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.

Who Will Be Affected by China’s Trade War?

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

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

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

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

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

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