As 2019’s third quarter came to an end, the salient thought in our mind at Henry James International Management was ‘growth’, despite raging political, economic and market volatility. The trend evident across markets is that while 2019’s 3rd quarter was a downer, positive September growth partially offset the quarter’s losses. Despite this disappointing quarter, Year-to-Date (YTD) markets are up significantly. MSCI EAFE was +2.92% in September, -1.00% in the 3rd Quarter and +13.35% YTD; MSCI Emerging Markets +1.94% in September, -4.11% in the 3rd Quarter and +6.23% YTD; MSCI World ex USA Small Cap was +2.6% in September, -0.19% in the 3rd Quarter and +13.01% YTD.
Just keeping up with the news has presented enough turbulence to make even those with strongest constitutions feel motion sickness. Some of the prominent market influencing headlines continue to be the US-China trade conflict and a range of other tariff scrums between nations, Brexit, Iran’s provocation of the West and United States (US) President Trump’s subsequent saber rattling. The pro-democracy riots in Hong Kong show no sign of abating and one assumes it is only a matter of time before we see a version of Tiananmen Square again with China’s using its military to put the Special Administrative Region firmly under its thumb. Staying in Asia, North Korea is getting antsy and has resumed missile testing again at the expense of the Sea of Japan. Domestically any chance of short-term political stability was derailed when US Congressional Democrats launched an impeachment inquiry on the back of accusations that Trump encouraged the Ukrainian president to interfere on his behalf in the 2020 US General Election. Germany, the bellwether of global manufacturing, has seen its output continue to drop; American and Chinese manufacturing has followed suit.
And yet, somehow markets – despite personifying the before-mentioned volatility – have pressed forward in a mostly unperturbed fashion. Of course, there is some reason for optimism. The Fed lowered interest rates again by 25 basis points to between 1.75% and 2.00%, which should give domestic and global markets (particularly emerging markets) an excellent spark of positive momentum. Also noteworthy is a new US-Japan trade deal that is set to take effect on January 1, 2020; while it will technically have to be approved by Japanese lawmakers before it is official, it is expected to be ratified without difficulty.
James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, sees self-inflicted political turmoil as the main factor impeding global economic growth: ‘It seems that politicians globally cannot sit back and enjoy a stable and slowly expanding global economy,’ he said. According to O’Leary, the economic slow down, that we discussed at length in our August Market Commentary, will continue as long as Brexit is uncertain and continues to pull both the United Kingdom and European Union down, the US is mired in political turmoil, the US and China fail to achieve a mutually beneficial trade resolution and Iran continues to destabilize the Middle East and threaten oil through its support of regional terrorism.
Despite the volatility, O’Leary sees markets as resilient, but to a point. ‘Markets took Iran’s bombing of the Saudi oil processing facility in stride, and were unaffected by Trump’s United Nation’s speech where he lambasted Iran and China,’ said O’Leary. Of course, the world remains awash with oil despite the actions with which Iran has been accused and, in spite of the US President’s bellicose rhetoric, shooting-from-the-hip style, and apparently being ‘locked and loaded’, he has made it very clear that he does not seek war.
At this point – around mid-September – O’Leary believed that markets were cautiously hoping to find some element of terra firma at their feet to use as a sturdy platform to reverse the global slowdown. What they were greeted with was what O’Leary views as Congressional Democrats who could not leave well enough alone and took impeachment action against Trump. Not only does this tremendously damage US-China trade war negotiations before the 2020 General Election – as a distracted, politically impeded President will not be able to negotiate from a position of strength in the face of Chinese Premier Xi Jinping’s absolute rule – it will also push the required robust domestic economic agenda to help stimulate the US economy to the back burner. When combined with the Chinese debt crisis, Hong Kong riots and Brexit taking yet another turn for the worst and paralyzing British business, one wonders how much more markets can take before the global slowdown becomes a global recession. Thankfully, the global economy is still expanding and is projected to grow just below 3% in 2020, though new International Monetary Fund Chief Kristalina Georgieva’s October 8th speech could certainly erode some optimism.
O’Leary is hopeful that the international economy will shake off the political uncertainty and that we will see a globally coordinated fiscal and monetary response. The ray of good news for the US and global economy is this: as pressure turns coal into diamonds, so may Trump’s ardent desire to get re-elected drive him to achieve a trade deal with China and get his own economy back on track with the help of falling Fed interest rates.
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