Henry James International Management June Market Commentary

In last month’s market commentary we indicated that the global economy was beginning to rebound nicely and that we expected that the communications, technology, software and pharmaceutical industries to drive the markets upward and catalyze a global rebound. While this has been true, there is one item we missed: the spark of growth facilitated by the humble and inexplicably polemical facemask. It is not the production of facemasks that is important; rather that the countries whose citizens more steadfastly wear them that are seeing abating infections who are subsequently in a position revitalize their economies through production and consumption.

The diffusion of the virus in the South of the United States (US) highlights the problem: when people came out of lockdown and were not required to wear facemasks, the virus thrived and set the record number for weekly cases in the US. Yet, despite the many reason for pessimism in the US, we still expect a global economic rebound in the second half of 2020 (both here and globally), which we believe will continue into and through 2021. We also persist in our belief that COVID-19 infections and deaths will diminish substantially due to better protection of senior citizens, Gilead’s Remdesivir, a younger median age of those being infected and the improved usage of facemasks and practice of social distancing. It seems that until a vaccine is developed the world will be coerced into coexisting with COVID-19, something that may be quite feasible (e.g. Japan who have experienced comparatively minor infection and deaths despite never having been in lockdown) through the fastidious use of facemasks, social distancing, good hygiene and better medical intervention.

Government and central bank spending remain at the forefront of the global economy’s rebound. Massive global government stimulus – including free cash to both rich and poor citizens, alike – fiscal spending, central banks buying corporate bonds and quantitative easing are all having their positive, intended effect. We believe that interest rates will remain at historical lows and – as we suggested last month – this will continue to encourage investors to favor equities in developed and emerging markets over lower interest bonds, with increased trading volumes continuing to push stocks higher. Moreover, good market returns have served to make investors more optimistic and less afraid of the pandemic.

Significant parts of the globe that were once being decimated by COVID-19 are seeing infections and deaths from the virus sink to very low levels; moreover, they are able to maintain their R-value below 1 through a potpourri of testing, tracking and social isolation (not to mention the assiduous use of facemasks). As a result Europe’s Schengen Area have officially restarted both economic activity and manufacturing while other parts of the globe – including parts of the US, the Middle East and Africa – have been left spinning their wheels due to surges of COVID-19 infection. The outbreak in the US Southern States is a warning that reopening too early, forsaking the protection offered by a facemask and not maintaining social distancing make the dreaded second wave a not possibility, but a veritable guarantee.

Looking into the future, we continue to have a positive outlook for companies that produce the technology to deliver goods and services to consumers and businesses internationally. Similarly, we see strong opportunities in in companies that provide the means for people to work and study remotely from multiple locations. We continue to see increased potential in the pharmaceutical and biotech industries as efforts to combat the pandemic continue to increase.  Lastly, we also have our eye on businesses related to 5G and its use in technology, especially cloud data storage.  We are also encouraged to see that many of the companies that comprise the major US indices are benefiting from increased forward corporate revenues, earnings and margins. We are seeing enough good news which we believe may indicate that the recovery is set to stay on track. We are hopeful that the world’s governments and central banks persist in the effective course they set for themselves, that the virus continues to stay under control across the globe and that people help power the global economic recovery through the simple act of doing their part to combat the spread of COVID-19.

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 May Market Commentary

In last month’s market commentary we said that we expected a global economic rebound in the second half of 2020, which would continue into and through 2021; that COVID-19 infections and deaths would diminish substantially and that its presence would be all but extinguished in Asia; and that global manufacturing would start to pick up again (particularly in Asia).

At this point, we’ve seen indications that the global economy is beginning to rebound nicely. Massive global government stimulus, including free cash to citizens, fiscal spending, the Fed and other central banks around the world buying corporate bonds and quantitative easing are all having a positive impact on the global economy. Interest rates remain at historical lows and remind investors of former United Kingdom Prime Minister Margaret Thatcher’s famous 1980s quote: ’there are no alternatives’. Consequently, investors are continuing to favor equities in developed markets over low interest bonds with increased trading volume pushing stocks higher.

At this point we see certain parts of the world slowing the spread of the virus and getting back to work. By the end of May, the COVID-19 infection and death rates in Europe’s Schengen Area was becoming substantially lower than the worrying and desperate heights experienced in April. As a result, much of the area’s economic activity and manufacturing are resuming. Conversely, other parts of the globe are seeing new surges of infection, such as in Brazil, where new cases are at worrying levels.

In North America and the United Kingdom (UK) the virus seems to be just about where it was last month in Europe and Asia: at a point that is far from ideal but which some believe is showing signs of abating. However, we believe that North America and the UK may be opening up again a bit too early which may make the dreaded second wave a distinct possibility. Such an outcome would be catastrophic for the global economy that relies on their output. However, to be more optimistic, we believe that institutional investors are looking well past the economic destruction brought on by COVID-19 and to a return to economic prosperity in the not-too-distant future.

We believe that investors anticipating economic recovery has largely driven the US stock market up over 40% from its COVID-19 bottom and that it is helping to power the ‘round trip journey’ made by the S&P 500; i.e. returning to pre-pandemic levels as it did on June 8, 2020. Of course, it is not just market optimism helping international equities flourish. Along with the massive support by provided by the world’s central banks, COVID-19 infection rates are going down nearly everywhere excluding South America and a very positive US jobs report has served to bolster investor optimism. We are encouraged that the June stock market surge has been largely driven by industrial and energy stocks, which shows that markets are reacting to increased demand as reflected by the increase in international movement of goods and increasing global manufacturing.

Looking into the future, we continue to have a positive outlook for companies that are able to deliver goods and services to consumers and businesses internationally. We see increased potential in the pharmaceutical and biotech industries as efforts to combat the pandemic continues to increase.  Businesses related to 5G and the use of 5G services and technology companies focused on communications services including cloud data storage are also likely to find favor with our portfolio managers.  Additionally, if the recovery stays on track more investment opportunities will likely emerge in the energy, industrials and financial sectors. We believe that in many ways markets have shaken off the trauma of COVID-19 and as the effects of the pandemic recede the global economy will continue to regain its footing.

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 April Market Commentary

Last month we stated that – despite the catastrophic way in which the COVID-19 pandemic has threated and affected life and caused the global economy come to a veritable halt – we believed a sliver of light was becoming faintly visible at the end of the tunnel. While the situation in which Earth’s inhabitants find themselves remains absolutely dire and no less serious today than it was a month ago, we feel that our prediction has largely come true, albeit with a caveat: though the light is visible it remains distant and faint. The month of April displayed evidence of “green shoots” as most major indices posted positive returns. Indeed, the broad based MSCI EAFE index returned 6.29% after posting negative returns in each of the preceding 3 months.

From the perspective offered from our isolated home desks, we are expecting very weak economic activity for the second quarter with all major countries having economic contraction and increased un-employment for 2020’s second quarter. Indeed, the economic plunge in this quarter will likely set records, the likes of which we haven’t seen since the Great Depression. And yet, there is hope. Provided that COVID-19 does not see a pernicious second wave, we expect an economic rebound in the 3rd and 4th quarters and continuing into 2021. With massive stimulus progams in place globally, alongside historically low interest rates – not to mention the price of energy and fuel being at all time lows, which essentially offers the positive impact of a global “tax cut” – there are good reasons to be optimistic for the second half of 2020.

While we seem very far away from life as we knew it, social distancing has worked and is working. Throughout the world the hallowed ‘flattening of the COVID-19 curve’ has been realized: in Asia, Europe and now in the United States. Consequently countries like Belgium, Germany, Italy and Portugal have started the slow reboot of the European Union through the opening of some retail businesses and slightly relaxed rules about leaving one’s home. Schools have even re-opened in Germany (with strict sanitation and social distancing protocols, of course). While it cannot be denied that there are fears of a second wave brewing in Germany and beyond due to the relaxing of social distancing measures, the world seems to be inching in the right direction.

As social distancing is relaxed and people are successfully able to get back to work, the economic vacuum caused by COVID-19 will abate. We believe there will be a resurgence of consumer demand pushing factories to ramp up production in order to restock depleted inventories as social distancing restrictions are lifted. Consumer demand is increasing in the developed markets and we believe that businesses will accelerate efforts to re-open as soon as possible given that their very existence depends on it.

In the United States COVID-19 testing is ramping up across the entire country. Here in New York City one is able to get tested for $50 at an Urgent Care Center; of course, while this sum of money may be ‘chicken feed’ to some, to others it will be prohibitive, which presents a range of problematic health and social issues. Nonetheless, we are optimistic that the increased testing, along with contact tracing will stop the growth of large infection clusters.

We expect that Asia and the Pacific Rim countries will lead the way in economic growth in the second and third quarters and that their markets and global investors may mutually benefit from one another. Despite fears of a brewing second wave in China, Japan and South Korea, we are hopeful that their manufacturing will continue to ramp up through the next few months. In early May South Korean Prime Minister Chung Sye-kyun announced that his government would allow business activity to resume in a phased fashion and that gatherings and events could take place provided they follow strict disinfection and social distancing guidelines. This will include schools, parks, museums and even the re-start of the Korean professional baseball league (unfortunately in front of empty stands).

Looking to the future, we have a positive outlook for the following sectors: companies that are able to offer consumers and corporations the ability to sell, package and deliver internationally; the pharmaceutical sector and its companies who not only provide services to fight COVID-19 but also those who fight cancer and a full range of diseases; communication services including streaming, telephone, video games and video conferencing; and technology companies that provide the backbone of communications services including cloud data storage.

In our view, the light at the end of the tunnel is visible, and its vibrancy and radiance will only increase as we continue to turn the tide in terms of our global health battle with COVID-19. We believe markets will begin to recover and there are several economic sectors poised to make solid gains as the recovery from the pandemic continues.

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 March 2020 Market Commentary

There is only one story in town: COVID-19. While these are unprecedented and extremely worrying times from a range of perspectives, including public health, health infrastructure, medical/pharmaceutical supplies, mass unemployment, economic contraction and falling equities prices and bond yields, we are optimistic that light is becoming visible at the end of this harrowing tunnel.

While it is obvious that global markets have been oppressed by this deadly pandemic, the forces that are affecting their movements are a bit of a mixed bag. On one end we have raging fear, Western nations charging towards what may be approaching the first wave of their COVID-19 infection’s apex, as well as the reality and implications of having been in social isolation for the past month and the likelihood of it persisting for a while longer. On the other end, we see improved and more stable market liquidity, global governmental stimulus packages along with evidence that South East Asia is approaching a place from which it may be able to resume some semblance of normality (economic and otherwise).

Despite COVID-19 having caused an alarming number of deaths in Southern Europe (Italy and Spain) as well as carving out a path of destruction throughout the rest of Europe, America and elsewhere, we are feeling more optimistic in the short term. Firstly, it appears that social distancing is beginning to bear fruit in Southern Europe, where infection numbers and deaths are decreasing for the first time in a matter of weeks (of course, decreasing does not mean infection and death figures are still are not really high). Moreover, on April 5, 2020 New York Governor Andrew Cuomo revealed that in the previous 24 hours new hospitalizations had fallen by 50%. Despite Cuomo wisely cautioning against wishful thinking that this evidence suggests that the crisis is beginning to plateau in New York State, as good news is in short supply these days, we will take it with open arms.

The fuel for our optimism is driven by the dramatic increase in COVID-19 testing after a disastrous start by the United States government. According to US government officials, labs are processing almost 100,000 tests daily and that over 1.4 million test have so far been administered. Abbott Labs delivered more good news as its new quick test could be used very soon to clear first responders, medical personnel and other key workers.

South East Asia is apparently about to get back to work – perhaps not as one envisaged ‘work’ pre-COVID-19 but ‘work’ nonetheless – as China, Japan and South Korea have begun ramping up manufacturing. A stunning example of this – which would have been unthinkable a matter of weeks ago – is Japanese automaker Honda Motor Co. along with rival Nissan Motor Co. both resuming partial production in Wuhan, the city in which the pandemic first began.

Looking to the future we have a positive outlook for the following sectors: pharmaceuticals that provide services to fight COVID-19 along with the revolutionary technology that will help fight cancer and other diseases; communication services including streaming, telephone, video games, video conferencing and more; and companies that provide the technology for logistics and cloud data storage. In terms of retailers, CVS and Walgreens appear to have a place in the future recovery and government expenditures will help major industrial companies stay afloat. Lastly, the low cost of energy, which many will view as a drawback, will help to power a global recovery when the time is right.

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 February 2020 Market Commentary

Market Overview

 Since last month’s entry, coronavirus – or for the more technical among us, COVID-19 – has gone from theoretically worrying to officially scary, life-changing and economically devastating. A short time ago coronavirus was mostly China’s problem and was a situation that we in the West looked at with genuine worry and sympathy. Now, no country is immune from the devastating impact of this virus on virtually every aspect of life. The effect of the coronavirus on China can be seen as a harbinger of the impacts of the virus on other societies and economies. Initially the West was seemingly mostly concerned about the economic effects of a disruption to supply chains and was reluctant to take precautions.  That has all changed as virtually every country in the world is taking extraordinary steps to abate the spread of this pandemic.

Until the last week of February most investors were all braced for a significant, but not necessarily ruinous, coronavirus impact. That all changed on February 21, 2020 when Italy’s very manageable and seemingly stable total of 3 coronavirus infections jumped to 20. The next day the number became 70 and a week later 1,128, including some fatalities. Markets took note of coronavirus making itself at home comfortably within a Western nation and investor panic ensued to deliver the worst week for stocks since the 2008 financial crisis, which saw the MSCI EAFE index tumble by -8.00% in February, the MSCI Emerging Markets index by -4.17% and the MSCI World ex USA Small Cap index plunge by  -8.74%. There has been little improvement since the final week of February; the current situation is far worse and several nations are seeing the virus run rampant through their populations. Moreover, economies are paralyzed and markets have been in veritable free fall.

Without minimizing how dangerous coronavirus is for both the elderly, infirm and possibly others – the death rate is generally believed to be less than 1%. Indeed, for the vast majority of people it is even less than that. What the virus lacks in deadliness to people, it more than makes up for in its lethalness the global economy. COVID-19 has the power to freeze the capitalism that drives global growth: slowing both production and consumption. As we have seen in China, Italy and now across the rest of the world, to prevent the spread of the virus, places of work shut down and whole cities and provinces are quarantined. While plenty of jobs in the modern economy allow for employees to work remotely at home, not only are many businesses not equipped for this kind of work, factories and the manufacturing sector cannot do so by their very nature. As was the case in China, factory closures suspend both product and component manufacturing, which not only stifles the quantities of items for consumers to purchase locally (and affects business cash flow), all global businesses whose supply chains run through China (and elsewhere) are starved for the items or parts required to sell and/or complete their finished products, respectively. Car manufacturing in South Korea, Europe, United States and beyond, for example, have been massively impacted by the supply chain disruption in China; many have already suspended their own production or are poised to do so.

On the consumer side, people staying indoors due to quarantine, self-isolation or fear of contracting coronavirus have seen the amount they spend in the economy plummet; indeed, in recent days consumer spending is at unprecedented lows. Simply put, we have not been spending in the retail sector, on entertainment, at restaurants or travel, etc. Moreover, doing so is scarcely possible since many countries have coerced such businesses to close. These sectors are huge parts of the global economy and not only does it mean that big businesses are suffering and small businesses risk bankruptcy, it also threatens millions upon millions of jobs that supply people with cash to afford their lives and to spend in the local economy. In short, people are not only refraining from buying because coronavirus is keeping them away from shops, restaurants, movie theatres; etc. – they also are cash deprived or soon will be.

The knock on effect is massive, and when production and consumption have been suffocated, it is down to banks and governments to step up to the plate, but the question is what can they really do when coronavirus has literally taken off the wheels of capitalism? Banks can give loans to businesses struggling to pay their bills; they can also let mortgage holders miss a couple of payments, amongst other items. However, as we witnessed in 2008, even the biggest banks are mere mortals and have limits to what they can do. Indeed, even governments and central banks have limits, not just because their pockets are not infinitely deep but also because policy changes – dramatic though they may be – cannot always have the desired effect. For example, on March 3, 2020 when the Federal Reserve slashed interest rates by 50 basis points – not to mention March 15th’s slashing of an entire percentage point – markets were left unsatisfied and continued in their volatile downward trend. Indeed, the face value for this seems quite obvious in hindsight: the reasons consumers are not spending money in shops is not because of expensive loans or debts, but the fact that they are afraid of contracting coronavirus. Ultimately, economies must pay their own way, and while government policy can help banks loosen their purse strings, delay or abolish tax payments and help to lubricate the wheels of capitalism through financial packages, it is down to whether production and consumption can persist through this pandemic and out-muscle and outlast the virus.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, believes that the impact of the coronavirus pandemic will catapult us into a global recession. ‘The major global sell off that began at the end of February indicates that as coronavirus spreads throughout the planet that markets will continue to panic and result in a global recession.’ He continued: ‘Hopefully everything will slow down through a coordinated global effort and prevent – or limit the impact of – this near inevitability.’ O’Leary suggests reasonable expectations include a 1% reduction in global economic output (from 3% to 2%) citing that the world’s second largest economy China has already been devastated by coronavirus and the reality that the pandemic is poised to smite the rest of the world’s economies in no time at all.

As readers will recall, as we transitioned from 2019 to 2020, despite being bullish, we were particularly aware of the full range of snags and snares desperate to trip up a roaring global economy (of course, who would have predicted a virus would have been the inevitable tripwire?). 2019 stiff-armed Brexit and President Trump’s tariff wars, including the US-China trade dispute, along with plenty of other headwinds. According to O’Leary, in a world without coronavirus the 2020 economy may have simply ploughed through these items to deliver returns for investors, as it did in 2019; however, in our current situation he believes that they will only add to the pain. He said, ‘Brexit and the US trade disputes with China will continue to have an effect on the global economy and coronavirus will only magnify their effects and make them more painful.’ According to O’Leary, a silver lining is that he believes that coronavirus has taken Trump weaponizing tariffs off the menu until at least after the November General Election, saying, ‘Trump needs a strong economy to be re-elected.’

While O’Leary does value globalism, he believes the coronavirus has exposed the fatal flaw of the status quo; i.e. a lack of diversified import sources. ‘It has negatively effected global supply chains as China is a major provider of parts that go into many finished products that are manufactured elsewhere, like in the automobile industry for example.’ He continued: ‘Since these parts are not available, manufacturers in other countries, like in South Korea, for instance, have to stop production lines altogether.’ In short, the undiversified supply chains that were arguably put in place to turbo boost capitalism, have become its undoing.

Of course, the implications are far more significant than negatively impacting the economic cycle: how does an undiversified supply chain threaten the supply of the drugs and medical equipment needed to maintain and manage our national health in normal times? In 2018, 88% of active pharmaceutical ingredients came from overseas, with around 14% of that sum produced in China. In short, from a pharmaceutical perspective, the US is not self-sufficient and relies on its supply chains, so what happens when there is a pandemic and our trading partners are either unable to continue supplying us with the necessary drug ingredients, or they simply become unwilling to part with their stash to instead look after their own populations? ‘Evidentially the USA is dependent upon China for some of the component ingredients that are needed to make drugs that are used to fight the coronavirus,’ O’Leary said. Of course, one hopes and expects that the experts will figure out how to overcome these present difficulties; however, it is clear that coronavirus has revealed that undiversified supply chains are not the best way forward on any front.

This brings us to the faint silver lining of the dark cloud that is coronavirus: will this hasten the creation of diversified supply chains? We think so. ‘We think that a decoupling of the US and Chinese economies will be a good thing for both countries and will mean US relying less on China for rare metals, pharmaceuticals and a range of other items.’ Of course, one may say that the US-China trade war was rather inadvertently a blessing in disguise in so far that it got businesses expanding their supply chains outside of China to avoid tariffs. Despite this, the US and Chinese economies are still deeply interconnected; indeed, the trade deal Trump has been working on presumably would strengthen, if rebalance, the relationship between these two economic juggernauts. O’Leary doubts that any business will want to continue with the existing supply chain status quo when coronavirus calms down; on the contrary, he believes that companies will be proactively diversifying their production and parts sourcing throughout the world. O’Leary said, ‘The impact of a diversified supply chain will make business production more complicated and likely more expensive, but it will protect it.’

In conclusion, we think it is likely that markets will be forced to endure more pain in the coming months and that coronavirus will have ruined any hope of 2020 being a bull year. However, we believe that it is reasonable to expect markets to find a bottom and begin to recover. This is not the time to panic, financially speaking – history has shown that even the most violent negative market spirals are often followed by significant gains. We believe in maintaining a portfolio of high quality stocks to weather the storm and remain in position to take full advantage of the inevitable recovery. Despite sucker punching international markets and creating a global health emergency, we believe the coronavirus will lose much of its sting by the end of 2020’s second quarter. Hopefully, by the middle of 2021 the economic wounds wrought by the coronavirus pandemic will be nearly or completely healed.

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 January 2020 Market Commentary

Market Overview

 While the first month of the new decade generally saw negative equity performance, after the way in which markets overcame apparent obstacles throughout 2019, we are hopeful that this is nothing more than a temporary setback. In January the MSCI EAFE index fell by -2.08%, which, while a deviation from its stellar 2019 returns, could quickly resume growth if the market returns to its long term trend in 2020.  Meanwhile, the MSCI Emerging Marketing index plateaued for most of the month before falling sharply at its tail end, resulting in performance of -4.66%. Lastly, the MSCI World ex USA Small Cap index did not fare much better, as its value fell by -2.88% in January.

For all the drama of 2019, the fresh decade has arguable ‘kicked it up a notch’. While memories of an impending World War 3 are fading and were almost certainly exaggerated from the onset, one cannot deny that the United States’ assassination of Iranian General Qasem Soleimani, and subsequent Iranian missile relatiation, was a rather tense affair that could have easily erupted into a deadly war; moreover, this skirmish added imense uncertaintry and risk to markets. If this wasn’t enough, we are now in the midst of a global health emergency courtesy of the coronavirus which poses a serious threat to large numbers of people and is playing a large part in disrupting the Chinese economy.

The final instalment in the trinity of geopolitical market perils was the impeachment trial of President Donald Trump. While the verdict in the Republican held Senate was never really in doubt, given the stakes of the trial, markets were under plenty of stress –  both actual and potential. While Trump polarizes opinion, what is clear is that markets would not have viewed removing the 45th President from office favorably. Of course, Trump was acquitted of all charges, which draws a line under this issue; moreover, it is widely believed that the President’s impeachment has damaged Democratic hopes in the upcoming US General Election and has put Trump in pole position for a November victory, a result that would likely be market-friendly in the short term. However, if a second Trump term results in even higher levels of fiscal spending with the Federal Reserve keeping interest rates at, or near, negative levels in real terms, not only would this be at odds with the fiscally conservative modus operandi for which Republicans are famous, but it would also dash our medium term optimism.

Boris Johnson’s January announcement of a new law that would prohibit the sale of gasoline and diesel motor vehicles from 2035 underscores our confidence that we are rapidly moving towards de-carbonization. There are a range of opportunites that will present themselves to markets and investors; of course, there are also risks. We believe that the electric vehicle (EV) market is one that will be of interest to investors as electric car deployment has sky-rocketed during that past decade. There were 5 million electric cars in 2018, which represented a 63% increase from 2017. We believe that 2019 will have seen an even more dramatic rise due to increasing consumer and governmental pressure on the automobile sector to play its significant part in helping to achieve carbon neutrality. Meanwhile, gasoline and diesel cars are starting to become more expensive as governments begin to impose punative taxes to make them less attractive to consumers; at the same time electric cars are seeing their prices reduced through a combination of government subsidies and tax breaks. In 2018 45% of eletric cars, or 2.3 million, were on the road in China, while Europe boasted 24% of the global fleet, with 22% in the US. Norway is the global leader in terms of marketshare. While electric cars and other EVs represent improvements in terms of green house gas emissions versus their fossil fuel counterparts, the best results will only occur when electricity grids are also less carbon intensive or fully green and/or sustainable.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, sees coronavirus as a major threat to the global economy. ‘We believe that the virus will take 1% off China’s GDP growth rate in 2020, which will see it fall below 6% for the first time in a long while. Furthermore, we see China’s first quarter GDP falling to 4%.’ He continued: ‘Since China is the world’s second largest economy, this will negatively impact global GDP growth.’ Indeed, though markets vividly remember the SARS outbreak of 2003, the economic stakes were far less significant as back in those days China’s economy was considerably smaller, ranking only 6th in the world and with a GDP that was well below $2tr. By contrast, in 2019 China’s GDP was over $14tr and represented over 16% of the global output, which presents a worrying picture for those fearful of coronavirus sparking a global meltdown. While coronavirus presents short term – and possibly medium term – issues for both China and all global economies, the result may be particularly harmful for China. Indeed, US businesses moving supply chains from China to other countries – like Vietnam, for instance – that began with the US-China trade war may well be accelerated due to the major interruptions that coronavirus has created for both product and component manufacturing. O’Leary said: ‘Once a supply-chain is moved outside of a particular country, it doesn’t automatically return once the initial problem is resolved.’

Despite the clear issues created by coronavirus, O’Leary says that China’s government and central bank have responded appropriately to thwart the economic rot by lowering interest rates, offering tax breaks and consumer subsidies and flushing their market with liquidity. And yet, even a totalitarian government can only control so much, as despite all of these measures including President Xi Jinping promising to help mitigate large-scale layoffs, it is likely that the small businesses; i.e. the lifeblood of the Chinese economy, will still be rocked by layoffs, bankruptcies and increased unemployment.

Coronavirus has complicated everyday life in Wuhan – the Chinese city in which the global health emergency began – severely impacting the local economy. Due to quarantine, businesses being shut for weeks beyond the expected Chinese New Year holiday season and citizens remaining indoors to avoid contracting the virus, China’s streets are empty and deprived of consumer spending. As a result the restaurant and retail sectors have been hard hit; moreover, they have entirely missed out on the Chinese New Year-induced spending spree (the local equivalent to our Christmas shopping season) which is a disastrous and often fatal blow for the many business who are utterly dependent on this annual sales spike. Moreover, on the recommendation of a range of national governments, foreigners are staying away from China, which has resulted in tourism spending drying up too. Indeed, many airlines including Delta and British Airways have suspended all flights to China until the coronavirus situation improves. ‘The Chinese economy is at the mercy of the coronavirus. Indeed, it is easy to see how the global economy may be in a similar situation in no time at all,’ says O’Leary.

According to O’Leary, while EVs currently make up a mere 2-3% of total global automobile production, it is a no-brainer to expect their marketshare to increase dramatically. He believes that companies that join Tesla to compete to become the standard-bearers of the industry will see increased growth which may lead to increased stock value. ‘The big beneficiaries will be chip companies that specialize in automotive applications and software producers that manage efficiency and safety,’ says O’Leary. Businesses that produce small efficient motors and specialized engine lubricants should also benefit by the emergence of EVs ramping up their global presence.

Henry James International Management has been an early advocate of ESG investing through our HJIM International ESG Large Cap strategy, whose track record extends back to September 2008. Our faith in ESG is not only because we see value in offering the chance for people to invest using their world view as a crucial overlay, but we also believe that it is important to ride both the cutting-edge and clear direction in which we see the market trending. As such, we believe in finding the industries and companies that will benefit from a move to a range of environmentally friendly solutions. But O’Leary offers a stark warning: ‘In order for the green revolution to be both environmentally impactful and economically beneficial we need to remember that EVs are not a solution unto themselves. For example, while EVs have become prevalent in China and even India, it is easy to forget that much of their electricity production is achieved through burning coal.’  Furthermore, O’Leary believes Trump must get on the same page as British Prime Minister Boris Johnson, who recently put into law a ban on the sale of gasoline and diesel engines after 2035, as otherwise this may become the next example of something that sees China run circles around the ponderous and clumsy West as it clearly is doing with its 5G technology. O’Leary believes that there is great growth to be had in the EV sector, but it is a question of whether the future will see us driving US- or Chinese-made electric cars.

O’Leary says that the price of oil will likely be greatly affected by the emergence of EVs becoming mainstream and gas and diesel fuel consumption gradually decreasing. ‘The one thing we know,’ says O’Leary, ‘is that while oil demand may decrease, it will never go completely away as oil and oil products are required in all vehicles and machines. This will not go away even when EVs take over our roads and highways.’ O’Leary believes that achieving carbon neutrality is something that will require governments, businesses and consumers working together. He said, ‘As we have seen through the coronavirus outbreak, the State (this time China) doesn’t always know best. Indeed, while the State may not always know how best to achieve the global goal of helping stop global warming, it is a objective that is as important as anything we are currently faced with and failure is not an option.’

As we enter the second half of the First Quarter, both economic threats and opportunities abound. While coronavirus’ potential to even further threaten global health and markets remains palpable, we anticipate that its momentum will eventually be thwarted and that the affected economies will recover. Furthermore, regardless of one’s views relating to global warming, we can hopefully all agree that there is money to be made in innovation, even if it is the green-friendly, carbon-neutralizing variety. While our concerns about high government debt and lower interest rates persist, we agree with Federal Reserve Chairman Jerome Powell that the US and global economies remain strong; as such, we see 2020 continuing 2019’s success.

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.