Henry James May Market Commentary

Market Overview

An Irish poet once wrote, ‘Things fall apart’. While William Butler Yeats’s words were illuminating the terror and awe of the second coming of Christ, it would be easy to see how investors might consider them rather apropos for the way in which May managed to thwart and consume 2019’s positive market momentum. Just as the S&P 500 reached its record high at the end of April, May saw the index fall by -6.35%. Developed Market (DM) equities were also victims to the blood-dimmed tide: as measured by the MSCI EAFE index their value tumbled by -4.66%. While such losses will trouble investors, particularly as most indicators point towards a daunting, uphill climb for markets for the rest of 2019 and beyond, it would be wise to remember that year-to-date the S&P 500 and MSCI EAFE not only remain well into positive territory, they are both exceeding the expectations set during the dismal days of December 2018. While American and DM equities have been left merely bruised, May brought Emerging Market (EM) equities to their knees. Their stellar 2019 returns were overrun and eliminated, falling by -7.22% as measured by the MSCI EM index, practically down to where they were at the end of 2018.

The main protagonist who pitilessly turned markets upside down in May was the United States (US)-China trade war. Just over two months after US President Donald Trump indefinitely postponed the tariff raise from 10% to 25% on over $200bn of Chinese goods, on May 10, 2019 he suddenly enacted them with no more than a few days’ notice. The following Monday, May 13th the Chinese retaliated with their own tariff increases on over $60bn of US goods. The freshly realized trade war had begun and its impact was swift and immense: the Dow fell 617 points and the S&P 500 and Nasdaq both dropped a shocking 2.4% in just one day of trading. Those hoping that Trump’s hard nose tactics would yield an immediate result and that the tariffs would be short-lived may well have been thinking naively: we are a lot closer to new increases than to a cooling of trade hostilities. More than $300bn of fresh Chinese goods – mostly consumer goods, including automotive vehicles, some of which rather ironically bearing the name ‘General Motors’– are only a signature away from being enacted by Trump. More tariffs would likely incur a further retaliation from China and suck both countries deeper and deeper into a trade war from which it will not be easy to escape. According to the International Monetary Fund the trade war will cost the US around $455bn in the short term, a round number that is more than the total size of the South African economy, which is the entire continent of Africa’s largest. While it will hit China hard, too, the one party-state has the greater ability to manoeuvre and pull levers to stimulate its economy through monetary and fiscal easing and by lowering taxes. Furthermore, unemployment is not an issue in China; but despite its resilience, China’s businesses and consumers will feel plenty of trade war-induced pain. Despite this being a bilateral issue, all international markets will feel the trade war’s strain and stress.

Henry James International Management May 2019 Market Commentary
More than $300bn of fresh Chinese goods – including automotive vehicles rather ironically bearing the name ‘General Motors’– are only a Trump signature away from being enacted.

Chinese telecommunications giant Huawei is currently stuck between its lofty capitalistic aspirations and ownership links to the Chinese one-party Communist state. On May 15, 2019 Trump banned Huawei products from the US through a national security order, claiming that Beijing is using the company to conduct international espionage. Both China and Huawei vehemently deny the accusations; it has also been suggested that this is a power play by the US to make the Chinese more pliable at the trade negotiating table. This accusation was first levied against Washington back in December 2018 when Huawei Chief Financial Advisor Meng Wanzhou was arrested in Canada at the request of the US on 13 criminal charges including conspiracy to violate US Iranian sanctions, fraud and obstruction; she remains in Canada under partial house arrest where she is battling extradition. According to the US, Wanzhou’s arrest and its banning of Huawei products are both completely unrelated to the trade war. In the meantime, Huawei is suffering as computer chip behemoth Arm has set them adrift and Google is on the verge of withholding its signature Android mobile and tablet operating system. At the same time, Trump is pressuring US allies to also ban both Huawei products and technology – which presents difficulty for countries like Britain and Germany who are using the tech company to build their new 5G networks. If Huawei were tempted to think that their plight could not get any worse and that it was only up from here, they would be crestfallen by the news that Britain has dropped the Huawei Mate 20 X from its forthcoming 5G launch and that – as long as Trump has his Chinese vexation aimed at Huawei – more disappointments are likely to follow.

After a brief and thoroughly restful April slumber, a reinvigorated Brexit is poised to join ranks with the US-China trade war and become a serious thorn in markets’ side. To the delight of investors, late March saw a ‘No-Deal’ Brexit temporarily averted; regrettably the new October 31, 2019 deadline is rapidly approaching. April and May hoisted a range of existential and practical questions upon Britons, their government and their Members of Parliament (MP): what kind of Brexit the United Kingdom (UK) wants, how it will get there and whether it still even wants to leave the European Union (EU) at all. While these introspections have resulted in plenty of discord in the main opposition party, Labour, the ruling Conservatives have manifested their unrest by forcing their party leader and the Prime Minister (PM) Theresa May to resign. Mrs. May is wildly unpopular among Brexiters for failing to arrive at the hard Brexit the more dogmatic among them desired; she is disliked by Remainers for her dogged pursuit of Brexit despite what they believe is copious evidence that remaining in the EU is the far more sensible option. As a result, very few people will be shedding a tear for the PM, and yet markets may be quaking in their boots. While equities have been tortured by the instability and lack of clear direction fostered by Mrs. May’s inability to successfully manage Brexit, it was none other than the PM who saved them from the ruinous ‘No-Deal’ Brexit by postponing the deadline to October 31. Furthermore, any deal under Mrs. May would have probably been an equity-friendly soft-Brexit – now that she is leaving her post it is a near certainty that her successor will come with the most robust of Eurosceptic credentials and could have minimal problem steering Britain and markets off a ‘No-Deal’ cliff to achieve Brexit by October 31.

As Mrs. May has abdicated, the Conservative Party is currently in the midst of a leadership contest and the result will bring the UK its next PM. Boris Johnson, MP, is the leading candidate and he has already declared he has no problem with a ‘No Deal’ Brexit if a suitable agreement cannot be made before October 31, 2019. While Johnson is bold, brash and prone to the occasional gaff – a bit like a subdued, British equivalent of President Trump – his words will likely prove easier to say than to effect: there simply is not a majority for a No-Deal Brexit in Parliament and Johnson will inherent from Mrs. May a minority government from which it is very difficult to do anything significant, particularly when so many members of his own ruling Conservative Party are dead set against a ‘No Deal’ Brexit. While leaving the EU without a deal remains the default legal position regardless of Parliamentary math, if it appears that the UK is headed in that direction it is a near certainty that a no-confidence vote in the government would be triggered, which would result of a new general election. In this very plausible scenario, unless things drastically improve for Johnson’s Conservative Party, particularly after the way in which it got hammered at the recent European Parliamentary elections, they would likely lose the keys to 10 Downing Street to Labour. As such, Johnson will likely have no interest in a fresh general election and will therefore be keen to avoid a situation that would see his government dissolved through a no-confidence vote. Therefore, it seems sensible that even with a Hard-Brexit PM all options remain on the table, including a second ‘People’s Vote’ referendum that could break Parliament’s Brexit deadlock and give the a final decision about what kind of Brexit is desired – or if it is still desired at all – back to Britons. While markets may optimistically decide to take this as a news teetering on ‘positive’, even with rose-tinted glasses it is clear that the raging political uncertainty that would accompany avoiding a ‘No Deal’ Brexit in this convoluted, dragged-out fashion would punish the British economy and equities within and beyond the UK.

Already a diabolical month for markets, there was more bad news for investors on its final day – on May 31st Trump announced plans for a 5% tariff on all imported Mexican goods to begin on June 10, 2019 as a way to pressure Mexico into taking action to help manage the illegal migrant crisis. As discussed in last month’s Market Commentary, the Mexican economy is already in bad shape and tariffs would have been a crushing blow, particularly as they were scheduled to increase incrementally:  up to 10% in July and possibly as high as 25% by October. Thankfully Trump announced on Saturday June 8th that he would cancel the tariff increase as Mexico agreed a host of new measures: to clamp down on migrants crossing its northern US border, to deploy its national guard to the southern Mexican border to thwart fresh migrants moving north and to work to abate human smuggling. The result of this drama – an 8 day period that saw American equities, consumers, businesses, investors and the Mexican economy all squirm in uncertainty and fear– may be painted as a political victory for Trump as Mexico obliged to his wishes without any tariff ever having been introduced. But the question must be asked, particularly in light of the on-going issue of the US-China trade war: is it wise to use tariffs in the way in which the President is quickly becoming a fan?

According to Trump, ‘Tariffs are a “beautiful thing when you’re the piggy bank,”– but what happens to this bold assertion when it is scrutinized? Investors and equities should all delight in the fact that President Andrés Manuel López Obrador (AMLO) recognized the genuine damage that quickly escalating tariffs would do to his country’s already fragile and floundering economy and acquiesced to the US President; the problem from an American perspective vis-à-vis Make America Great Again is that tariffs would have done arguably more damage to the US economy (and those who rely on it), its vastly superior strength, notwithstanding. Indeed, Mexican tariffs would be a blow for US businesses with supply-chains running through Mexico and the resulting products – from car parts to avocados – would bear what is effectively a sales tax that would be passed on to American consumers. As such it is no surprise that the Republican Party was unable to rally behind the President, with both Senators Mitch McConnell and Ted Cruz speaking out in opposition to the Mexican tariffs. Moreover, to view Trump’s thoughtless words on his love of tariffs through a historical prism, one need only look back to the Smoot-Hawley Tariff Act to see the effects of over-reliance on tariffs that saw them implemented on over 20,000 imported goods, which subsequently incurred punitive retaliatory measures, which resulted in American exports and imports being reduced by more than half during the Great Depression. There is near consensus that the Smoot-Hawley Tariff Act – effected in 1930 – greatly exacerbated the Great Depression; it is a bit of history that confirms that excessive tariffs have the ability to cause economic shrinkage, spiral out of control and cause a deep and painful recession. The President may wish to consider this if he is to stand a chance at re-election in 2020.

Henry James International Management May 2019 Market Commentary
Mexican tariffs would be a blow for US businesses with supply-chains running through Mexico and the resulting products – from car parts to avocados – would bear what is effectively a sales tax that would be passed on to American consumers.

Like Trump, the Federal Reserve would also like to see a recession avoided; indeed, we believe its Chairman Jerome Powell is all too aware of the likelihood of one barrelling towards the US. Not only has he spontaneously climbed down from a more-or-less set policy of increasing interest rates throughout 2019, he has even given signs that he is open to lowering them. During a speech on June 4th in Chicago, Powell said that he would be ‘closely monitoring’ trade negotiations and ‘other matters’ – that one might suggest could be tariffs – for the US economic outlook and to act appropriately to sustain its expansion. Naturally, lowering interest rates would not only be a trick to fighting back recession, it would also provide relief to US businesses and consumers from tariffs.

In the Middle East, US-Iranian tensions have flared up to the point where a bona fide war has become a genuine possibility. Since leaving the Iran Nuclear Deal, Trump’s administration has followed a policy of maximum pressure – apparently this has so far failed as Iran is not succumbing to sabre rattling or threats and they have even defiantly said they may soon cease complying with the Nuclear Deal. Moreover, according the US Secretary of State Mike Pompeo, Iran is using mines to attack oil tankers in the Gulf of Oman. In short, through Trump’s treatment of Iran, not only are we closer to a war, we are also closer to Iran choosing to resume its nuclear weapons program. Despite Trump saying that his only desire is to get Iran back to the negotiating table to prevent it from developing these weapons, in May the President deployed military assets to the region, which may suggest a somewhat more hawkish stance.

Ever since Brazilian President Jair Bolsonaro managed to get his ambitious and necessary pension reform through the Lower House Constitution, Justice Committee and subsequently on the doorstep of Brazil’s Congress, there has been little movement. However, as this was always going to be a long process, Bolsonaro’s administration remains positive. However, according to credit rating agency Fitch, while the pension overhaul is absolutely necessary, there is no scenario in which it will single-handedly stabilize Brazil’s public debt, much less kick its economy into the high gear the reforms supposedly promised. Consequently, it would seem that the market’s original enthusiasm for President Bolsonaro may have been unjustified.

In India, despite failing to realize his wide-ranging reform program in his first term and the disaster that was his currency redenomination, Narendra Modi won a decisive election victory to see him remain the PM for another 5 years. Indian equities enjoyed this tremendously, surging to record highs on the back of Modi’s new potent political mandate. Despite India’s Sensex’s recent success, there are concerns that the index is overvalued, with a forward PE of 18 compared to its EM Asia peers who average 12. Moreover, the Indian economy is facing high unemployment and its lowest GDP growth in 5 years.

A bright spot that stands in relief to the ruin of May is Vietnam, who is rather enjoying the US-China trade war. The Southeast Asian country is capitalizing on supply chain disruptions as more and more manufacturers move from China to within its borders to escape Trump’s tariff. In no small part due to this, its economy is expected to grow to just under 7% in 2019 and is poised to exceed 7% in 2020. While Vietnam’s economic success bodes well for other Asian EM economies, it is set to reap the most benefits from the US-China trade war given its proximity to China, well regulated and high quality labor conditions and affordable wages.

Henry James International Management May 2019 Market Commentary
Vietnam is set to benefit from the US-China trade war given its proximity to China, well regulated and high quality labor conditions and affordable wages.

Investment Outlook

No matter the direction from which you approach it, May was an appalling month for equities. Beyond its poor performance, a range of intimidating headwinds appear to be here for the long haul to stymie or at least frustrate positive market momentum. The only bit of lipstick we can put on this is really two fold: DM equities remain well above expectations so far in 2019 and they are in positive territory year-to-date. Secondly, despite EM equities losing all their 2019 gains in a single month, there are still fine investment opportunities to be had – one just might have to look a bit harder to find them.

We had repeated to ourselves ad nauseum that cooler heads would prevail in the US-China trade war. We were wrong and we are now immersed in a full-fledged trade war which – despite arguably some virtuous motivations – will damage both the US and Chinese economies and will cause pain for many others. While it is at best wishful thinking, we can only hope that there will be a somewhat swift resolution that will see all tariffs gradually rolled back while both countries work toward a new, mutually beneficial trade deal to mitigate the ways in which American businesses, consumers and the economy have to suffer. What is more, even without a trade war, both the US and China have been in the midst of worrying economic slow downs, so one wonders how much deeper the plunge will be now? Our lone hope is that Trump’s survival instincts will kick in and he will remember that he has an election to win in the next calendar year, which may be a tall order if he has single-handedly driven the US into a trade-war-induced recession.

We are delighted that Trump called off his Mexico tariffs at the last moment, something that equities at least momentarily enjoyed; however, we believe untold damage has been done to the American economy and its trading relations as a consequence of the 8 days during which the 5% tariff threat appeared to be an imminent and palpable reality. From an American business perspective, only the most optimistic persons will think that the trade hostilities are done and dusted and that we have emerged on the other side into a new stable trading relationship between the US and Mexico. In many ways, American businesses who rely on Mexico for their supply chains or materials are faced with a similar predicament as their UK counterparts with Brexit. The threat of future tariffs popping up again creates a most uncertain environment for businesses with links to Mexico, and such conditions impede the ability to make medium- to long-term business plans and also make it difficult to invest in new infrastructure and make new hirings; it also makes these businesses far less attractive investment opportunities.

We also wonder what damage the threat of tariffs has done to the North American Free Trade Agreement (NAFTA) replacement between United States, Mexico and Canada vis-à-vis the recently signed (but have not yet ratified) United States-Mexico-Canada Agreement (USMCA)? One may ask whether this new free trade agreement is worth the paper on which it is written if tariffs can be thrown into the equation whenever Trump is feeling trigger-happy. It does not just hurt the US’s reputation with its northern and southern neighbors, we believe it sends the wrong message to the Chinese about the potential value of a new US trade deal. Furthermore, the US brazenly devaluing the meaningfulness of its trade deals does not exactly encourage the Communist state to make any of the dramatic concessions that Trump is justifiably demanding.

Henry James International Management
Despite Brexit, Britain remains an economic powerhouse and is filled with some of the biggest, best and most innovative businesses in the world.

Our expectations for Brexit are not overwhelmingly positive. We see a ‘No-Deal’ leaning PM replacing Mrs. May, and we see this person (probably Mr. Johnson) being thwarted and frustrated by his lack of Parliamentary majority, the Remainers in his own party, the opposition parties and maybe even the House Speak John Bercow (who has been transparent about his desire to block Brexit). Britain is at a Brexit stalemate which means that markets should be braced for more uncertainty and any residual positive momentum may gradually evaporate and grind the UK economy to at best a halt, at worst, recession. If there is any hope, it is that Britain remains an economic powerhouse and is filled with some of the biggest, best and most innovative businesses in the world who may be able to keep the country afloat and heading in the right direction while Britons and their MPs duke it out over a Brexit resolution.

Regarding EM markets, while they will largely be victimized by the fall out of the US-China trade war – which is most worrying – it is not all bad. The Fed’s decision to freeze interest rates is very good news for EM equities; Powell deciding to lower rates would be an early Christmas present. Furthermore, while China is clearly in a worse place while embroiled in a trade war, its President Xi Jinping has the ability to manipulate his monetary policy in a way that can soften the damage through continuing a strategy of monetary and fiscal easing. China also recently delivered over $298bn of tax cuts and company fees savings, which will only help further. Of course, lowering taxes will not help Chinese businesses retain the manufacturing they will lose to other Asian EM economies to avoid Trump’s tariffs. Vietnam is already benefitting tremendously from this and will likely continue to do so; and Bangladesh, Myanmar and the Philippines will also likely enjoy benefiting from China’s manufacturing losses. We believe all these markets offer interesting opportunities for investors, but of course rising US interest rates and an even stronger US dollar could bear negative consequences. Lastly, while India’s market may be overpriced, it is likely that their equities may offer better value than US or other DM equities stifled by Brexit or stagnant EU growth.

In conclusion, May has not been a positive month for investors – a trade war is waging without an end in sight between the world’s two largest economies, Brexit is a disaster and is impeding both the UK and EU economies, Trump has a self-admitted weakness for recession-inducing tariffs and there are a range of other geopolitical issues that have destabilised markets. And yet, the many causes for concern notwithstanding, we expect the world economy to end 2019 with growth; what is more, we believe EM equities will presents investors with copious ‘diamonds in the rough’ opportunities which will be there for those willing and capable of unearthing them.

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 April Market Commentary

Market Overview

In our last Market Commentary our delight with 2019’s first quarter returns was somewhat tempered by the view that widespread geo-political risks could send markets crashing down and undermine investor confidence. In so far as April was concerned, we were grossly out of step – April saw the S&P 500 end at its all time high 2,945.83 and up 4.05% for the month. Developed Market Equities (DMEs) were up 2.91% in April as measured by the MSCI EAFE; Emerging Market Equities (EMEs) followed suit, up 2.12% as measured by the MSCI EM Index. Unfortunately, as things stand at the time of writing this commentary, the early days of May have so far managed to wipe off April’s gains, leaving investors filled with uncertainty about the immediate future.However, it’s important to look at the longer view. Year-to-date most of the relevant indices have exhibited strong returns: the DMEs as measured by the MSCI EAFE are up 11.72%, the MSCI EM Index is up 11.75%, while certain regions have defied gravity and posted exceptional returns like the MSCI BRIC Index up 15.54% year-to-date and Chinese Large Caps, which have particularly defied the odds, posting a 22.6% year-to-date return.

All is relatively quiet on the Brexit front. Of course, that does not mean that markets are responding positively as a consequence of the calm or that an economy- and market-friendly resolution is in the pipeline. It does, however, mean that Britain and the Europe Union (EU) are caught in limbo and are blind to what kind of future relationship they might have with each other. While EU leaders are apparently desperate to avoid a damaging no-deal Brexit, if we take them at their word they are unwilling to offer UK Prime Minister (PM) Theresa May any more flexibility to make her much maligned deal more appealing to UK Members of Parliament. As result, the PM has been engaged in inter-party negotiations with the opposition Labour Party; but these do not appear to be going anywhere and both sides are calling on their respective leaders to abandon the talks. It is likely that May will bring her EU approved Brexit deal back to Parliament for a fourth vote, which might just offer equities the certainty they require to thrive if it were passed; and yet investors should not get too excited as Parliament’s first rejection of the deal was a record worst defeat for any PM in the UK’s long history. Of course, the second and third rejections were almost as decisive and equally humiliating for May. The topic du jour in the UK is the European Parliamentary elections; i.e. the elections that were never meant to come to pass which will see Britons and their fellow EU citizens visit the ballot box to elect their future Members of European Parliament. While nothing certain can really be determined or effected by the results of who wins the UK seats, it is easy to see how and why many view this election as either an unofficial referendum on Brexit and/or an opportunity to voice Brexit-related frustration.

It was only a matter of weeks ago when markets spiked on the back of the news that President Donald Trump would indefinitely suspend the promised tariff hike from 10% to 25% on over $200bn of Chinese goods and that a trade war seemed all but avoided. Yet suddenly – though, to be fair, not completely unexpectedly – in the week commencing May 5th Trump put his 25% tariff increase back on the table, which he said he would enact should significant progress in US-China trade talks fail to be achieved by Friday May 10th. Good on his word, The US President ordered the new tariffs, which were met by China’s own retaliatory tariffs on $60bn on US goods. Of course, American consumers will feel the brunt of this, but investors were hardly unscathed as on the first business day since the trade war spectacularly reignited, Monday May 13, 2019, that is, we saw the biggest sell-offs since the depressing days of December 2018 and January 2019: the Dow closed down 617 points, the S&P 500 fell 2.4% and the Nasdaq dropped a whopping 2.4%.

Henry James International Management April Market Commentary
As the American consumer will likely feel the result of the US-China trade war almost as a sales tax, Trump has urged the US Federal Reserve to lower interest rates to balance things out for consumers and help stimulate US business.

As the American consumer will likely feel the result of the US-China trade war almost as a sales tax, Trump has urged the US Federal Reserve to lower interest rates to balance things out for consumers and help stimulate US business. Citing that ‘China will be pumping money into their system and probably reducing interest rates to make up for business they are losing (as a result of the trade war),’ Trump has suggested that the Fed following suit would put America at a huge advantage over China. ‘It would be game over, we win,’ said the US President. While as investors we like the sound of lowering interest rates, not only are we ethically uncomfortable with a government’s executive branch blurring political boundaries, we are wary of Trump trying to make economics work for him and his policies – much like how Turkey’s President Erdoğan has done to great damaging effect in his own country – by turning the Fed into a puppet institution.

South of the border in Mexico, things are not going so well as Mexican President Andres Manuel Lopez Obrador (AMLO) is under significant pressure since first quarter economic data shows a 0.2% shrinkage. This is problematic for AMLO not only because his first quarter results are woefully short of the 4% annual growth he has promised, it is also worse than 21 of the fiscal quarters over which his predecessor President Enrique Pena Nieto – of whom AMLO has been so critical – presided. It will be a tall – perhaps impossible – order for AMLO to fulfil his economic ambitions as not only does Mexico suffer from widespread crime and weak rule of law, but he also committed the own goals of suspending oil contracts and cancelling a $13bn airport, which does not create the atmosphere of certainty private companies will desire to invest in Mexico.

As we travel down to South America, Venezuela exists in a hellish state with an increasing unemployment rate (currently over 35%) and astronomical inflation rates. Maduro remains in the Presidential Palace despite his country crumbling around him. Why and how is the question that the US-backed (amongst others countries, too) Interim President Juan Guaido must be wondering; and the answer likely has something to do with Maduro’s Russian backing, a sinister influence of drug money as well Venezuelans blind faith in so called Chavismo, or the way in which everyday Venezuelans once improved both their wealth and station under their former leader Hugo Chávez, in whose political tradition Maduro follows. Guaido is continuing in his protesting and campaigning in a steadfast fashion, but the look of weariness on his face is unmistakeable. In the meantime Venezuela’s oil production could be cut to zero by the end of 2019 as the US tries to oust Maduro, and despite fears of a tightened oil market, US reserve inventories appear more than capable of filling in for the shortfall left by the world-leading South American oil giant and by Iran, who have been forced to the oil market’s side lines through robust US foreign policy measures.

The expression ‘even a blind squirrel occasionally finds a nut’ was given reinvigorated meaning when Brazil’s far-right President Jair Bolsonaro succeeded in getting his essential pension reform bill past the first legislative hurdle. Bolsonaro managed to refrain from Twitter ‘war or words’ with Brazil’s most senior law maker, lower house Speaker Rodrigo Maia, just long enough to get the Lower House Constitution and Justice Committee to approve the bill so it can proceed to congress. Getting to this point involved more than eight hours of tense debate, as well as Bolsonaro having to submit to several bill alterations demanded by Brazil’s centrist party. Brazil’s President welcomed the success by paying tribute to Maia: ‘The government continues to count on the patriotic spirit of lawmakers.’ Of course, getting the necessary pension reform over the line is anything but a done deal – months of debate and at least another six votes in both houses of Congress must be endured before the bill can become a law.

In other news, South Africans recently went to the polls for their general election. As in all elections in Africa’s largest economy since the end of apartheid, Nelson Mandela’s African National Congress (ANC) won decisively, and yet it managed to reduce its majority. This is will be a worrying sign for party leader and South Africa’s President Cyril Ramaphosa as it suggests that his citizens are utterly fed up of the widespread corruption and economic impotence that marked the multi-term presidency of his predecessor Jacob Zuma. Despite this and South Africa’s dire economic situation marked by high inflation and unemployment, the majority of South African’s see Ramaphosa – one of South Africa’s richest persons as well as being famed for being an adept business leader – as someone capable of digging his country out of its current hole and putting it on the right track toward prosperity.

Henry James International Management April Market Commentary
For the moment Maduro continues to enjoy support from many Venezuelans, some of whom are blinded by their faith in so-called Chavismo, or the way in which everyday Venezuelans once improved both their wealth and station under their former leader Hugo Chávez, in whose political tradition Maduro follows.

India is in the midst of the world’s largest ever democratic election – a more-than 5 week exercise for which there are over 900 million registered voters. While much of Indian politics is local, the two national protagonists are incumbent Narendra Modi of the Hindu nationalist BJP party and Rahul Gandhi of the so-called Congress Party of which Mahatma Gandhi was once a leading member. Which way it will go is not particularly clear at this point, particularly as Modi failed to enact the full range of the promises and reforms that saw him elected in 2014 after the Indian electorate was fed up of the failings and corruption of the Congress Party.

For many of the reasons mentioned above, and more, EMEs have recently taken a beating. Among the most at risk have been countries with USD denominated debt whose own local currencies have been battered either through political miscalculations or geo-political risks and/or threats.

Investment Outlook

So far, 2019 has exhibited a great deal of market volatility.  Although recent market reactions to the escalating trade war and bellicose US-Iran posturing have been severe, it bears noting that most major indices generated strong returns for investors this year through the end of April. 2019 remains a difficult year to forecast, with many reasons for continued optimism tempered by caution. If anything personifies this, it is Brexit. Britain will almost certainly kick the can down the road until October 31, 2019, the new Brexit deadline, which will cast an ominous and uncertain shadow over British and European equities for virtually all of the fiscal year. What will happen after this deadline is most unclear and all options remain palpable realties including a new Prime Minister of a hard Brexit pedigree (e.g. Boris Johnson) taking over from May to crash the UK out of the EU without a deal; equally possible is a scenario that would see a Britain cancelling Brexit on the back of a second ‘People’s Vote’ referendum. If these are both viable and realistic outcomes, so is the veritable infinity of options in between. Of course, there is a way out of this – at least a couple actually. May’s deal remains an option, but – as it satisfies neither Brexiteer nor Remainer – it is unlikely it will be passed. A second option is Parliament getting its act together to come up with a compromised, mutually agreeable solution, but that would involve a degree of cooperation, communication and understanding that has so far proved illusive. If the two sides find reasonable compromise it would likely generate a great deal more investor confidence in the EU. Of course, even with the UK making a nice and cosy home in the liminality that is neither in nor out of the EU, the likely result is still positive economic growth for Britain, but below that of the EU, hovering at or just above 1% for the rest of 2019 and 2020. Of course, if the UK does Brexit without a deal, all bets are off.

As far as a positive outcome for the US-China trade war is concerned, we can only hope that Trump knows what he is doing and that his game of high-stakes poker will result in China coming back to the table, willing to offer the necessary concessions. But if Trump needs the Fed to commit the unorthodox and even inappropriate step of bending to his wishes just to attempt to shield Americans from the trade war’s negative impact, it would seem that the President may have lost control of the situation. We said a trade war would be a disaster for both the US and Chinese economies and that the negative effects would send tidal waves to other world economies; today we stand by that view and hope that cooler heads prevail to see it averted through a mutually beneficial bilateral trade deal. Agreement on a trade deal would likely contribute a major boost to investor confidence and drive the broad markets higher.

Given the recent poor performance of EMEs (the first two weeks of May saw the MSCI EM Index down a dramatic 5.86%) it seems there would be very little to be optimistic about in the emerging market (EM) sector. Despite many EM countries being faced with the challenges created by the range of economic and politics crises in which they find themselves, we are still feeling (relatively) bullish. If there was any doubt, the US-China trade war has made it unofficially official that interest rates will be frozen at 2.5% in 2019; indeed, independent of Trump’s urgings, we believe the Fed will decide to lower rates by 25 basis points in 2019 to counteract the damage the trade war will likely inflict on US consumers. Of course, lower US interest rates tend to bode well for EMEs. Furthermore, due to China’s economic slow down and the way in which it will suffer from the trade war, it will continue its policy of monetary and fiscal easing which will continue to help drive the EM Asia sector. There’s more good news: despite India’s state of political flux from its difficult-to-predict general election, its economy is predicted by the International Monetary Fund to grow by over 7% through 2020. Other Asian EM countries are poised to join India in the ‘7%’ club, including Bangladesh, Vietnam, Myanmar and the Philippines due – in part – to an influx of manufacturing output that may be in a position to fill in for US supply chains gaps created by the US-China trade war.

In conclusion, we are faced with a volatile world economy filled with a range of geopolitical crises, including the behemoths of the US-China trade war and the potential for disaster in Brexit. Despite this, we still believe that EMEs may present excellent opportunities for investors over the long run.

Disclosures

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

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

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

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

March Market Commentary

Market Overview

Those who feared that January’s boom would lead to a more somber – or even negative – February will have been relieved as, despite the serious potential for punishing economic headwinds, global markets continued their positive climb. The S&P 500 was up by nearly 3% and there is scope for even more dramatic gains in the short term if the United States (US) and China can announce a tariff free trade deal in the short term. Developed market equities (DMEs) stiff-armed Brexit fears and continued their 2019 good form into February, up 2.56% as measured by the MSCI EAFE. Emerging market equities (EMEs) maintained their January gains, up 0.23% as measured by the MSCI EM Index thanks to South America’s positive momentum.

At the end of January we viewed the bang with which 2019 started cautiously and a bit dubiously; however two months into the year not only have markets performed relatively well, but also many of the reasons for such raging economic anxiety appear to have turned a corner to pose less of a threat. Among the more salient of these has been the risk of an all out trade war between the US and China, which has ominously hovered over markets for more than 8 months to foster an aura of instability. What is more, the ever-present trade tensions have caused real damage to both nations’ economies and have boiled over and bruised global markets. While we always believed that reason would triumph and that a mutually beneficial trade deal would eventually be agreed by the two protagonists, this conflict has been practically wrapped in tinder just waiting for the smallest spark to ignite a fiery trade war. However, a matter of days before the US was set to raise tariffs on over $200bn of Chinese goods from 10% to 25% – and surely incur an equally punitive response from the Chinese on American goods – President Trump declared he would indefinitely suspend the March 2nd deadline, citing progress to a mutually beneficial trade deal, which might well be finalized shortly. The deal that is nearly over the line is reported to see Washington abolish most of its tariffs in exchange for Beijing proactively protecting intellectual property rights and buying significantly more American products, including China fast-tracking the removal of its foreign-ownership limitations on auto ventures and reducing imported auto tariffs to below the current rate of 15%. While markets will not be completely out of the woods until a US-China trade deal is announced, investors should take comfort in the fact that relations between the countries appear to be at an 8 month high and that the chance of a trade war looks far slimmer than it did only a month ago.

Despite January’s boom, US markets had plenty of domestic shock to absorb through the longest ever government shutdown in country history. While Washington’s political chaos failed to measurably damage domestic equities, the threat of yet another government shutdown created plenty of investor anxiety. Thankfully, regardless of the furore over Trump having declared a national emergency to fund his border wall with Mexico, markets seemed to have taken comfort in the fact that Congress agreed a federal budget that will last through the current fiscal year, ending September 30, 2019 and thus preventing a fresh shutdown in the short term and eliminating this ominous threat to markets.

Henry James International March Market Commentary
It seems highly unlikely that Mrs. May, who has been intent on respecting the 2016 referendum result and who was the one who triggered Article 50 in the first place, would ever countenance such a dramatic political move.

So far so good in 2019, then? Everyone’s least favorite issue could rapidly corrode the burgeoning optimism: Brexit. As things currently stand Britain is set to crash out of the European Union (EU) without a trade deal on March 29, 2019, which (if we are to believe mainstream economic pundits) will likely bequeath the United Kingdom a deep and painful recession and inflict serious damage on EU economies, particularly given the latter’s UK trade surplus. Such a catastrophic outcome would send tidal waves of economic headwinds and investor uncertainty far beyond British and European shores to the rest of the world. March 12 proved to be a decisive day in the Brexit saga as it saw Parliament reject Prime Minister Theresa May’s deal for a second and likely final time. On the following day Parliament voted in favor of a motion that ruled out a no-deal Brexit under any circumstances; yet this resolution lacked the power to stop Britain crashing out of the EU on March 29th without Brussels’ consent to extending the deadline. Of course, Britain is able to unilaterally revoke Article 50, which would result in avoiding a much-feared no-deal Brexit (for the time being, anyway) or even cancel Brexit altogether. And yet, it seems highly unlikely that Mrs. May, who has been intent on respecting the 2016 referendum result and who was the one who triggered Article 50 in the first place, would ever countenance such a dramatic political move.

While Michael Cohen was testifying against his old boss in the House of Representatives, President Trump was in Hanoi for his hotly anticipated second summit with North Korean Supreme Leader Kim Jong Un. Despite a range of positive predicted outcomes including the official end to the Korean War, nothing at all was achieved as Trump pressed for complete denuclearization while Kim evidently wanted all sanctions lifted. In the words of the President: ‘Sometimes you have to walk and this was one of those times.’ The lack of result battered South Korean equities (KOSPI), which were hopeful the summit would begin the process of making inter-Korean cooperation a more viable and immediate reality, which would be a major catalyst for South Korean economy.

With no sign of the turmoil in Venezuela ending anytime soon, its oil industry – which produces 1.2 million barrels a day in normal circumstances – is on the brink of collapsing due to its flat-lining economy and failing power grid. Additional headwinds include OPEC and some non-OPEC countries agreeing to cut productions by that same amount; i.e. 1.2 million barrels a day, which suggests that the oil market is not particularly dependent on Venezuela’s contribution. Besides which, expanding exports from Canada and the US would be able to fill any gap left by the Venezuelans.

Meanwhile despite the Bovespa index maintaining its 2019 gains, the Brazilian economy is in relative dire straights and has seen its 2019 growth estimate downgraded for a 3rd consecutive week to 2.01%. The forecast for the benchmark Selic rate has also been cut from 8% to 7.75% at the end of 2020; the rate presently sits at the all-time low of 6.5%. Brazil’s Central Bank also revealed that its economic activity shrank by 0.41% in January. Despite this important background, Brazilian President Jair Bolsonaro’s most important and biggest challenge is state pension reform. The proposal that would see the minimum retirement age raise to 65 for men and 62 for women is predicted to save more than 1 trillion reais ($270bn) over the next decade. Failure to enact this reform would not only be a body blow to Bolsonaro’s presidency, it would also push Brazil further into an unsustainable debt profile. If Bolsonaro does manage to pass it through both houses of Congress – which will require two-thirds support – the pension reform is widely expected to kick start the Brazilian economy. Unfortunately for Brazil’s controversial far-right President, the opposition party has promised to block the pension the reforms; Bolsonaro will also be only too aware that many previous government have tried to reform Brazil’s pension system and all have failed spectacularly.

The end of February saw the Indian Air Force launch an attack in Pakistani territory for the first time since 1971 in response to a suicide attack on February 14th by terrorist group JeM that killed 40 Indian troops. India accuses Pakistan of a direct hand in the attack. Subsequently the Pakistani Air Force shot down two Indian fighter jets and the world braced itself for what might come of a direct military conflict between two nuclear powers. Thankfully the conflict has cooled down to mere sabre rattling thanks to interventions by US officials, including National Security Advisor John Bolton. While investors were keen to see a fresh geopolitical crisis avoided, it appears that as things currently stand that damage to markets has been limited. Yet despite the Indian SENSEX’s seemingly indifferent response, data shows that foreign investors have not been quite as keen to invest in Indian equities in 2019. What is more, the surge of money into the rupee since the start of November has petered out. While one might be tempted to think this might be an Emerging Market-wide trend, no other country under the classification has experienced major equity outflows along side a falling demand for its currency. As such it would seem that Indian equities have been damaged by the instability the conflict with Pakistan has precipitated; moreover, with a fresh Indian general election this spring there is the possibility that markets will fear domestic political uncertainty as well. In so far as how the conflict damaged Pakistani equities and its rupee, neither have been performing very well and war with its longstanding foe would certainly not be seen as a step in the right direction. Pakistan’s rupee has been near or at history lows against USD since November 2018, and its economy is battling high inflation and current account debt. Yet, after being battered in 2018, Pakistani equities have so far shown life in 2019 and have not moved significantly in either direction since the conflict with India.

 Investment Outlook

Despite the fact that the US and Chinese relations still might devolve into a full-blown trade war, Britain remains on the brink of a no-deal Brexit and market damaging geopolitical crises can blossom seemingly out of no where, we are feeling pretty positive about where markets are so far in 2019 and where they are headed in the medium term.  A cooling of trade tensions between the US and China and a fully funded US government are two items on which we simply could not count only a month ago, but which now present markets with relative stability. Of course, Brexit remains a wildcard with tremendously high stakes and no one knows how it will end – apparently least of all Theresa May and her government. And yet – while this may be a view through rose-tinted glasses – one suspects we are unlikely to head back towards the hard or no-deal Brexit that has given investors so much anxiety. Firstly, there isn’t a sizeable appetite for this in the UK Parliament and, despite the EU’s unflinching poker face, there likely is not an appetite for it in Brussels nor in the capitals of the other 27 EU member states. Yet there is likely desire on both sides for a mutually beneficial soft Brexit – or possibly no Brexit at all – a scenario that local and global markets would likely savor.

Henry James International March Market Commentary
A pausing in interest rates should also cause USD to weaken, which would improve flows into EM economies and their equities.

Markets will also revel in what Federal Reserve Chairman Jerome Powell is expected to announce shortly: that he will lower his interest rate forecast to little to no further fiscal tightening in 2019 due to global economic growth appearing to be slower than anticipated. At the end of 2018 – with President Trump blasting Powell from his Twitter pulpit – it seemed a foregone conclusion that 2019 would be a year marred by headwinds to growth induced by still more interest rate increases. As of today the terrain appears to have shifted considerably and investors should see plenty of opportunity as a result. A pausing in interest rates should also cause USD to weaken, which would improve flows into EM economies and their equities. Failing liquidity was among the main reasons that EM equities fell so precipitously in 2018, and it appears that this problem has been all but solved which would suggest a possible recuperation of 2018’s losses. Indeed, a resolution to the US-China trade conflict would give EM equities an even further boost.

In summary, while there is still plenty to keep investors up at night, we believe that market conditions have improved significantly in a short space of time. Whereas in January and February we were aware of the potential for disaster striking in 2019, much of the sources for anxiety have either been improved or eliminated entirely. As a result if Brexit concludes in a market friendly fashion and the US and China make a mutually beneficial trade deal a reality, we will be tempted to reassess and possibly even improve our prediction of subdued global growth in 2019.

Disclosures

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

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

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

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