February Market Commentary

Market Overview

Despite January having been a month rife with political turmoil and economic anxieties, for many investors the panic of Christmas Eve will have likely abated considerably as markets have so far rebounded nicely in 2019. The S&P 500 – which was among the standard bearers leading 2018’s 4th quarter nose dive – enjoyed its best January since 1987 thanks to positive contributions of over 8.5% growth from the energy, industrials and financials sector. Developed Market (DM) equities followed suit by gathering a head of steam in their own right, up 6.59% as measured by the MSCI EAFE. Emerging Market equities were also lifted in the momentum, up 8.78% as measured by the MSCI EM Index after having been battered in 2018.

 Despite January market performance putting a spring back in many investors’ steps, headwinds to economic and market growth abound. Among the more notable is the United States’ inauspicious start to 2019 that saw its government in the midst of a shut down that lasted 35 days – a record, but likely not the kind with which anyone would have wanted to have been associated. Having been triggered by President Donald Trump and Congressional Democrats wrestling over the former’s polemical border wall with Mexico – the shut down is estimated by the non-partisan Congressional Budget Office (CBO) to have cost about $11bn and to have wiped 0.2% off its 2019 annual growth forecast. Of course, when the shut down ended on January 25 much of the lost money was recaptured, but it is estimated that around $3bn is gone forever and that the full effects of the shutdown may be far greater than what initial figures might suggest as over 800,000 workers were affected and federal spending on goods and services were significantly delayed. While investors can take comfort in knowing that the shut down is over, there remains palpable risk of another one on the horizon if lawmakers cannot agree on a solution for enhanced security along the US-Mexican border.

Across the pond the world’s 5th biggest economy, Britain, is a matter of weeks away from crashing out of the European Union (EU) without a deal. Aside from crippling the UK economy, mainstream pundits, policy makers and business leaders have indicated that Britain will be susceptible to widespread food and medical supply shortages. While this self-inflicted wound is bad for the UK, a no-deal Brexit would radiate shock waves throughout the rest of the world and would ravage global markets. In 2010 the world was afraid of the possible contagion from Greece’s debt crisis, and yet Britain’s economy is more than 10 times larger, which raises the stakes considerably. We believe no one would be safe in a no deal Brexit and we will be hoping that Prime Minister Theresa May will be able to acquire further concessions from the European Union (EU) and secure an orderly and structured (hopefully soft) Brexit.

Henry James International's February Market Commentary
If the US and China do not agree a new trade deal by March 2 over $200bn of Chinese goods will see their existing 10% tariff more than doubled to 25%.

While Britain and the EU scurry to work out a last minute deal, the top brass of China and US have been knuckling down to avoid their own cliff-edge: if a new trade deal is not agreed by March 2 over $200bn of Chinese goods will see their existing 10% tariff more than doubled to 25%. China has promised retaliatory measures, which would likely result in a ‘gloves-off’ trade war, which would hit both the American and Chinese economies and reverberate catastrophically throughout the rest of the world. At the heart of the deal is correcting an imbalance in trade between the nations, as well as the more serious White House accusations that US tech companies doing business in China are coerced to hand over their intellectual property, which the Chinese vehemently deny. Talks began two days after the US charged Telecoms company Huawei and its chief financial officer, Meng Wanzhou, with conspiring to violate US Iranian sanctions; US officials insisted Meng’s arrest in Canada had nothing to do with the trade talks. Despite ample scope for disaster, the Chinese hailed the talks as a great success and promised to help correct the trade imbalance through buying more American soybeans; and both parties nebulously agreed progress had been achieved on the intellectual property front. While there does appear to be a positive glow about the meeting, the clock is ticking and the stakes really could not be higher.

US Federal Reserve Chairman Jerome Powell is apparently feeling the heat of a less rosy outlook for the US economy, the record-breaking shutdown, trade impasses and global headwinds to growth as he has done a near complete about-face with his monetary policy in a matter of weeks. On January 30, 2019 Powell signaled a possible end to incremental interest rate increases, saying that despite neither inflation nor financial stability being particular risks, ‘cross-currents’ of slowing global growth – including China having its weakest economic output in 2018 for nearly 3 decades – and a less certain US outlook required changes to the Fed’s monetary policy. While we welcome a pausing of rate hikes, it must be said that with interest rates between 2.25% and 2.5% there will be little wiggle room to combat any future downturn with rates cutes alone.

Brazil is the clear bright spot for international investors as its Bovespa index managed to build on its stellar 15% 2018 growth by hitting its all-time high after surging up more than 8.5% in January. The benchmark stock index is clearly enthusiastic about the presidency of the far right Jair Bolsonaro who began his premiership on January 1, 2019 and comes with the promise of a range of business-friendly reforms, including changes to the Brazil’s pension system. And yet, in the midst of the Brazilian buzz the Vale Dam tragedy literally burst onto the scene, incurring for the mining giant a combined $1.7bn of blocked funds and government fines. Over 300 people are believe to have died in this ecological disaster, and Vale confirmed that it will decommission other dams similar to the one that collapsed, which will reduce its production of iron ore by as much as 10% in the next 3 years. Besides providing an element of headwinds to Brazil’s thriving equity prices, China and Vale’s mining rivals BHP Group and Rio Tinto may profit by having to pick up the slack.

Brazil’s northern neighbor Venezuela wishes it could steal even a pinch of the magic that is propelling Brazilian equities as the ‘Bolivarian Republic’ is in a particularly bad place right now. In addition to the usual poverty, mass-food shortages, unemployment, hyperinflation and ruined economy, January brought forth fresh political crisis through the emergence of the leader of the opposition Juan Guaidó. Based on the widespread view that Nicolàs Maduro won Venezuela’s 2018 General Election through fraud, on January 23 Guaidó took an oath to serve as the Interim President of Venezuela. Since then the US, EU and range of European countries including the UK, Spain, France, Germany, Sweden and Denmark all recognise Guaidó as the interim president; meanwhile, Russia, Syria, Turkey, Iran and North Korea still back Maduro. Despite fervent backing for Guaidó among Venezuelans and world leaders, Maduro remains in charge of a country on the verge of collapse, particularly after the US divvied out new punishing sanctions on its oil. While this is devastating blow for Venezuela and the Maduro’s reign, it has only had a positive effect on the price of oil which, along with OPEC-led production cuts – has helped to push US crude oil up by more than 20% to over $55 a barrel, which represents its best January on record.

Investment Outlook

Even before the US government shutdown, we predicted more tempered economic growth; and only 1 month into 2019 the CBO has already wiped 0.2% off its forecast. Of course, the full extent of the shutdown’s damage remains unclear but it is likely that it will be far greater than what initial estimates have suggested as – according to the CBO – they have yet to incorporate the indirect negative effects such as businesses not able to acquire federal permits and certifications, reduced access to federal loans and the overall uncertainty that has compelled firms to postpone important business, investment and hiring decisions. As distressing as this “own-goal” has been to the American economy and its workers, it is possible that another shutdown is imminent if Trump and House Democrats cannot come to a resolution on the budget for the Mexican border wall.

Markets are hoping for a soft-Brexit – or even a scenario in which Brexit is entirely averted – however, if nothing changes between now and March 29, 2019 Britain will leave the EU without a deal. Were this to happen, middle-of-the-road estimates suggest a 9% drop in GDP, which would make the 2009 financial crisis look insignificant by comparison. This would increase unemployment, the cost of borrowing and could crush the value of the pound which could combine to set the UK economy back a decade and would drag other economies and markets with it.

While a possible US-China trade war has hung ominously over markets for several months, we are encouraged that the January trade talks ended positively and we are hopeful that President Trump will visit Chinese President Xi Jinping this February to shore up a preliminary deal and extend the deadline to work through the thornier issues. While it will hardly be adequate for Trump and his team, it is a good sign that China agreed to increase its purchase of American soy. However, until a final deal is agreed, markets will live in fear of a Sword of Damocles in the form of a devastating trade war dangling perilously by a single thread from above.

We believe there is excellent value to be found in EM equities based on their valuations relative to profitability: they are trading at prices lower than their 10-year average but are still posting returns near 13%, which is similar to their DM counterparts. This view is fortified by the Fed’s recent decision to pause the interest rate hikes that caused so much harm to EM equities in the first place; our optimism is also based on a relative calming of geopolitical tensions, particularly on a peaceful resolution to US and Chinese trade.

February Market Commentary
While Bolsonaro has so far been hitting all the right notes with markets, his volatile disposition seems to make him a risk both to himself and to the lofty ambitions on which Brazilian equities and Brazil’s economy are counting.

We expect the Brazilian economy to remain the darling of EM equities and continue its excellent 2019 run; Brazilian stocks should also get a boost from the Fed’s slow down in interest rate hikes. However, Brazilian equities have performed so well recently not because of anything that has been done as much as the potential of President Bolsonaro’s campaign promises – chiefly pension reform. Brazil’s current pension system – that sees men retire at age 60 and women at 55 – and has led to massive government debt: more than 75% GDP according to the Brazilian central bank. Bolsonaro plans to raise retirement age to 62 for men and 57 for women as well as roll back some benefits; yet, failure to enact these changes, and to do so immediately, will push Brazil further into an unsustainable debt profile. Furthermore, while Bolsonaro has so far been hitting all the right notes with markets, his volatile disposition seems to make him a risk both to himself and to the lofty ambitions on which Brazilian equities and the Brazilian economy are counting.

2019 is undoubtedly a year in which not just economic threats abound, but extremely serious ones. If there is another US government shut down, Britain falls out of the European Union without a new trade deal and the US and China breakout into an all-out trade war, the global situation would be dire. Indeed, it would be bad news if only one of these items were to happen. And yet, beyond just blind optimism, one has to be cognizant that world leaders – no matter how seemingly brazen – are unlikely to shoot themselves in the foot in a permanently debilitating way. Both President Trump and Democrats are all too aware of the 2020 Election barrelling towards them and neither will want any part in knocking the wind out of the economy, beyond the damage that has already been inflicted. Regarding Brexit, Prime Minister May will not want to be the premier who cripples the world’s 5th largest economy and while she cannot single-handedly get the Parliament to agree to her deal or coerce the EU to accept her demands, she does have the authority to either extend or cancel Article 50, which would give the UK and EU more time to work out a mutually beneficial arrangement. It must also be said that the EU – despite its draconian stance during the negotiations – stands to be damaged by a no-deal Brexit almost as badly as Britain does, for which reason there will be plenty of incentive on their side to see that a deal is reached. To complete the trifecta, neither the US nor China will benefit from a trade war, which suggests that cooler heads shall prevail, as it seems was the case at the January summit. Therefore, despite the ample threats to markets, we believe that the global economy will make it to the other side relatively unscathed; however, while there will be growth, current conditions and looming threats will make for subdued 2019 growth at best.

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.

January Monthly Market Report

Market Overview

December ended a rough year for investors with S&P 500 flirting with bear market territory on Christmas Eve.  The S&P 500 was up almost 9% for the year until the sell-off began in October as investors became deeply concerned over global economic weakness, increasing trade tensions, geopolitical instability and rising interest rates. The S&P 500 dropped precipitously in the 4th quarter finishing down -13.97%. Globally speaking, virtually no regional markets provided a positive return for the year.  The MSCI EAFE Index was down -16.14% for the year with most of the damage coming in during the 4th quarter when the index slid by almost 13%. Emerging markets, as measured by the MSCI EM Index, fell -7.85% during the quarter and were down -16.64% for the year. Essentially, there was no where to hide for equity investors during 2018. 

Bear Market January 2019
December ended a rough year for investors with S&P 500 flirting with bear market territory on Christmas Eve.

Investors were not in a festive spirit during the month of December, exhibiting more angst over Federal Reserve Chairman Jerome Powell controversial decision to raise interest rates by 25 basis points to 2.5%. This was the fourth time the Fed raised rates during the year and at its most recent meeting it signaled that there are likely two more rate hikes coming in 2019. President Donald Trump added his own holiday touch by attacking the Fed Chief further and deflating the markets’ Christmas spirit by failing to sign off Congress’ proposed government budget and demanding that it include the required $5bn to build his polemical wall on the US-Mexican border. As the President and House and Senate Democrats could not agree on this key aspect of the budget, the government was sent into a partial shutdown on December 21st which, when coupled with the December 19th Fed rate hike, made it a near certainty that markets would plummet as evidenced by the week before Christmas, with the Dow Jones losing 653 points on December 24th which not only capped the worst week in a decade but made for the worst ever Christmas Eve trading.
 
Unfortunately the Trump administration appeared rather ham-fisted in its efforts to quell market turmoil. Despite the fact that many investors agreed with President Trump in his palpable distaste for raising interest rates, one wonders how committing the unusual step to criticize the Fed’s Chairman – on Twitter, no less – and failing to quash speculations that Powell was on the ‘hot seat’ could have possibly helped restore investor confidence and mitigate market volatility? Furthermore, one wonders what strategy was behind Treasury Secretary Steve Mnuchin’s memo announcing that none of the six largest US banks had experienced any clearance or margin issues? Arguably, this announcement only created greater doubts in the minds of investors.

Brexit Saga
Even casual observers will admit that Brexit has snowballed into a disaster.

Looking beyond the US economy and interest rate hikes, global equity markets fell, as disappointing economic data from Japan, China and Europe ignited global growth slowdown fears, and concerns around trade frictions and European politics added to investor uncertainty. China’s November retail sales and industrial production came in lower than expected. China’s stock market suffered a nearly 25% loss in 2018.  The on-going Brexit saga remains distressingly far from a resolution. Britain’s Prime Minister, Theresa May successfully avoided a leadership challenge within the UK’s Conservative Party, ensuring she won’t face a similar no-confidence vote for another year. However, she failed to win concessions from the EU that could have made the UK Parliament more likely to pass her Brexit withdrawal-agreement proposal.  Furthermore, even casual observers will admit that Brexit has snowballed into a disaster which might end well but has caused unnecessary uncertainty for the 2nd largest economy by GDP in the EU, the world’s 5th largest economy in Great Britain and the rest of the world whose economies are faced with the direct and indirect consequences of this mammoth tussle. Brexit weighed heavily on the FTSE as it dropped by 12.5% in 2018. Somewhat unexpectedly, Brazil’s Bovespa index surged by 15% during the year, as Brazilian investors welcomed far-right candidate Jair Bolsonaro’s rise to the Brazilian presidency and made the Bovespa the best performing major index globally. Overall, the world stock markets were almost all in negative territory as evidenced by the MSCI World ex-USA index sinking by -13.12% during the 4th quarter and finishing the year down -16.40%.

Investment Outlook

Despite the raising interest rates punching the mirth out of investors’ Christmas spirit and the effects of the partial government shutdown, the fact remains that on balance, 2018 was a good year for the US economy outside of stock market performance. In the Fed Chairman’s own words: ‘Over the past year, the economy has been growing at a strong pace, the unemployment rate has been near record lows and inflation has been low and stable. All of those things remain true today.’We share the Fed’s view that both the US and certain global economies have strong fundamentals and with the prospect for another positive year of expanding. While there remains cause for optimism in 2019, we view the risk of further market underperformance as significant. We believe The U.S. remains a relatively strong anchor for the global economy, and we see emerging market equities potentially offering exceptionally positive returns after being beaten down to attractive prices given the associated risk. Emerging market (EM) assets have cheapened dramatically this past year offering better compensation for risk in 2019 compared to the more developed markets. Country-specific risks, such as a series of EM elections and currency crises in Turkey and Argentina are mostly behind us. China is easing policy to stabilize its economy, marking a sea change from 2018’s clampdown on credit growth. EMs are set to maintain double-digit earnings growth, led by China as its tech sector recovers and a pivot toward economic stimulus supports its economy. Ultimately, investors will focus on earnings growth as a positive indicator while remaining guarded against macro-economic headwinds. U.S. earnings growth estimates look set to normalize from an impressive 24% in 2018 to 9% in 2019, consensus estimates from Thomson Reuters data show. This is still above the global average. EMs are set to maintain double-digit earnings growth, led by China as its tech sector recovers and pivots toward economic stimulus to support its economy.  Globally, dramatically slowing earnings growth and the impact of tariffs make for more cautious market expectations.

President Donald Trump
President Donald Trump added his own holiday touch by attacking the Fed Chief further and deflating the markets’ Christmas spirit by failing to sign off Congress’ proposed government budget and demanding that it include the required $5bn to build his polemical wall on the US-Mexican border.

While we believe recession is unlikely (and Trump’s impeachment even less likely than that), it is more likely now than it was a year ago. US-China trade frictions ominously hang over markets and it does not appear that they will go away anytime soon while these two economic behemoths duke it out for tech supremacy. And despite our faith in the Fed’s wisdom, it is absolutely the case that 5 straight quarters of interest rate hikes have created economic volatility, which have had perilous effects on developed world economies and most notably on emerging market economies.

Despite this somewhat bleak picture, one should be reminded that 2018’s growth was assailed by a range of threats – indeed, many of the same with which 2019 is faced, and it still exhibited solid economic fundamentals.

To sum up our 2019 outlook, we are cautiously optimistic that we will see modest positive returns for both the US and many global economies; however, we expect continued market volatility, geopolitical risks, increasing costs of capital and trade tensions to continue to weigh down expectations. We also believe that while 2019 will see additional rate increases, we will expect to see the Fed slow down its cycle to assess the effects of abating economic growth and tighter financial conditions, which should result in easing the pressure on asset valuations.

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.

‘The Death of One Man is a Tragedy, the Death of Millions is a Statistic’ – Joseph Stalin

Jamal Khashoggi’s murder in the Kingdom of Saudi Arabia’s consulate in Istanbul, Turkey this past October has caused a zealous chorus of international outrage amongst governments, businesses and concerned world citizens, alike. Yet more than a month on from his ‘disappearance’ one must wonder why everyone has been so upset, as Saudi Arabia’s brutal and medieval view on human rights generally elicits not so much as a peep from anybody aside from Amnesty International and other human rights groups. Indeed, one might even question the authenticity of the collective scorn, as it has not really amounted to any tangible punishment for the Kingdom. Saudi Arabia’s track record of bloody oppression and its endorsement of a form of Islam that many religious Muslims would define as ‘extreme’ is well documented. Despite this, the death of one journalist – who was one of Saudi Crown Prince Mohammad bin Salman’s (MbS) most fierce critics – has been the proverbial straw that has broken the camel’s back and has allowed the world to see this country for what it is: a brutal and bloody autocracy. As a result some of Saudi Arabia’s closest allies like the United States of America – have expressed the gravest concerns and have threatened economic sanctions. Wall Street, leading banks and major corporations –have echoed these sentiments. Others have gone a step farther and snubbed the previously considered ‘un-missable’ investment conference the Future Investment Initiative that took place in Riyadh at the end of October 2018.

When Khashoggi was first suspected of having been murdered (allegedly ordered by MbS) President Donald Trump said that if the Saudi authorities were found responsible, America’s response would be ‘severe’.  He suggested he might impose economic sanctions, but he did not go as far to say he would halt arms sales. Yet, despite his critics saying that this did not go far enough – not to mention Trump’s interim silence on the issue – it was clearly a change from the jovial and fraternizing figure he cut in Saudi Arabia during the first official state visit to any foreign country in his presidency. Furthermore, mere talk of putting sanctions on Saudi Arabia – however abstract and unlikely – represented crossing a line that few in previous administrations would have ever considered. British Prime Minister Theresa May also took the unusual step to condemn the Kingdom over Khashoggi’s murder and added that the Saudi account that rogue operatives killed him was not credible. As a result, the United Kingdom’s government ordered that any British visas belonging to the murder suspects be immediately revoked. France, Germany and the Netherlands have also joined in by suspending political visits to Saudi Arabia until there are ‘clarifications’. Yet, like Trump, no one has seriously considered ceasing or suspending arms sales to the Kingdom.

Wall Street and the international business community were served an opportunity to express their disapproval on a silver plate, as Khashoggi’s murder happened just before the much anticipated Future Investment Initiative, or ‘Davos in the Desert’. As a result, a number of business and banking A-listers who were scheduled to attend MbS’s signature investment conference pulled out at the last moment. Among those who did not attend were Jamie Dimon, Chief Executive of JPMorgan Chase, Stephen Schwarzman, Chief Executive of Blackstone, Larry Fink, Chairman and Chief Executive of BlackRock, Dara Khosrowshahi, Chief Executive of Uber, Lynn Forester de Rothschild, Chief Executive of EL Rothschild and Bill Ford, Chairman at Ford, amongst others. United States Treasury Secretary Steven Mnuchin and International Monetary Fund Managing Director and Chairwoman Christine la Garde were also among the notable absentees, along with expected media partners the Financial Times, Bloomberg and The New York Times. Despite the Future Investment Initiative having been declared a success, the combination of such heavyweights pulling out of the event and the wide-ranging negative publicity about Saudi Arabia during the conference combined to strip off some of its gloss.

Riyadh, Saudi Arabia
Wall Street and the international business community were served an opportunity to express their disapproval to Saudi Arabia on a silver plate, as Khashoggi’s murder happened just before the much anticipated ‘‘Davos in the Desert’.

It is absolutely clear that the initial response by governments and businesses rattled Saudi Arabia. It widely believed that MbS’s reputation took a major hit, which could even deteriorate further if any evidence points to him ordering Khashoggi’s murder. Moreover, it is reported that there have been murmurs both inside and outside the Kingdom that have questioned MbS’s suitability to take over the crown from his father, King Salman. But perhaps the item that showed Saudi Arabia’s vulnerability most acutely is that King Salman re-emerged from the comfort of his retirement to help his favourite son manage Saudi Arabia out of this crisis. Yet, despite the real and palpable way in which this has affected and even damaged the Kingdom, beyond the initial outcry, governments and businesses have failed to follow up with anything meaningful or impactful.

One wonders about the incongruity of it all. The world was compelled to respond harshly to Saudi Arabia following to Khashoggi’s murder; but despite the collective condemnation it is unlikely that it will lead to any lasting deceleration of diplomatic or business relations with the Kingdom. And yet, if the final outcome was always going to be maintaining the status quo, albeit after a firm smack on Saudi Arabia’s wrist, why did the world choose to be stirred into action after the death of one journalist as opposed to resorting to it its typical inactivity and ‘looking the other way’? Indeed, Khashoggi’s murder managed to make an impact that Saudi Arabia’s history of bloody oppression, totalitarian rule and extremist Islam simply could not. Lest one forgets, Saudi Arabia frequently treats its citizens brutally and horrifically: due process and women’s rights are all but absent, the state endorses public beheadings, flogging and cross-amputation and political dissidents are imprisoned and often tortured. Moreover the Kingdom’s state-enforced denomination of Islam called Wahhabism, which many committed Muslims see as vile, is generally believed to have inspired Islamic terrorism and to have nurtured Al-Qaeda and the Islamic State into the malevolent organizations they are. Beyond overlooking these toxic attributes, the devastation caused by the Saudi-led coalition’s bombing of Yemen in the Yemeni Civil War has killed thousands of innocent civilians and millions are at risk of starving in what might become the worst famine the world has seen in a century. One hastens to add that this has been achieved through weapons purchased from the United States, Britain and other Western countries.

Desert, Saudi Arabia
The world was compelled to respond harshly to Saudi Arabia following to Khashoggi’s murder; but despite the collective condemnation it is unlikely that it will lead to any lasting deceleration of diplomatic or business relations with the Kingdom.

Has Khashoggi’s murder spurred the world to outrage because it rubs us in a different or worse way than normal bloodshed and oppression? Is it, perhaps, the case that he was ‘silenced’ on the basis that he was a journalist that had the audacity to criticize the ruling elite? Possibly, but it would seem that collectively our love of the freedom of the press is somewhat less ardent than what our superficial genuflections towards it might otherwise suggest. Are we compelled to turn a blind eye to what happens within Saudi Arabia but moved to react if and when it murders on another country’s soil? Quite possibly, as the world came to Britain’s side when Russia allegedly instigated the Novichok poisoning of the Skripal family in Salisbury, England. But perhaps the greatest clarity might be offered through the words of one of the world’s most significant standard-bearers of state-managed mass murder, Joseph Stalin: The death of one man is a tragedy, the death of millions is a statistic. Simply put, it is easy to ignore the plight of faceless persons whose tragedy and devastation is only given form through a sterile number, indeed, even if this number pushes into the thousands or, indeed, the millions. But it is nearly impossible for Western countries and its businesses and citizens not to be moved – or at least feel the need to feign having been moved – when a person wearing a kind, smiling face whose only sin is using his pen to stand up to and shed light on injustice is brutally extinguished.

Yet, despite the initial uproar of indignation, even Khashoggi’s murder has failed to move governments and businesses to set Saudi Arabia adrift from the international community. Politics and money have won the day. Aside from Saudi Arabia’s natural resources from which both governments and businesses greatly benefit, the Kingdom presents tremendous potential for new ways to earn billions through new initiatives including the ambitious Vision 2030 that will attempt to modernize Saudi Arabia and open it up to Western tourism. Politically speaking, Saudi Arabia is also the country through which the West is able to maintain its own sphere of influence and counter the perceived threat of Iran and its allies, something that will not be given up easily or capriciously. But, unless one were to argue that the response to Khashoggi’s killing was just for show, one wonders if it was ultimately an unequivocal notice to Saudi Arabia and its de facto King that these kind of headline grabbing shenanigans are simply bad for business and that any more infractions might well result in the West clandestinely locating and installing a new head of state who will work within, and for, the West’s political and business agenda.

Will Labour Save Theresa May’s Brexit Bacon?

Anyone who has ever seen Prime Minister (PM) Theresa May battle Leader of the Opposition Jeremy Corbyn in the House of Commons would find it borderline impossible to imagine any kind meaningful political union between the two parties. Historically, the Tories (as Conservatives are known locally) and Labour vehemently disagree on practically everything in contemporary politics – from austerity, to corporate taxation, unions, education, and far more. And yet, as the PM nervously clings to her so-called Chequers deal – her vision for Britain’s future relationship with the European Union (EU) and the basis for her upcoming Brexit negotiations – an unholy alliance of desperation and convenience is brewing between the two parties.

Brexit Bacon
Will Labour Save Theresa May’s Brexit Bacon?

Key Brexit-supporting Tory Members of Parliament (MPs) are deeply dismayed by the Chequers deal, saying that it fails to deliver the ‘hard Brexit’ for which the people voted, and are therefore threatening to abandon their leader should it come to a vote in the House of Commons. On the other side Labour MPs have been ordered by their leader Corbyn to vote against Chequers on the basis that it fails to meet the six tests the left-leaning party have set to establish their definition of what a good Brexit deal would be. Were May’s Chequers deal to be voted down in the House of Commons, it would effectively end her time as PM and – as Corbyn hopes – will likely lead to another general election, which the Labour leader would hope to win. Given the vitriol between the two leading British political parties, one might take it as a given that Labour would only be delighted by the idea of a Tory PM battling desperately for her political life with enemies of all persuasions knocking on the gates of 10 Downing Street.

And yet, politics are not so simple these days, something that holds true for both the Tories and Labour. There are potentially over 30 Labour MPs who are strongly considering defying their leader and supporting the PM’s Chequers deal as they fear the economic consequences of a no-deal Brexit. Such is the depth of their concern that will consider betraying Corbyn even if it means inadvertently propping May up and keeping Labour out of power. On the other side, the most dogmatic Brexiteer Tory MPs – chief among whom Jacob Rees-Mogg, Boris Johnson, David Davis and Steve Baker – along with another 30 or so of their parliamentary colleagues are poised to defy May and vote down Chequers, presumably to preserve their slim hopes of a pristine hard Brexit. Of course, they must be aware that failing to support May might come back to bite them, particularly if toppling her brings forth another general election that results in Labour, not them, in the Brexit negotiation driver’s seat, a scenario which some have suggested might see Brexit called off entirely. What we have in front of us is a near perfect syllogism by which both parties are putting their Brexit concerns and aspirations over traditional party politics and ambitions.

Brexit politics
The Conservative and Labour parties are putting their Brexit concerns and aspirations over traditional party politics and ambitions.

Despite Labour MPs overwhelmingly supporting Britain’s EU membership, there are seven in their ranks, with the notable inclusion of leader Corbyn, who can be classified as Euro-skeptics or even ‘card-carrying’ Brexiteers.  Yet, even beyond this minority group there are a wide range of Labour MPs who represent Brexit-heavy constituencies, which means that many will be forced to consider abandoning their own views to pander to their voters’. Beyond this awkward dilemma, for Labour MPs a May-brokered deal is vastly preferred to a no deal Brexit. As such they will face what one shadow minister referred to as a ‘crisis of conscience’: on one side the party leader telling MPs to vote ‘no’ to Chequers and help catapult Labour into government; on the other side the wishes of Brexit-voting constituents and the havoc a no-deal Brexit might wreak on Britain’s stuttering economy.

Labour MP Kevan Jones from North Durham is among the many in this predicament and he indicated that he would be open to supporting Chequers in Parliament. He said: ‘I would not support [a] no-deal [Brexit] because that would be disastrous both for my constituents and the country.’ Jones’ Labour colleague Lisa Nandy, MP, is also worried about how a no-deal Brexit might affect her Wigan constituency, and if what May brings to parliament is deemed good enough she will feel pressure to support it. Nandy said: ‘The public wants [Brexit] over, they are fed up with this and want it done so the government can get on with other difficult decisions. There is a push from the public to just sort this out.’ Another Labour colleague anonymously added that while it will not be easy for Labour MPs to defy Corbyn and back a Tory government – far from the neat and tidy solution that Labour would merely stroll into 10 Downing Street in another general election – there is a real threat that an ideological hard Brexiter like Rees-Mogg might be the next PM who will pursue either a hard Brexit or a no-deal Brexit. Therefore, even with the false choice of two unappealing alternatives; i.e. Chequers or a no deal Brexit, May’s vision for some Labour MPs might seem the more palatable.

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Theresa May’s Brexit vision will likely seem more palatable than a no-deal Brexit for Labour MPs on the fence.

Within May’s Conservative party it is clear that those who oppose Chequers will not budge and will vote it down in Parliament if given the opportunity. One might say that this is rank and brazen stupidity (if one were a Tory and/or Brexit voter) as surely a Chequers Brexit is better than risking an even softer Brexit or even no Brexit at all under a Labour government. And yet Rees-Mogg and his eurosceptic crew are prepared to risk this and topple May’s government if it is the only remote way to achieve their perfect hard Brexit.

With daggers pointed at May from all directions, will she accept re-enforcements from her sworn enemy? One would imagine that reaching across the aisle, as it were, would be among the bigger ‘no brainers’ in the PM’s career… That is, if she’s given the opportunity. Yes, despite the borderline impossible situation May is facing domestically, there is a tangible threat that she many never be able to give her Labour colleagues the chance to save her Brexit bacon. Upon hearing the details of Chequers EU leaders, chief among whom President of the European Council Donald Tusk, German Chancellor Angela Merkel and French President Emmanuel Macron, rejected it out of hand based on its solution for avoiding a hard border between Northern Ireland and the Republic of Ireland; i.e. what will be the only land border between the EU and UK. Chequers sets out a vision whereby the whole of the UK would remain in the EU custom union for a limited time while a reasonable trade solution is worked out. EU leaders have said such a concept is unacceptable, which means that as things currently stand, there is serious doubt as to whether the EU will even consider entertaining Chequers in its current form. If the EU rejects Chequers, it will never ever be put to a vote in the House of Commons, making May’s unlikely Labour allies irrelevant.

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If Theresa May’s political shrewdness out-maneuvers her European counterparts and she brings a Chequers-inspired Brexit deal back to Parliament, will Labour’s support even be enough?

And yet, in the event that May’s political shrewdness out-maneuvers her European counterparts and she manages to bring a Chequers-inspired Brexit deal back to Parliament, will Labour’s support even be enough? Not only have there been estimates of up to 80 Tory MPs who view Chequers suspiciously, on a good day May’s government only has a majority – albeit a slim one – in the House of Commons only because she is propped up by the 10 Democratic Unionist Party (DUP) MPs from Northern Ireland. Depending on the agreement May makes regarding the Irish border, the DUP’s support may be called into question. In a scenario in which she is coerced to accept a version of the EU’s solution for the Irish border – their so-called ‘backstop’ that would see Northern Ireland remain in the EU customs union and single market on a temporary basis while the rest of the UK existed on the outside – the DUP would withdraw its support from Chequers. In the words of Arlene Foster – leader of the DUP – her party’s only ‘red line’ is a situation in which Northern Ireland is treated differently in customs or constitutionally than the rest of the UK. She said: ‘We don’t know what will happen in five or 10 years’ time. We don’t want Northern Ireland going off in a different direction from the rest of the UK.’ To say that the PM is in a tight spot is an understatement, as it is clear a sleight of hand or some other magic trick will be necessary to resolve the conflicting needs of the EU and the DUP just to give willing Labour MPs a hope and a prayer at turning her Brexit vision into law.

Why is Brazil doing so well in the current geopolitical climate?

Since 1980, the Brazilian economy has consistently underperformed compared to other LatAm markets, but the end of July may be showing promise of returning to the glory days. With workers often striking and a questionably inefficient public sector – Brazil often struggles to keep afloat financially. It seems that 2018 has been the year of buoyancy for the brasileros. In the rubble of the current trade conflict – Brazil may re-establish itself as the captain of Latin American markets.

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Since Trump declared a trade war with China, Brazil has found itself in a strong position. Seeking alternatives, the Chinese have begun trading with Brazil to fill the gap left by sanctioned American supplies, which have been taxed by up to 25%. Should they continue to build this trade relationship, Latin American emerging markets could profit significantly – with Brazil at the spearhead.

Brazilian stocks have been rallying as their domestic political environment improves and they take the mantle as a primary beneficiary for the U.S.A.’s trade war with China. The Bovespa Index has since jumped 12% during the past month while the iShares MSCI Brazil Index ETF has also risen by 12%.

As exportation makes up a mere 13% of the Brazilian GDP, they are relatively unaffected by external events. However, they still remain the largest exporter of food, soft commodities, and minerals – coincidentally, the same exports that China previously bought from America. These two aspects should be seen as the reason China would turn to Brazil – a somewhat stoic economy with expertise in exports that the Chinese have been deprived of. Because of this, should the Chinese decide to continue trading with Latin America, the Brazilian GDP will most likely prosper.

Peter Donisanu, an investment strategy analyst at Wells Fargo Institution, has claimed that there is an improvement in risk sentiment across emerging markets and Brazil is piggybacking off of that. He continues arguing that recent easing of trade tensions between the U.S. and some of its key partners has improved sentiments around emerging markets, and consequently, Brazil.

While there has been an improvement in risk sentiment, as Donisanu claims, LatAms sudden boost seems to be directly correlated to recent political events, and it would be a large coincidence to say otherwise. While Brazil most definitely is piggy backing off attitudes towards emerging markets, their disproportionate boom should be attributed to the Chinese interest – not a general interest.

Who Will Be Affected by China’s Trade War?

After sitting on the cusp of a financial war with China, the U.S.A. has finally unleashed their tariffs on Chinese goods after accusing them of stealing intellectual property in March. This back-and-forth disrepute of imposing tariffs on certain items will have a backlash on the citizens of both countries as China seek to reprimand the U.S. The Chinese have since stated has since stated that although they did not start this conflict, they will fight back.

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Chinese technology is receiving a 25% tariff due to accusations by the Trump administration that the Chinese stole intellectual property which optimizes semi-conductor chips. These chips are found in most electronics, ranging from televisions, personal computers, iPhones, and cars. Unfortunately, it seems that the U.S. consumer will most likely be footing the bill as China’s production pricing will remain the same, but the cost to American citizens will increase by 25%, and the Chinese will not be covering these expenses.

China will not take a hit to its economy lightly and have already planned their retaliation by focusing their own tariffs on a wide variety of U.S. exports. This ranges from plastics, to nuclear reactors, to even dairy making equipment. China must be vigilant and handle these tariffs sensibly as Chinese brokerages are sitting on more than £240 billion of loans that grow riskier by the day as China’s equity market tumbles. Losses on the debt could wipe out 11pc of the industry’s net capital, the U.S. bank reported in July; and we suspect this is something U.S. Administration is aware of.

The reality could be more than fist wagging as this tariff war is the biggest economic attack in history. Although undoubtedly better than boots on the ground, this conflict still poses a threat to Americans and Chinese citizens. Firstly, American citizens have a lot to lose beginning with the aforementioned 25% tax they are going to need to pay on certain goods. Further issues include a shrinking market from Chinese buyers, and even rotting livestock due to smaller demand which will heavily affect farmers in the red Mid-West as they lose access to China’s market and are left with excess goods.

It seems likely that the war will not take place in the open, and the real battle will be “on the flanks in the form of unnecessary inspections, product quarantines, and heightened regulatory scrutiny” says James Zimmerman, a partner in the Beijing Office of International Law.

But in reality, this war affects everyone across the globe. With reduced access to the U.S. market, China’s growth may come to a halt which would have a knock-on effect to all world economies. Increased caution and confidence for business will cause uncertainty within China’s market and puts expansion plans on ice. With the two biggest economies grinding themselves against each other, could there be space for a third party to intervene?

Italy’s Harlequin Performance

The laughable situation in Italy in which the traditional political parties struggle for majority votes at the behest of the populist movement “5 Star” (MS5) is somewhat remnant of the Renaissance theatre style commedia dell’arte. MS5, the ambiguous and enigmatic harlequin-esque populist movement, has danced its way into mainstream politics taking a large slice of votes from the Right-Wing parties, who are now screaming “encore” as they attempt to scramble enough power to encourage a second election. But why have these events had a tumultuous effect on the rest of the world?

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The political drama began when the MS5 seized power through their refusal to bow down to political elites. This is not the typical Left vs. Right epidemic we see in most Western countries, but more of a working class vs. elite struggle like the Catalonians against Franco or British Labour reforms in the 60s. At this stage, MS5’s aim seems drastic – this is not just about a reform, this is about a revolution with a focus on domestic empowerment, immigration issues and the European Union alongside a strong hatred of the mafia. But nothing is set in stone, and due to this, Italy are currently proving real tricksters to label which is a massive turn-off for international investors.

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Geo-political issues and rapid social change tend to not bolster share prices, and since the beginning of this new chapter, Italy’s stocks have gone on sale. Rocky prices like we have seen it Italy do however tend to draw in the braver investors who hedge their bets on the dangerous side. Unfortunately, the sale prices don’t match the level of volatility in political stability, and therefore don’t seem to be a great bargain. This of course puts off even the high-risk investors. JP Morgan strategist Mislav Matejka noted recently that there is a poor risk-reward going forward giving the strong run and the political overhang.” It seems that nearby German equities have been the preferred route for most investors after taking profits on Italian stocks.

This mass sell-off of Italian stocks was originally triggered by fears of a second election and investors fear of Italy ditching the Euro, which currently seems highly likely. Investors have decided to keep their money in their pockets for now until the situation cools down with SocGen trio warning that buying could remain weak for several months.

Italy’s performance hasn’t just affected Europe, it managed to dance its way across to the Atlantic and cause the Dow Jones Industrial Average to drop 391 points. Although the Dow Jones made a huge recovery, making back most of the May dip, it is still undeniable that Italy’s Euroscepticism and quick social change managed to scare even the Americans.

No one can predict the ending of this drama, and although for now it seems that Italy have put forward a government, we don’t know if we are at the beginning or end of this unbridled saga which will likely continue to tighten the strings on investors’ wallets.

 

Just What Is Happening with Brexit?

Since the Brexit vote of 2016, British politics has been tumultuous with inter- and intraparty disagreements causing investors to treat FTSE and UK market investments as high-risk. So far, the most damaging aspect of Brexit seems to be uncertainty. Beyond the ramifications of leaving the EU, analysts are struggling to predict what a post-Brexit Britain will be like. It is difficult to predict how red tape around the Customs Union, which greatly benefits the British economy, will affect British trade, market capitalisation, and deciphering whether the market is undervalued or not.

The constant battles and disputes surrounding the legitimacy of Brexit and how Britain should go about it are frequently voiced in the House of Commons, appropriately reflecting the nations division over Brexit. Despite disunion being apparent between the two main British parties, Conservatives pushing for Brexit and Labour for a second referendum, there is a glaring divide notable within the Labour party – the left-wing alternative in the British parliamentary system.

Although individual Members of the Labour Shadow Government Parliament are for the most part Remainers, the party is a life-long Eurosceptic which is an obvious conflict of interest. Voters are very aware of this, and it is making Labour’s position on Brexit unappealing and creates more confusion among the electorate. Ex-British Labour Prime Minister Tony Blair has come out of the woodwork and criticised the current shadow government leader Jeremy Corbyn’s policies as being “the worst of both worlds”.

Following from this glaring division, an unforeseen issue has arisen in Ireland as talks of a hard border are discussed. Northern Ireland will follow Britain out of the EU, but Ireland will not. This issue was made more prominent when Theresa May stated recently that Britain is leaving the EU and will not softly exit the customs union.

This debate could reopen a healing wound with Northern Ireland by raising the issues of borders between the Ireland and Northern Ireland causing more political instability. Four political parties have backed Northern Ireland staying in the single market – stating that there should be no hard border between Ireland and Northern Ireland – and Ireland and the rest of the UK. This is also being supported by the DUP who propped Theresa May into power during the last election.

These political conditions reflect peoples’ uncertainty as to what will happen. Since the referendum, there have been market crashes, volatility, and stagnation in house prices all related to the vote.

Theresa May has opened the Conservative sails to the wind with her firm Leave stance when addressing the EU last week, stating that Britain will not be “climbing down” and will leave the Customs Union. Hopefully, Britain will decide soon how it will tackle leaving the EU so that it can begin reshaping itself according as currently no one seems to know what is going on, making it tricky for investors to trust British markets.

Oil Prices – Who Wins and Who Loses?

Due to Trump’s recently announced Iran trade sanctions and OPEC led geopolitical shifts, oil prices have soared to a three and a half year high since March 2018. Saudi Arabia are set to benefit greatly from this if they look to use the opportunity to diversify their economy, but consumers will be left footing the bill all around the world as companies pass on their new oil expenses.

Donald Trump is reinstating sanctions on Iran, one of the world’s major oil suppliers, claiming the deal was a “horrible agreement” and “an embarrassment” during his speech on Tuesday, May 8th. In restricting trade with Iran, he inadvertently increases the price of oil by reducing supply to the market. This has happened at a point in which crude oil prices were already estimated to breach the $80 mark due to other geopolitical factors.

Aside from Trump’s involvement, OPEC has rallied its efforts to reduce exports, curtailing the quantity supply to the demand, therefore erasing a global surplus. Consequentially, we could soon see a global shortage of crude oils – theoretically increasing the value of crude oil for years to come. Other factors include a 0.6 million barrel per day reduction in supply from Venezuela due to domestic issues, aging wells naturally depleting all over the world, and exhausted supplies from China and Angola.

Saudi Arabia, who can use the money from oil to diversify its economy from this single commodity propping up its market, are set to benefit from this opportunity greatly. These circumstances fuel its long-term “2030 vision” which seeks to lessen domestic reliance on oil. Unsurprisingly, this OPEC member has led the way in curbing supplies by 0.7 million barrels a day since 2016.

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Although OPEC countries will thrive in this economy, airlines may experience some turbulence as they pass on surmounting costs to the consumer. They will inevitably have to dump the pain of expensive fuel unevenly to jetsetters meaning flights prices might increase above inflation. Airline analyst Savanthi Syth claims this will mainly affect leisure travel lines – whose consumers are highly price sensitive – and are more loyal to price than to brand. This is opposed to business travel airlines, who will not suffer much grief in passing the costs along.

Despite this, budget airlines could use these incidents to push their brand as being the cheapest – taking a short term hit to profit and hoping for long term loyalty after the oil hype dies down – if it ever does.

 

Is It Finally Euro-Russian Economic Armageddon?

Russia’s economy is heavily reliant on the European Union (EU). Over the last six years, we have seen a decline in trade relationships between the neighbours with EU investment falling by heights of as much as 44pc in 2014. Could the recent alleged Russian chemical attack in Salisbury, Britain hammer the final nail in to the coffin of an already dying economic relationship?

The EU/Russia trade relationship is based on the price of oil. Here’s why: The EU market’s relationship with Russia is dependent on the growth of the Russian economy, but this growth is intrinsically linked to oil prices. If this commodity does badly, then Russia does badly. Since 2011, and most significantly 2012-2016, the price of oil began to a steady decline – which is correlated to the weakened financial partnership between the EU and Russia. This was seen most notably at the end of 2015, when hydrocarbon exports were down 42pc from 2012. This subsequently leaves Russia in a weakened financial position – they could not burden further blows and remain buoyant in their current economic situation.

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But the Salisbury attack could be the last straw. Western states have already begun an exodus of Russian politicians from their embassies which worsens Russia’s geo-political influence worldwide.  So far, this has had no impact on the EU/Russia trade deal. Yet, if these sanctions begin to affect trade relations, Russia’s economy could find itself on life support as it stumbles toward a nadir. Its economy is already being pressurised by the decline in oil price, and a dwindling relationship with the EU – trade sanctions would leave the Russian economy in a hopeless situation, seeking alternative solutions.

It seems Russia is  aware of this and have begun reaching out to alternative markets to keep their economy afloat. In difficult circumstances Russia has reached out to Turkey, a nation who has been trying to gain access to the EU for years but has been rejected for a myriad of reasons – most notably their poor human rights record. Earlier this month, Putin joined President Erdogan at a ceremony for a Russian made Nuclear Power Plant. This isn’t the first sign of a romance brewing between the two nation states. Over Christmas they finalized an agreement that Turkey would purchase their S-400 Missile Defence System. Aside from this, they are building the Turkstream pipeline to transfer Russian gas to Turkey. Will Russia need the EU if relationships blossom with alternative markets? They have reached out to Turkey, but could this become a patterned behaviour?

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance.