may have lost control of the situation. We said a trade war would be a disaster for both the US and Chinese economies and that the negative effects would send tidal waves to other world economies; today we stand by that view and hope that cooler heads prevail to see it averted through a mutually beneficial bilateral trade deal. Agreement on a trade deal would likely contribute a major boost to investor confidence and drive the broad markets higher.

Given the recent poor performance of EMEs (the first two weeks of May saw the MSCI EM Index down a dramatic 5.86%) it seems there would be very little to be optimistic about in the emerging market (EM) sector. Despite many EM countries being faced with the challenges created by the range of economic and politics crises in which they find themselves, we are still feeling (relatively) bullish. If there was any doubt, the US-China trade war has made it unofficially official that interest rates will be frozen at 2.5% in 2019; indeed, independent of Trump’s urgings, we believe the Fed will decide to lower rates by 25 basis points in 2019 to counteract the damage the trade war will likely inflict on US consumers. Of course, lower US interest rates tend to bode well for EMEs. Furthermore, due to China’s economic slow down and the way in which it will suffer from the trade war, it will continue its policy of monetary and fiscal easing which will continue to help drive the EM Asia sector. There’s more good news: despite India’s state of political flux from its difficult-to-predict general election, its economy is predicted by the International Monetary Fund to grow by over 7% through 2020. Other Asian EM countries are poised to join India in the ‘7%’ club, including Bangladesh, Vietnam, Myanmar and the Philippines due – in part – to an influx of manufacturing output that may be in a position to fill in for US supply chains gaps created by the US-China trade war.

In conclusion, we are faced with a volatile world economy filled with a range of geopolitical crises, including the behemoths of the US-China trade war and the potential for disaster in Brexit. Despite this, we still believe that EMEs may present excellent opportunities for investors over the long run.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

April Market Commentary

Market Overview

The first quarter of 2019 finished with largely impressive numbers: the S&P 500 boasted its best quarter in ten years, up by 13.1% almost erasing the disastrous losses of the last quarter of 2018.  Globally,stocks generally posted solid returns for the quarter as the MSCI EAFE Index produced a return of 9.04%. International stocks were led by the BRIC countries which generated a 13.01% return. Even lackluster regions like Africa posted a positive return of 3.98%.  Indeed, when considering the full range of threats the global economy faced at the beginning of the year, investors should be happy that markets were able to shrug off those concerns and generate solid returns for the first quarter.

While we are delighted by 2019’s market performance thus far, we sense the palpable risk that the markets’ positive form is on borrowed time and that the 2019 of muted growth that we envisaged at the end of 2018 may return. We still feel very far away from the market friendly Brexit and United States (US)-China trade deal we were anticipating only a month ago. Both items continue to cause a considerable lack of clarity, which will likely perpetuate market instability. This, and other factors, remain problematic even in the face of last month’s optimism and have compelled us to face the reality that 2019 may yet become an uphill battle for international equities.

Henry James International Management April Market Commentary
Prime Minister Theresa May once said that ‘no deal is better than a bad deal’; alas, she ate her words and extended Britain’s withdrawal and in the process risked Brexit never happening at all, a reality that markets may find rather appealing.

It was largely a foregone conclusion that Britain would leave the European Union (EU) on March 29, 2019 ever since Primer Minister Theresa May and Parliament invoked Article 50 to begin the count down two years ago. Indeed, this was due to happen either with a mutually beneficial deal or an acrimonious divorce; i.e. a ‘no deal’ Brexit. And yet, to the joy of some and ire of others, the supposedly immoveable Brexit deadline was pushed back, first to May 22nd – were May able to get Parliament to pass her deeply unpopular Brexit deal – and most recently to October 31st due to Parliament rejecting her deal three decisive times and failing to agree on any viable alternative arrangement. May once said that ‘no deal is better than a bad deal’, which suggested that she would have been prepared to see Britain ‘crash’ out of the EU on April 12th, were the new six month Brexit extension not granted. Alas, she ate her words and extended Britain’s withdrawal and in the process risked Brexit never happening at all, a reality that markets may find rather appealing. Part of the latest Brexit extension is that, were Britain able to agree on a Brexit deal by May 22nd, it would be able to formally Brexit on June 1st. Of course, the UK Parliament’s failure to do so, would mean that Britain would have to participate in the European Parliamentary elections, something that May has always been reluctant to do as it would be – in her view – an abrogation of democracy and send the wrong signal about having respected the result of the 2016 Brexit referendum. In terms of next steps, it is genuine guesswork, yet plausible items on the horizon include a battle within the Conservative Party, with May defending herself from being ousted as Prime Minister from her own Members of Parliament, as well as a so-called People’s Vote referendum that would give final say to British voters about how it will want to proceed on Brexit, or if it even still does want to Brexit at all.

At February’s close we had good cause to believe that the incipient blaze of a possible US-China trade war was about to be extinguished. Just as the March 2, 2019 deadline that was to see the tariff on over $200bn of Chinese goods more than double from 10% to 25%, President Donald Trump confidently proclaimed that all planned increases would be indefinitely suspended as a result of a new bilateral trade deal nearing completion. Yet more than a month later not only has a deal not been confirmed, the US and China appear to be much further apart than what Trump’s bluster and the general bonhomie between the superpowers would have suggested. While it must be said that it appears that an all-out trade war between the world’s two largest economies has been averted for now – a reality that investors would have been all too eager to embrace only a matter of months ago – it seems that it was premature to have expected a mutually beneficial trade deal that would abolish all tariffs and give international equities the boost they have craved.

China is reported to be pushing back against US trade demands that it perceives as one-sided; moreover, they want all tariffs lifted immediately, which the US is reluctant to do. Consequently, Chinese negotiators are evidently less gung-ho about fulfilling their key promises on intellectual property rights, which for Trump and both sides of Congress is the foundation to any meaningful trade deal. The superpowers are caught in a tedious Catch-22: the US will not roll back tariffs until China fulfills its key commitments, but China refuses to honor its side without movement on tariffs. Robert Lighthizer, Trump’s chief negotiator, deflated expectations by saying, ‘If there’s a great deal to be gotten, we’ll get it. If not, we’ll find another plan.’ Furthermore, news that Trump and Chinese President Xi Jinping’s meeting has been postponed by at least a month until the end of April also suggests that a quick, easy and market friendly solution is not at all imminent.  According to reports, it is unlikely that any future trade deal will begin by repealing all existing tariffs and will instead be more like a trade cease-fire that will see no new tariffs introduced. Of course, it is plausible that the deal may set stages at which tariffs are lifted when particular targets or agreements are met, but one has to wonder if there ever will be a medium term scenario of free, frictionless trade between these two super powers given that they are, and will remain, commercial, economic and military rivals? Yet, Trump continues to hype up his delivery of a positive trade deal with China, which, if he were able to achieve, would give him at least one foot into a second term at the White House and offer markets a positive jolt. This should give him plenty of incentive and what is more Democrats may even cheer him on (privately, of course). However, politicians, markets and investors will likely have to face the facts that the road to economic peace with China will be long, harrowing and may even be impossible in the short to medium term.

In Brazil President Jair Bolsonaro’s honeymoon period is over. The Brazilian market hit its all time high in mid-March but dismal reports over Bolsonaro’s questionable economic ideas and concerns over rapidly increasing inflation cost the market almost 6% in the final 2 weeks of March. The sweeping market optimism that his corruption fighting, business-liberalizing premiership was thought might bring has turned sour as Bolsonaro is under widespread criticism from across the Brazilian political spectrum. What is more, his apparent inexperience and desire to get into Twitter battles has not only mitigated his ability to navigate himself out of his current political quandary, it has also distracted him from selling his ambitious and necessary plans to lawmakers. Bolsonaro aims to make wide-ranging changes to Brazil, yet none is more important than his proposed reform of the state pension system, which is crippling the state’s coffers. Pushing his reform through would cut 1TR Reals from the fiscal deficit in the next decade and would shore up Brazil’s public finances. Of greater importance to investors, it is believed that it would also spark the economy into high gear. Yet, the so called ‘apprentice President’ is facing an arduous battle as opposition parties either oppose the reforms in their entirety or want to chop and change them until they are so watered down they lose their fiscal and economic potency. Bolsonaro has so far failed to engage with the opposition political parties whose support he requires to make meaningful change to Brazil’s state pension; what is more, instead of courting the support of Brazil’s most powerful lawmaker House Speaker Rodrigo Maia, for whom pension reform is also very important, Bolsonaro has chosen to trade petty insults with him. As things currently stand, Bolsonaro has scant support in Congress for pension reform and if he fails to build bridges through the so-called ‘pork barrel politics’ of which he has been so critical, he will fail and South America’s largest economy will likely remain in the catastrophic political and economic situation in which it has found itself for the past few years.

In more positive news, the US Federal Reserve confirmed what was widely speculated: there are no plans to raise interest rates in 2019 due to slower than anticipated economic growth. Chairman Jerome Powell indicated that the current rate of 2.5% is rate neutral and that it would take some time before the employment and inflation outlook called for a change in fiscal policy. The Fed did indicate, however, that regardless of its recent announcement its policy remained nimble and was subject to change depending on future economic indicators.

Henry James International Management April Market Commentary
Will it even be possible in the medium term to envisage free, frictionless trade between the US and China given that they are, and will remain, commercial, economic and military rivals?

Investment Outlook

Despite 2019’s first quarter having outperformed expectations, we fear we are creeping back to the muted optimism and incipient pessimism with which we began the year. It seems highly unlikely that the US and China will agree the mutually beneficial trade deal markets have expected for more than 8 months. Moreover, a decisive and market friendly Brexit is at least 6 month’s away and it is widely believed that further ‘kicking the can down the road’ delays are extremely possible.  As a result, we are left with a petering-out US economy, China in the midst of an economic slowdown, a Britain frozen by Brexit uncertainty and an EU economy that is flat-lining. Adding to the negativity are first quarter corporate earnings that are anticipated to be lackluster. And yet, investors will be thankful that we have at least avoided an all-out trade war between the US and China and a devastating ‘no-deal’ Brexit, which could have made matters much worse than what they may be poised to become.

A spot for genuine, unmitigated optimism may be EM equities, which have rallied in 2019 and may outperform for the next 6 to 12 months. Moreover, we believe it is reasonable to expect EM equities to claw back their 2018 losses. We have already seen the MSCI EM Index up 9.56% in the first quarter of the year. China will help Asia lead the way for EM equities through their own policy of monetary and fiscal easing.  Other countries like Mexico and Brazil may not be so lucky as the former may see capital outflow as a result of domestic political uncertainty as well as trade tension north of the border and the latter will be stuck in a well without a ladder unless Bolsonaro can abandon his idiosyncratic style and effectively push his state pension reform through the Brazilian Congress.

In conclusion, it seems unlikely that markets will benefit from the much-desired steroid injection of a US-China trade deal in the short term. President Trump is still talking up the possibility of a mutually beneficial, market catalyzing solution, but taking him at his word might be unwise. A more likely victory for markets may be Britain leaving the EU through a ‘soft Brexit’ – or even doing an about-face and persisting as an EU member. However, any market-friendly resolution is not only difficult to imagine in the short term, there also remains the perpetuated uncertainty fostered by the October 31st extension as well as the risk of Brexit culminating into something pernicious for investors. For 2019 we believe that US equities will continue in positive territory despite a likely earnings recession, that Europe will be mired in uncertainty until Brexit is resolved and that EM equities may offer investors excellent opportunity, particularly in Asia where share prices are comparatively cheap.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.