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 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.

March Market Commentary

Market Overview

Those who feared that January’s boom would lead to a more somber – or even negative – February will have been relieved as, despite the serious potential for punishing economic headwinds, global markets continued their positive climb. The S&P 500 was up by nearly 3% and there is scope for even more dramatic gains in the short term if the United States (US) and China can announce a tariff free trade deal in the short term. Developed market equities (DMEs) stiff-armed Brexit fears and continued their 2019 good form into February, up 2.56% as measured by the MSCI EAFE. Emerging market equities (EMEs) maintained their January gains, up 0.23% as measured by the MSCI EM Index thanks to South America’s positive momentum.

At the end of January we viewed the bang with which 2019 started cautiously and a bit dubiously; however two months into the year not only have markets performed relatively well, but also many of the reasons for such raging economic anxiety appear to have turned a corner to pose less of a threat. Among the more salient of these has been the risk of an all out trade war between the US and China, which has ominously hovered over markets for more than 8 months to foster an aura of instability. What is more, the ever-present trade tensions have caused real damage to both nations’ economies and have boiled over and bruised global markets. While we always believed that reason would triumph and that a mutually beneficial trade deal would eventually be agreed by the two protagonists, this conflict has been practically wrapped in tinder just waiting for the smallest spark to ignite a fiery trade war. However, a matter of days before the US was set to raise tariffs on over $200bn of Chinese goods from 10% to 25% – and surely incur an equally punitive response from the Chinese on American goods – President Trump declared he would indefinitely suspend the March 2nd deadline, citing progress to a mutually beneficial trade deal, which might well be finalized shortly. The deal that is nearly over the line is reported to see Washington abolish most of its tariffs in exchange for Beijing proactively protecting intellectual property rights and buying significantly more American products, including China fast-tracking the removal of its foreign-ownership limitations on auto ventures and reducing imported auto tariffs to below the current rate of 15%. While markets will not be completely out of the woods until a US-China trade deal is announced, investors should take comfort in the fact that relations between the countries appear to be at an 8 month high and that the chance of a trade war looks far slimmer than it did only a month ago.

Despite January’s boom, US markets had plenty of domestic shock to absorb through the longest ever government shutdown in country history. While Washington’s political chaos failed to measurably damage domestic equities, the threat of yet another government shutdown created plenty of investor anxiety. Thankfully, regardless of the furore over Trump having declared a national emergency to fund his border wall with Mexico, markets seemed to have taken comfort in the fact that Congress agreed a federal budget that will last through the current fiscal year, ending September 30, 2019 and thus preventing a fresh shutdown in the short term and eliminating this ominous threat to markets.

Henry James International March Market Commentary
It seems highly unlikely that Mrs. May, who has been intent on respecting the 2016 referendum result and who was the one who triggered Article 50 in the first place, would ever countenance such a dramatic political move.

So far so good in 2019, then? Everyone’s least favorite issue could rapidly corrode the burgeoning optimism: Brexit. As things currently stand Britain is set to crash out of the European Union (EU) without a trade deal on March 29, 2019, which (if we are to believe mainstream economic pundits) will likely bequeath the United Kingdom a deep and painful recession and inflict serious damage on EU economies, particularly given the latter’s UK trade surplus. Such a catastrophic outcome would send tidal waves of economic headwinds and investor uncertainty far beyond British and European shores to the rest of the world. March 12 proved to be a decisive day in the Brexit saga as it saw Parliament reject Prime Minister Theresa May’s deal for a second and likely final time. On the following day Parliament voted in favor of a motion that ruled out a no-deal Brexit under any circumstances; yet this resolution lacked the power to stop Britain crashing out of the EU on March 29th without Brussels’ consent to extending the deadline. Of course, Britain is able to unilaterally revoke Article 50, which would result in avoiding a much-feared no-deal Brexit (for the time being, anyway) or even cancel Brexit altogether. And yet, it seems highly unlikely that Mrs. May, who has been intent on respecting the 2016 referendum result and who was the one who triggered Article 50 in the first place, would ever countenance such a dramatic political move.

While Michael Cohen was testifying against his old boss in the House of Representatives, President Trump was in Hanoi for his hotly anticipated second summit with North Korean Supreme Leader Kim Jong Un. Despite a range of positive predicted outcomes including the official end to the Korean War, nothing at all was achieved as Trump pressed for complete denuclearization while Kim evidently wanted all sanctions lifted. In the words of the President: ‘Sometimes you have to walk and this was one of those times.’ The lack of result battered South Korean equities (KOSPI), which were hopeful the summit would begin the process of making inter-Korean cooperation a more viable and immediate reality, which would be a major catalyst for South Korean economy.

With no sign of the turmoil in Venezuela ending anytime soon, its oil industry – which produces 1.2 million barrels a day in normal circumstances – is on the brink of collapsing due to its flat-lining economy and failing power grid. Additional headwinds include OPEC and some non-OPEC countries agreeing to cut productions by that same amount; i.e. 1.2 million barrels a day, which suggests that the oil market is not particularly dependent on Venezuela’s contribution. Besides which, expanding exports from Canada and the US would be able to fill any gap left by the Venezuelans.

Meanwhile despite the Bovespa index maintaining its 2019 gains, the Brazilian economy is in relative dire straights and has seen its 2019 growth estimate downgraded for a 3rd consecutive week to 2.01%. The forecast for the benchmark Selic rate has also been cut from 8% to 7.75% at the end of 2020; the rate presently sits at the all-time low of 6.5%. Brazil’s Central Bank also revealed that its economic activity shrank by 0.41% in January. Despite this important background, Brazilian President Jair Bolsonaro’s most important and biggest challenge is state pension reform. The proposal that would see the minimum retirement age raise to 65 for men and 62 for women is predicted to save more than 1 trillion reais ($270bn) over the next decade. Failure to enact this reform would not only be a body blow to Bolsonaro’s presidency, it would also push Brazil further into an unsustainable debt profile. If Bolsonaro does manage to pass it through both houses of Congress – which will require two-thirds support – the pension reform is widely expected to kick start the Brazilian economy. Unfortunately for Brazil’s controversial far-right President, the opposition party has promised to block the pension the reforms; Bolsonaro will also be only too aware that many previous government have tried to reform Brazil’s pension system and all have failed spectacularly.

The end of February saw the Indian Air Force launch an attack in Pakistani territory for the first time since 1971 in response to a suicide attack on February 14th by terrorist group JeM that killed 40 Indian troops. India accuses Pakistan of a direct hand in the attack. Subsequently the Pakistani Air Force shot down two Indian fighter jets and the world braced itself for what might come of a direct military conflict between two nuclear powers. Thankfully the conflict has cooled down to mere sabre rattling thanks to interventions by US officials, including National Security Advisor John Bolton. While investors were keen to see a fresh geopolitical crisis avoided, it appears that as things currently stand that damage to markets has been limited. Yet despite the Indian SENSEX’s seemingly indifferent response, data shows that foreign investors have not been quite as keen to invest in Indian equities in 2019. What is more, the surge of money into the rupee since the start of November has petered out. While one might be tempted to think this might be an Emerging Market-wide trend, no other country under the classification has experienced major equity outflows along side a falling demand for its currency. As such it would seem that Indian equities have been damaged by the instability the conflict with Pakistan has precipitated; moreover, with a fresh Indian general election this spring there is the possibility that markets will fear domestic political uncertainty as well. In so far as how the conflict damaged Pakistani equities and its rupee, neither have been performing very well and war with its longstanding foe would certainly not be seen as a step in the right direction. Pakistan’s rupee has been near or at history lows against USD since November 2018, and its economy is battling high inflation and current account debt. Yet, after being battered in 2018, Pakistani equities have so far shown life in 2019 and have not moved significantly in either direction since the conflict with India.

 Investment Outlook

Despite the fact that the US and Chinese relations still might devolve into a full-blown trade war, Britain remains on the brink of a no-deal Brexit and market damaging geopolitical crises can blossom seemingly out of no where, we are feeling pretty positive about where markets are so far in 2019 and where they are headed in the medium term.  A cooling of trade tensions between the US and China and a fully funded US government are two items on which we simply could not count only a month ago, but which now present markets with relative stability. Of course, Brexit remains a wildcard with tremendously high stakes and no one knows how it will end – apparently least of all Theresa May and her government. And yet – while this may be a view through rose-tinted glasses – one suspects we are unlikely to head back towards the hard or no-deal Brexit that has given investors so much anxiety. Firstly, there isn’t a sizeable appetite for this in the UK Parliament and, despite the EU’s unflinching poker face, there likely is not an appetite for it in Brussels nor in the capitals of the other 27 EU member states. Yet there is likely desire on both sides for a mutually beneficial soft Brexit – or possibly no Brexit at all – a scenario that local and global markets would likely savor.

Henry James International March Market Commentary
A pausing in interest rates should also cause USD to weaken, which would improve flows into EM economies and their equities.

Markets will also revel in what Federal Reserve Chairman Jerome Powell is expected to announce shortly: that he will lower his interest rate forecast to little to no further fiscal tightening in 2019 due to global economic growth appearing to be slower than anticipated. At the end of 2018 – with President Trump blasting Powell from his Twitter pulpit – it seemed a foregone conclusion that 2019 would be a year marred by headwinds to growth induced by still more interest rate increases. As of today the terrain appears to have shifted considerably and investors should see plenty of opportunity as a result. A pausing in interest rates should also cause USD to weaken, which would improve flows into EM economies and their equities. Failing liquidity was among the main reasons that EM equities fell so precipitously in 2018, and it appears that this problem has been all but solved which would suggest a possible recuperation of 2018’s losses. Indeed, a resolution to the US-China trade conflict would give EM equities an even further boost.

In summary, while there is still plenty to keep investors up at night, we believe that market conditions have improved significantly in a short space of time. Whereas in January and February we were aware of the potential for disaster striking in 2019, much of the sources for anxiety have either been improved or eliminated entirely. As a result if Brexit concludes in a market friendly fashion and the US and China make a mutually beneficial trade deal a reality, we will be tempted to reassess and possibly even improve our prediction of subdued global growth in 2019.

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.

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.

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.