Henry James International Management June Market Commentary

Market Overview

There is a lot of turmoil facing global markets these days, but – despite a shaky May – two quarters into 2019 there is a lot to be positive about. So far this year, we have seen a great deal of drama involving the world’s two superpowers on the verge of a bare-knuckle trade war. Despite the many reasons to be pessimistic, Year-to-Date (YTD) markets have performed brilliantly: Developed Market (DM) equities are up a roaring 14.49% as measured by the MSCI EAFE index; Emerging Market (EM) equities stiffed armed 2018’s woes, up 10.76% and the MSCI World ex USA Small Cap is up an impressive 13.22%. For the Second Quarter these indices are in positive territory: the MSCI EAFE +3.97%, the MSCI Emerging Markets +0.74% and MSCI World ex USA Small Cap +1.97%. Both the YTD and Second Quarter figures have a stellar June to thank for such happy reading, as the month that just finished clawed back the devastation wreaked by May with the MSCI EAFE up 5.97%, the MSCI Emerging Markets +6.32% and MSCI World ex USA Small Cap +4.59%.

Just as 2019’s second fiscal quarter transitioned to its third, US President Donald Trump was behind the scenes at the G20 summit with his Chinese counterpart Xi Jinping banging out a shiny new trade truce. This was unveiled on July 1st and markets erupted in elation, but were brought back down to earth when everyone realized that ‘trade truce’ does not actually mean a sweeping resolution to the damaging trade dispute, nor does it end the costly tariffs both sides have enacted on the other’s goods. Moreover, Chinese tech giant Huawei remains a blacklisted company in the US and President Trump has not exactly signaled that he will back down from his desire to see his allies also eradicate Huawei technology from their borders. And yet, there were good will overtures galore, including Trump agreeing to ease restrictions on Huawei’s US technology purchases and to halt a fresh round of tariffs that would hit another $300bn of Chinese goods. President Xi responded with positive gestures of his own, promising to purchase an unspecified amount of US farm products and to resume trade talks immediately.

Henry James International Management June Market Commentary
Is trade between the US and Mexico stable?

It seems that Trump has frightened Mexico’s President Andrés Manuel López Obrado (AMLO) into submission through the threat of quickly escalating tariffs, the new free trade deal known as the United States-Mexico-Canada Agreement (which is agreed to but not yet ratified), notwithstanding. While early June was a worrying period for markets impacted by US-Mexico trade, normality resumed when Trump called off the 5% tariff on all Mexican goods on June 8th. As a result of this spectacle, trade along the southern US borders seems stable for both countries, but one wonders what the impact may be for such blatant disregard of this free trade agreement and if it may alter the way in which other nations (chiefly China) view the value of a trade deal with the US.

June saw the US and Iran on the brink of genuine military conflict when on Thursday June 20, 2019 President Trump called off an air strike on 3 Iranian targets. It is reported that the mission was aborted at the last moment as the President was advised that the strike would cause upwards of 150 casualties, which was deemed a disproportionate response to Iran shooting down a US drone. US-Iranian tensions had already been at boiling point even since an incident in the Gulf of Oman involving two oil tankers, which the US says were victims of an Iranian mine attack, which the Islamic Republic has vehemently denied. Far from being on the mend, since then US-Iranian relations have only worsened and Iran has taken dramatic steps to put pressure on the rest of the international community to re-embrace it: on Monday July 1st Iran declared that it breached the 300-kilogram limit for low-enriched uranium that was agreed in the Iran Nuclear Deal. Iranian President Hassan Rouhani warned on July 3rd that Iran would also be increasing its enrichment capacity to above the pre-agreed limits, too, and would not comply with the agreement unless it received relief from US sanctions provided by the other signatories.

Despite President Trump increasing pressure on the Federal Reserve to slash interest rates, Chairman Jerome Powell was unperturbed and announced that he would keep rates unchanged, between 2.25% and 2.5%. Trump has been a critic of Powell on Twitter and has apparently been privately threatening to fire him for failing to lower interest rates. Trump denies this rumor and Powell says he fully intends to serve his full 4-year term as the Federal Reserve’s Chairman; moreover, the President sacking Powell would be an unprecedented action that almost certainly does not have a legal basis.

Henry James International Management June Market Commentary
The EU has already confirmed that it is Prime Minister Theresa May’s deal or no deal at all.

In Britain the final two candidates for Conservative Party Leader and Theresa May’s replacement as Prime Minister (PM) are Boris Johnson and Jeremy Hunt. While both candidates appear to be lusting after the highest office in Britain, the winner will inherent a government that simply does not have the Parliamentary math to resolve the most pressing topic: Brexit. Johnson – who is by far the favorite – says that, while a no deal Brexit is not ideal, he will push Britain out of the European Union (EU) on October 31st, 2019 no matter what. His rival Hunt – who campaigned for Remain in the 2016 referendum – said he would deliver Brexit but would be open to extending the deadline if a deal was nearly complete. The EU and its Parliament are essentially closed for the summer, which means that when business resumes it will be very difficult for whoever wins the leadership contest to have the required time to renegotiate a Brexit Deal; besides which, the EU has already confirmed that it was Mrs. May’s deal or no deal at all.

Investment Outlook

According to James O’Leary, our Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, the trade sanctions of which President Trump has become so partial have become the greatest headwind to global markets, specifically the uncertainty it forces the US economy and its businesses and consumers to face. ‘When there is uncertainty, long-term investments are not made. This slows economic growth as investment into the future is not made and decisions are deferred,’ O’Leary says. Amongst other items, this has a significant effect on job creation and retention, which subsequently affects the consumer spending power that drives the economy. O’Leary points to two sectors that have been dealt unenviable blows by the tariff uncertainty: agriculture and technology. The former has been a victim of the US-China dispute as Beijing has dramatically reduced its purchases of soybeans and other items in response to US tariffs; the latter, namely Qualcomm and Intel, has seen it coerced to end selling computer parts to China by way of a Trump executive order.

While there is clearly much lasting damage that a prolonged trade dispute would do to the American economy, the positive news is that the sting will eventually subside as supply chains are moved away from China and to other EM economies like Vietnam, India and Myanmar. While China boasts the ability to manipulate its monetary policy in a way envied by Trump, O’Leary believes that China is in a more precarious situation than the US as once American businesses move their supply chains away from China there will be minimal incentive to move them back, even after a trade deal has been realized. ‘The problem for China,’ says O’Leary, ‘is that there is a chance that these losses will be permanent.’ He continues: ‘There is a positive for other EM countries who inherit this manufacturing as it may help increase longer-term economic growth. It is also a positive for the US in that production will have been diversified away from China.’ Despite this, O’Leary believes that President Xi will simply wait out the end of the Trump presidency to see if he can get a better deal from a less bellicose Democratic president who may well assume the keys to the White House in 2021 – as China does not suffer from the inefficiencies of party politics Xi and his party arguably have time on their side.

Despite the market anxiety of the eight-day period during which Mexico faced escalating US tariffs, both countries appear to have emerged on the other side of what could have been a fraught trading relationship. Mexican President “AMLO”came into office on the back of some bold and ambitious economic promises to his electorate; despite this, the economy over which he presides has been doing very poorly. Mexican Gross Domestic Product (GDP) shrank by 0.2% in the first quarter of 2019 from the previous three months, which was below estimates a panel of economists surveyed by Bloomberg predicted. Mexico is in dire straights and the threat of tariffs offered a layer of instability that AMLO could have done without.  Consequently O’Leary believes that AMLO will do anything – within reason – to stay on Trump’s good side to avoid any future tariffs.

The industry most affected by the threat of tariffs was the automobile sector, says O’Leary, which experienced plenty of equity volatility in June. European, Japanese and even American car manufacturers have opened up factories ‘south of the border’ to take advantage of the reduced cost of doing business in Mexico. While Trump’s tariffs were almost completely political in nature and focused squarely on immigration concerns, O’Leary is fascinated by a certain hypothetical: he imagines a scenario in which tariffs were enforced, which may compel car companies to bring their factories from Mexico to within America’s borders. Such a situation, which would no doubt be brilliant for the US economy, would face Mexico with one issue with which AMLO is not currently dealing; i.e. high unemployment. Historically higher Mexican unemployment means heightened illegal migration through the US-Mexico border so one wonders which political goal is the more salient for Trump: US manufacturing and jobs or thwarting illegal immigration?

Henry James International Management June Market Commentary
In June the automobile industry was extremely affected by Trump’s threat of Mexico tariffs.

Despite the roaring headwinds caused by tariff-induced uncertainty, at Henry James International Management our unbiased and disciplined country allocation system allows us to ignore the noise and focus on the facts with which our data present us. Our research is currently bullish on France, Germany and Sweden, as well as Latin America and Asia. According to our Senior Portfolio Manager O’Leary, our quantitative stock selection process will continue to flow in this direction.

The saber-rattling between the US and Iran has caught our attention, but only in so far as it is increasing our exposure to energy stocks. ‘The combination of reduced OPEC production and restricted supply from Iran has caused the price of oil to increase,’ says O’Leary. As long as the conflict persists, the price of oil will stay up, he says. While Henry James International Management is happy to enjoy the gains from rising oil prices, we believe the downside is that expensive energy will negatively impact global economic growth and pressure on consumers and businesses.

Despite Senior Portfolio Manager O’Leary closely monitoring the Federal Reserve’s near complete about-face when it comes to their projected monetary policy, he says that Henry James International Management has not had to change its own strategy as a result; rather, our quantitative growth strategy and targeted data analysis guides us safely through ‘bumpy stock market terrain’. According to O’Leary, this remains the case even in recession: ‘We generally underperform at the initial market drop and recover after a few months as valuations normalize. The portfolio naturally moves to a more defensive posture over time in a bear market while keeping its growth bias,’ he says.

O’Leary predicts that Powell will keep interest rates flat for the rest of 2019 and probably for 2020, too. While Republicans and President Trump will be keen to see interest rates lowered to spark the economy into high gear ahead of the 2020 election, according to O’Leary to see the effects of compromising the independence of a country’s national bank one only has to look to Venezuela and Turkey. ‘There seems to be a power struggle between Trump and the Federal Reserve Board,’ says O’Leary. ‘The Federal Reserve is supposed to be set up to serve the long term interests of the USA, whereas Trump wants it to serve his interests.’ O’Leary says that in 2018 the Federal Reserve’s medium term goal was to increase interest rates steadily so that when the next recession comes, they would have some stimulus tools; i.e. lowering rates, to deal with it. However, with such unstable market conditions, mostly due to tariffs and other trade issues, Powell may have to live with the existing cushion of 2.50%. O’Leary adds: ‘If the economy remains strong there will be an upward interest rate bias to hold inflation down while maintaining orderly growth.’ However, if future rising rates cause Trump to get into a battle with Powell, the American people will become the big losers, says O’Leary. In the event that rates are maintained at 2.50% – or are even lowered – EM economies may benefit tremendously as low interest rates allow them to borrow in US dollars (USD) at a low borrowing rate. Of course, this comes with a significant risk: strong USD against a weak EM currency can cause major problems in repaying loans which can result in defaults and bankruptcies.

Henry James International Management June Market Commentary
In the short term, there are no positive Brexit outcomes for investors.

Regarding Brexit, O’Leary says that he sees no good solutions on the horizon. ‘Once uncertainty entered the British economy prior to Brexit our system made us reduce our exposure to the UK and it has remained underweight relative to EAFE,’ he said. The UK equities to which Henry James International Management has exposed its portfolios receive a greater portion of their revenue from outside the UK rather than being domestic orientated companies. According to O’Leary, in the short-term, the question is not whether or not Brexit is a wise move for the UK as much as it is the case that it has created raging market uncertainty with dire consequences. He said: ‘We believe the UK will underperform until there is certainty; once there is certainty, UK equities will lag until it is clear whether or not the resolution to the mess that is Brexit is determined to be good or bad for the UK economy.’ In short, we believe difficult days lie ahead for UK equities.

In summary, with half of 2019 in the books there are clearly plenty of headwinds to keep investors up at night; but such anxiety belies the many reasons for optimism, not least of which markets’ apparent ability to breeze past the geo-political turmoil that can subdue them. Moreover, we believe that our quantitative strategy for growth gives Henry James International Management the ability to perform well relative to the benchmark in all market conditions.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its’ representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

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.

Italy’s Harlequin Performance

The laughable situation in Italy in which the traditional political parties struggle for majority votes at the behest of the populist movement “5 Star” (MS5) is somewhat remnant of the Renaissance theatre style commedia dell’arte. MS5, the ambiguous and enigmatic harlequin-esque populist movement, has danced its way into mainstream politics taking a large slice of votes from the Right-Wing parties, who are now screaming “encore” as they attempt to scramble enough power to encourage a second election. But why have these events had a tumultuous effect on the rest of the world?

carnival-275517__340

The political drama began when the MS5 seized power through their refusal to bow down to political elites. This is not the typical Left vs. Right epidemic we see in most Western countries, but more of a working class vs. elite struggle like the Catalonians against Franco or British Labour reforms in the 60s. At this stage, MS5’s aim seems drastic – this is not just about a reform, this is about a revolution with a focus on domestic empowerment, immigration issues and the European Union alongside a strong hatred of the mafia. But nothing is set in stone, and due to this, Italy are currently proving real tricksters to label which is a massive turn-off for international investors.

italy-1633682__340

Geo-political issues and rapid social change tend to not bolster share prices, and since the beginning of this new chapter, Italy’s stocks have gone on sale. Rocky prices like we have seen it Italy do however tend to draw in the braver investors who hedge their bets on the dangerous side. Unfortunately, the sale prices don’t match the level of volatility in political stability, and therefore don’t seem to be a great bargain. This of course puts off even the high-risk investors. JP Morgan strategist Mislav Matejka noted recently that there is a poor risk-reward going forward giving the strong run and the political overhang.” It seems that nearby German equities have been the preferred route for most investors after taking profits on Italian stocks.

This mass sell-off of Italian stocks was originally triggered by fears of a second election and investors fear of Italy ditching the Euro, which currently seems highly likely. Investors have decided to keep their money in their pockets for now until the situation cools down with SocGen trio warning that buying could remain weak for several months.

Italy’s performance hasn’t just affected Europe, it managed to dance its way across to the Atlantic and cause the Dow Jones Industrial Average to drop 391 points. Although the Dow Jones made a huge recovery, making back most of the May dip, it is still undeniable that Italy’s Euroscepticism and quick social change managed to scare even the Americans.

No one can predict the ending of this drama, and although for now it seems that Italy have put forward a government, we don’t know if we are at the beginning or end of this unbridled saga which will likely continue to tighten the strings on investors’ wallets.

 

Oil Prices – Who Wins and Who Loses?

Due to Trump’s recently announced Iran trade sanctions and OPEC led geopolitical shifts, oil prices have soared to a three and a half year high since March 2018. Saudi Arabia are set to benefit greatly from this if they look to use the opportunity to diversify their economy, but consumers will be left footing the bill all around the world as companies pass on their new oil expenses.

Donald Trump is reinstating sanctions on Iran, one of the world’s major oil suppliers, claiming the deal was a “horrible agreement” and “an embarrassment” during his speech on Tuesday, May 8th. In restricting trade with Iran, he inadvertently increases the price of oil by reducing supply to the market. This has happened at a point in which crude oil prices were already estimated to breach the $80 mark due to other geopolitical factors.

Aside from Trump’s involvement, OPEC has rallied its efforts to reduce exports, curtailing the quantity supply to the demand, therefore erasing a global surplus. Consequentially, we could soon see a global shortage of crude oils – theoretically increasing the value of crude oil for years to come. Other factors include a 0.6 million barrel per day reduction in supply from Venezuela due to domestic issues, aging wells naturally depleting all over the world, and exhausted supplies from China and Angola.

Saudi Arabia, who can use the money from oil to diversify its economy from this single commodity propping up its market, are set to benefit from this opportunity greatly. These circumstances fuel its long-term “2030 vision” which seeks to lessen domestic reliance on oil. Unsurprisingly, this OPEC member has led the way in curbing supplies by 0.7 million barrels a day since 2016.

saudi-2224135_1280

Although OPEC countries will thrive in this economy, airlines may experience some turbulence as they pass on surmounting costs to the consumer. They will inevitably have to dump the pain of expensive fuel unevenly to jetsetters meaning flights prices might increase above inflation. Airline analyst Savanthi Syth claims this will mainly affect leisure travel lines – whose consumers are highly price sensitive – and are more loyal to price than to brand. This is opposed to business travel airlines, who will not suffer much grief in passing the costs along.

Despite this, budget airlines could use these incidents to push their brand as being the cheapest – taking a short term hit to profit and hoping for long term loyalty after the oil hype dies down – if it ever does.

 

What South Korea Learnt from Sochi’s Winter Games

Hosting the Olympic Games brings with it a recipe for prosperity – and opportunities for disaster.   past, trends have dictated that countries overspend and rarely see returns in the long term. South Korea has decided to take an innovative approach. They cut heavily on spending and infrastructure that usually lies derelict for years after the Games. Maybe they learnt something from recent events in Russia?

 

sochi-266806__340

 

The Sochi Olympic Games in 2014 cost Russia a staggering $51bn. During the run-up to the Games, it was made clear that Sochi was to be the most extravagant Olympics ever. The 40’000-mile torch run from Kaliningrad to Chukotka which passed through all 83 regions of the country set the tone for a month of excessive and unnecessary folly. $30bn of the money went into embezzlements to Putin’s close associates while the rest was pumped into ensuring that Russia was portrayed affluently on the world stage. The absence of fair competition in building, strict censorship and clan politics led to sharp increases in prices and low quality of work. Only weeks after the event, Sochi began to fall apart with deserted buildings, empty streets and inhabited almost exclusively by stray dogs. Russia’s taxpayers are footing the bill and seeing very little return.

 

South Korea has learnt from these mistakes. Pyeongchang cut costs by saying no to unnecessary infrastructure and have to build low-cost temporary stadiums in lieu of behemoths that would later sit unused and decay. The stadium cost just over $109m and is set to be used 4 times before demolition. Currently, their frugality is bringing Pyeongchang bad press as blankets were handed out during the opening ceremony as opposed to intense heating. However, this decision is symbolic of their plan to cut costs. Although (like all Olympic Games) South Korea will break their budget of $12.9bn it is still a fraction of what was spent in Russia.

 

sculpture-3167712__340

 

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance. 

 

What are South Korea Gaining from the Winter Olympics?

The world’s eye is on Pyeongchang this February as they set the stage for the Winter Olympics. After winning the bid for the Games, South Korea is set to splash out large sums of money to attract positive attention to their country. There have already been huge political breakthroughs throughout the peninsula.

 

blue-81847

 

Bidding for the Olympic Games is not an open auction – getting through the application process is not a “survival of the richest”. There is a myriad of factors that are considered when the panel votes for the next host – including infrastructure, financial support, and even human rights records. Amongst all the applicants, three stood out: South Korea, Germany, and France. France was deemed unsuitable almost unanimously receiving only six votes, Germany took in 25 votes and was the closest, but nowhere near close to the winners: South Korea who took home the gold with 63 votes.

 

Hosting the Games is a financial burden. What is South Korea looking to gain out of this? Firstly, we don’t yet know how much the Games will cost, but generally, countries will be expected to dish out no less than $5.2bn. Their profits are most likely going to be indirectly obtained through tourism and stock market attention in subsequent years. Although financial profits are likely – there are more important political and cultural changes that have already occurred.

 

bobsled-643397

 

The Korean Peninsula has been divided since the 1950-1953 war. There was no post-war peace treaty signed, and South Korea boycotted the North in 1988. The Games have seen a diplomatic breakthrough with Kim-Yo-Jong visiting alongside her “army of beauties” – a group of women hand-picked for their good looks, talent, and loyalty to the regime. This is after Kim-Jung-un himself raised the prospect of North Korea’s attendance in his New Year’s speech.

 

It also gives South Korea a platform to show off their world-leading technology. Samsung, South Korea’s biggest company, will use this opportunity to expand their market share which will have positive ramifications for their domestic market.

 

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance.