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.


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.

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