Henry James International Management July Market Commentary

Market Overview

July’s lackluster market performance stands in contrast to the volatile political and economic forces we have experienced the past month. The question we have is what – in the grand scheme of things – will July’s numbers mean for markets short, medium and long term performance?  In July the MSCI EAFE was down -1.26%; the MSCI World ex USA Small Cap dropped by -0.43%; and the MSCI Emerging Markets index fell -1.14%. Given the extent of market uncertainty, one might say that such small dips in these indices are no big thing. Indeed, that may be a worthwhile view in light of the increased volatility caused by trade disputes, China’s less robust output, Brexit (possibly) drawing to a conclusion on October 31, 2019 and Germany (and maybe the European Union) slipping into recessions with the United States (US) also possibly joining suit with the news that 10 year bonds fell below 2 year bonds for the first time in more than a decade. And yet we see positives including the US’s low unemployment rate and the confidence inspired by the World Bank’s global growth forecasts of 2.6% in 2019 and 2.8% in 2020, figures that suggest we are no where near a global recession.

While we were happy to take the market victory a month ago when US President Donald Trump and Chinese President Xi Jinping agreed to a trade truce and recommitted themselves to working out a mutually beneficial trade deal at June’s G20 summit, we always believed that it was hype over substance as it did not repeal either sides’ crippling tariffs. Furthermore, judging by Trump’s erratic disposition and self-admitted fondness for tariffs it was evident that a mere truce would do nothing to stop the administration from further hostilities the moment the negotiations failed to go to plan. July largely enjoyed relative quiet on this front, but on August 1 the temporary calm gave way to a fresh wave of market rocking angst. After two days of trade talks with little progress and China failing to fulfill its promise of buying more US farm products, Trump announced that the 10% tariff on $300bn of Chinese goods was back on that table and scheduled to be enacted September 1, 2019. On Tuesday August 13 a change of pace was announced and markets reacted jubilantly to the news that Trump would be delaying the new tariffs on items like cell phones, video games and apparel, until December 15, 2019 in an effort to minimize the effect they would have on US consumers getting ready for the upcoming holiday season. Market joy notwithstanding, there was actually really no cause for genuine market excitement as not only will existing tariffs persist (as was the case a month ago) but also as things currently stand some items will see a new 10% tariff slapped on them on September 1. Moreover, far from China responding favorably to Trump’s partial climb down on new tariffs, the Communist giant has responded bellicosely by stopping all plans to buy more US agricultural products, with fresh tariff threats of its own and intentionally devaluing its currency. Despite the hostility, both sides are due to resume negotiations at the end of August.

Henry James International Management July Market Commentary
What does the 5G revolution have to do with the US-China trade war?

On July 31, 2019 Federal Reserve Chairman Jerome Powell announced a 25 basis point interest rate reduction. As a result US equities fell sharply with investors disappointed that rates were not slashed more aggressively, or at the very least were not accompanied by promises of future rate cuts. According to Powell the cut was the result of the Fed moving to a more accommodative stance due to mid-cycle adjustments. ‘Trade tensions seem to be having a significant effect on the economy,’ he said, adding that, ‘global manufacturing slow down is a bigger factor than expected last year.’ Given Trump’s apparent disregard for the Fed’s independence and his vociferous lobbying of Powell to aggressively lower interest rates which has included threats of firing him, some may many wonder if the rate reduction was effectively Powell succumbing to the President’s pressure. Even if Powell is not explicitly obeying the person who appointed him to his post, one may wonder if Trump is using tariff threats to dictate the Fed; if so, will he use them again?

 Investment Outlook

James O’Leary, CFA, our Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, is braced for on-going trade negotiations between the US and China through the 2020 elections. He believes there will be a range of smaller agreements along the way which may include Chinese concessions with respecting intellectual property and purchasing US agricultural goods (e.g. soy beans) but that the resolution that markets are craving will prove illusive until the 2020 election is decided. If a Democrat wins, one imagines a somewhat less hawkish stance against the Chinese, which President Xi would lap up; if Trump is re-elected O’Leary believes that Xi will be coerced to bow down to Trump’s demands, the Chinese President’s de facto life-long premiership, notwithstanding. While O’Leary is not particularly a fan of the market volatility that the trade dispute has inflicted upon markets, saying, ‘tariffs and the threat of tariffs have slowed down and damaged the global economy and will continue to impede growth,’ he believes that some battles are necessary in light of China’s brazen disregard of respecting patents and its unbalanced trading relationship with the US. Moreover, according to O’Leary, at the base of this trade disagreement is far more than mere trade: it is the battle for 5G technological supremacy. He believes that China is aggressively pursuing a plan of developing and disseminating its 5G tech throughout the world – through US blacklisted company Huawei – while the US government is putting its full support in Ericsson and Nokia not only to ensure that US-made chips are at the forefront of the 5G revolution but also to make sure that the West continues its domination in this tech sector. As a result of this tech battle, O’Leary believes that the tech sector is poised to grow positively as chips and software will be the major drivers in the 5G revolution. Consequently, says O’Leary, Henry James International Management will expect to be over-weighted in tech.

O’Leary agrees with Trump’s pointed assessment that China overtly manipulates its currency; yet, in his view, it is not necessarily a bad thing for the world. On the contrary, it may provide an element of economic stimulus for the world as it will make Chinese goods that much cheaper for consumers. This of course will keep Chinese goods relevant in the US market despite the negative intentions of Trump’s tariffs. And yet, devaluing the Yuan will likely impede China’s own economy because it has decreased the value of their own stock market – relative to the US’s – by 10%. While many Chinese companies who import to the US and other countries may be partially shielded from this negative side effect, the value of non-exporting companies will have gone down considerably in virtually one fell swoop. O’Leary also suggests that China devaluing its currency so brazenly has damaged the Yuan’s long term dollar independence and its ability to act as a major stable currency internationally.

O’Leary did not believe that the US economy needed a rate cut and that Powell lowered it as a precautionary measure and maybe even as a nervous attempt to undo his December 2018 rate increase. In light of trade disagreement escalations, O’Leary believes that we will see another rate cut by the end of 2019 to help stimulate the global and US economies. Of course, a consequence of lowering interest rates is that that EM economies – including China’s – will benefit because of their dollar denominated debt. As result, says O’Leary, Henry James International Management will hope to increase its EM exposure; however in light of China’s volatility there are no immediate plans increase exposure there.

Henry James International Management July Market Commentary
Was the Fed’ s 25 basis point rate reduction Powell succumbing to Trump’s pressure?

In so far as O’Leary is happy to combat the economic headwinds presented by trade disputes and even Brexit, which appears set for a no deal outcome on October 31, 2019, he will cautiously welcome the Fed cutting interest rates; however, he views interest rates being so low for such a long time as a rather dangerous game. ‘Cutting interest rates will stimulate the economy – but you can only play that card while there are still rates to be cut,’ he said. O’Leary added, ‘The Fed needs to the tools to control inflation when we have a recession, which many believe is on the horizon, but with rates so low there will be little wriggle room to make further cuts to mitigate the effects.’

We see July’s overall figures showing small dips in the face of raging uncertainty the result of a range of market forces battling themselves into a stalemate. In the medium term future we believe we can expect minor progress in the US-China trade dispute – with possibly some Trump-induced bumps in the road – until the next US general election; and we will look forward to the benefits of lower interest rates, despite our fear that unnecessary reductions may leave the Fed powerless should a recession hit. Ultimately, we remain hopeful that lower interest rates and a settlement to trade disagreements combined with the extra attention the Trump should give the economy in 2020 will result in continued global growth and that our concerns about economic headwinds will begin to fade.

 Disclosures

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

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

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

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

Henry James International Management 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.

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.

April Market Commentary

Market Overview

The first quarter of 2019 finished with largely impressive numbers: the S&P 500 boasted its best quarter in ten years, up by 13.1% almost erasing the disastrous losses of the last quarter of 2018.  Globally,stocks generally posted solid returns for the quarter as the MSCI EAFE Index produced a return of 9.04%. International stocks were led by the BRIC countries which generated a 13.01% return. Even lackluster regions like Africa posted a positive return of 3.98%.  Indeed, when considering the full range of threats the global economy faced at the beginning of the year, investors should be happy that markets were able to shrug off those concerns and generate solid returns for the first quarter.

While we are delighted by 2019’s market performance thus far, we sense the palpable risk that the markets’ positive form is on borrowed time and that the 2019 of muted growth that we envisaged at the end of 2018 may return. We still feel very far away from the market friendly Brexit and United States (US)-China trade deal we were anticipating only a month ago. Both items continue to cause a considerable lack of clarity, which will likely perpetuate market instability. This, and other factors, remain problematic even in the face of last month’s optimism and have compelled us to face the reality that 2019 may yet become an uphill battle for international equities.

Henry James International Management April Market Commentary
Prime Minister Theresa May once said that ‘no deal is better than a bad deal’; alas, she ate her words and extended Britain’s withdrawal and in the process risked Brexit never happening at all, a reality that markets may find rather appealing.

It was largely a foregone conclusion that Britain would leave the European Union (EU) on March 29, 2019 ever since Primer Minister Theresa May and Parliament invoked Article 50 to begin the count down two years ago. Indeed, this was due to happen either with a mutually beneficial deal or an acrimonious divorce; i.e. a ‘no deal’ Brexit. And yet, to the joy of some and ire of others, the supposedly immoveable Brexit deadline was pushed back, first to May 22nd – were May able to get Parliament to pass her deeply unpopular Brexit deal – and most recently to October 31st due to Parliament rejecting her deal three decisive times and failing to agree on any viable alternative arrangement. May once said that ‘no deal is better than a bad deal’, which suggested that she would have been prepared to see Britain ‘crash’ out of the EU on April 12th, were the new six month Brexit extension not granted. Alas, she ate her words and extended Britain’s withdrawal and in the process risked Brexit never happening at all, a reality that markets may find rather appealing. Part of the latest Brexit extension is that, were Britain able to agree on a Brexit deal by May 22nd, it would be able to formally Brexit on June 1st. Of course, the UK Parliament’s failure to do so, would mean that Britain would have to participate in the European Parliamentary elections, something that May has always been reluctant to do as it would be – in her view – an abrogation of democracy and send the wrong signal about having respected the result of the 2016 Brexit referendum. In terms of next steps, it is genuine guesswork, yet plausible items on the horizon include a battle within the Conservative Party, with May defending herself from being ousted as Prime Minister from her own Members of Parliament, as well as a so-called People’s Vote referendum that would give final say to British voters about how it will want to proceed on Brexit, or if it even still does want to Brexit at all.

At February’s close we had good cause to believe that the incipient blaze of a possible US-China trade war was about to be extinguished. Just as the March 2, 2019 deadline that was to see the tariff on over $200bn of Chinese goods more than double from 10% to 25%, President Donald Trump confidently proclaimed that all planned increases would be indefinitely suspended as a result of a new bilateral trade deal nearing completion. Yet more than a month later not only has a deal not been confirmed, the US and China appear to be much further apart than what Trump’s bluster and the general bonhomie between the superpowers would have suggested. While it must be said that it appears that an all-out trade war between the world’s two largest economies has been averted for now – a reality that investors would have been all too eager to embrace only a matter of months ago – it seems that it was premature to have expected a mutually beneficial trade deal that would abolish all tariffs and give international equities the boost they have craved.

China is reported to be pushing back against US trade demands that it perceives as one-sided; moreover, they want all tariffs lifted immediately, which the US is reluctant to do. Consequently, Chinese negotiators are evidently less gung-ho about fulfilling their key promises on intellectual property rights, which for Trump and both sides of Congress is the foundation to any meaningful trade deal. The superpowers are caught in a tedious Catch-22: the US will not roll back tariffs until China fulfills its key commitments, but China refuses to honor its side without movement on tariffs. Robert Lighthizer, Trump’s chief negotiator, deflated expectations by saying, ‘If there’s a great deal to be gotten, we’ll get it. If not, we’ll find another plan.’ Furthermore, news that Trump and Chinese President Xi Jinping’s meeting has been postponed by at least a month until the end of April also suggests that a quick, easy and market friendly solution is not at all imminent.  According to reports, it is unlikely that any future trade deal will begin by repealing all existing tariffs and will instead be more like a trade cease-fire that will see no new tariffs introduced. Of course, it is plausible that the deal may set stages at which tariffs are lifted when particular targets or agreements are met, but one has to wonder if there ever will be a medium term scenario of free, frictionless trade between these two super powers given that they are, and will remain, commercial, economic and military rivals? Yet, Trump continues to hype up his delivery of a positive trade deal with China, which, if he were able to achieve, would give him at least one foot into a second term at the White House and offer markets a positive jolt. This should give him plenty of incentive and what is more Democrats may even cheer him on (privately, of course). However, politicians, markets and investors will likely have to face the facts that the road to economic peace with China will be long, harrowing and may even be impossible in the short to medium term.

In Brazil President Jair Bolsonaro’s honeymoon period is over. The Brazilian market hit its all time high in mid-March but dismal reports over Bolsonaro’s questionable economic ideas and concerns over rapidly increasing inflation cost the market almost 6% in the final 2 weeks of March. The sweeping market optimism that his corruption fighting, business-liberalizing premiership was thought might bring has turned sour as Bolsonaro is under widespread criticism from across the Brazilian political spectrum. What is more, his apparent inexperience and desire to get into Twitter battles has not only mitigated his ability to navigate himself out of his current political quandary, it has also distracted him from selling his ambitious and necessary plans to lawmakers. Bolsonaro aims to make wide-ranging changes to Brazil, yet none is more important than his proposed reform of the state pension system, which is crippling the state’s coffers. Pushing his reform through would cut 1TR Reals from the fiscal deficit in the next decade and would shore up Brazil’s public finances. Of greater importance to investors, it is believed that it would also spark the economy into high gear. Yet, the so called ‘apprentice President’ is facing an arduous battle as opposition parties either oppose the reforms in their entirety or want to chop and change them until they are so watered down they lose their fiscal and economic potency. Bolsonaro has so far failed to engage with the opposition political parties whose support he requires to make meaningful change to Brazil’s state pension; what is more, instead of courting the support of Brazil’s most powerful lawmaker House Speaker Rodrigo Maia, for whom pension reform is also very important, Bolsonaro has chosen to trade petty insults with him. As things currently stand, Bolsonaro has scant support in Congress for pension reform and if he fails to build bridges through the so-called ‘pork barrel politics’ of which he has been so critical, he will fail and South America’s largest economy will likely remain in the catastrophic political and economic situation in which it has found itself for the past few years.

In more positive news, the US Federal Reserve confirmed what was widely speculated: there are no plans to raise interest rates in 2019 due to slower than anticipated economic growth. Chairman Jerome Powell indicated that the current rate of 2.5% is rate neutral and that it would take some time before the employment and inflation outlook called for a change in fiscal policy. The Fed did indicate, however, that regardless of its recent announcement its policy remained nimble and was subject to change depending on future economic indicators.

Henry James International Management April Market Commentary
Will it even be possible in the medium term to envisage free, frictionless trade between the US and China given that they are, and will remain, commercial, economic and military rivals?

Investment Outlook

Despite 2019’s first quarter having outperformed expectations, we fear we are creeping back to the muted optimism and incipient pessimism with which we began the year. It seems highly unlikely that the US and China will agree the mutually beneficial trade deal markets have expected for more than 8 months. Moreover, a decisive and market friendly Brexit is at least 6 month’s away and it is widely believed that further ‘kicking the can down the road’ delays are extremely possible.  As a result, we are left with a petering-out US economy, China in the midst of an economic slowdown, a Britain frozen by Brexit uncertainty and an EU economy that is flat-lining. Adding to the negativity are first quarter corporate earnings that are anticipated to be lackluster. And yet, investors will be thankful that we have at least avoided an all-out trade war between the US and China and a devastating ‘no-deal’ Brexit, which could have made matters much worse than what they may be poised to become.

A spot for genuine, unmitigated optimism may be EM equities, which have rallied in 2019 and may outperform for the next 6 to 12 months. Moreover, we believe it is reasonable to expect EM equities to claw back their 2018 losses. We have already seen the MSCI EM Index up 9.56% in the first quarter of the year. China will help Asia lead the way for EM equities through their own policy of monetary and fiscal easing.  Other countries like Mexico and Brazil may not be so lucky as the former may see capital outflow as a result of domestic political uncertainty as well as trade tension north of the border and the latter will be stuck in a well without a ladder unless Bolsonaro can abandon his idiosyncratic style and effectively push his state pension reform through the Brazilian Congress.

In conclusion, it seems unlikely that markets will benefit from the much-desired steroid injection of a US-China trade deal in the short term. President Trump is still talking up the possibility of a mutually beneficial, market catalyzing solution, but taking him at his word might be unwise. A more likely victory for markets may be Britain leaving the EU through a ‘soft Brexit’ – or even doing an about-face and persisting as an EU member. However, any market-friendly resolution is not only difficult to imagine in the short term, there also remains the perpetuated uncertainty fostered by the October 31st extension as well as the risk of Brexit culminating into something pernicious for investors. For 2019 we believe that US equities will continue in positive territory despite a likely earnings recession, that Europe will be mired in uncertainty until Brexit is resolved and that EM equities may offer investors excellent opportunity, particularly in Asia where share prices are comparatively cheap.

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.

January Monthly Market Report

Market Overview

December ended a rough year for investors with S&P 500 flirting with bear market territory on Christmas Eve.  The S&P 500 was up almost 9% for the year until the sell-off began in October as investors became deeply concerned over global economic weakness, increasing trade tensions, geopolitical instability and rising interest rates. The S&P 500 dropped precipitously in the 4th quarter finishing down -13.97%. Globally speaking, virtually no regional markets provided a positive return for the year.  The MSCI EAFE Index was down -16.14% for the year with most of the damage coming in during the 4th quarter when the index slid by almost 13%. Emerging markets, as measured by the MSCI EM Index, fell -7.85% during the quarter and were down -16.64% for the year. Essentially, there was no where to hide for equity investors during 2018. 

Bear Market January 2019
December ended a rough year for investors with S&P 500 flirting with bear market territory on Christmas Eve.

Investors were not in a festive spirit during the month of December, exhibiting more angst over Federal Reserve Chairman Jerome Powell controversial decision to raise interest rates by 25 basis points to 2.5%. This was the fourth time the Fed raised rates during the year and at its most recent meeting it signaled that there are likely two more rate hikes coming in 2019. President Donald Trump added his own holiday touch by attacking the Fed Chief further and deflating the markets’ Christmas spirit by failing to sign off Congress’ proposed government budget and demanding that it include the required $5bn to build his polemical wall on the US-Mexican border. As the President and House and Senate Democrats could not agree on this key aspect of the budget, the government was sent into a partial shutdown on December 21st which, when coupled with the December 19th Fed rate hike, made it a near certainty that markets would plummet as evidenced by the week before Christmas, with the Dow Jones losing 653 points on December 24th which not only capped the worst week in a decade but made for the worst ever Christmas Eve trading.
 
Unfortunately the Trump administration appeared rather ham-fisted in its efforts to quell market turmoil. Despite the fact that many investors agreed with President Trump in his palpable distaste for raising interest rates, one wonders how committing the unusual step to criticize the Fed’s Chairman – on Twitter, no less – and failing to quash speculations that Powell was on the ‘hot seat’ could have possibly helped restore investor confidence and mitigate market volatility? Furthermore, one wonders what strategy was behind Treasury Secretary Steve Mnuchin’s memo announcing that none of the six largest US banks had experienced any clearance or margin issues? Arguably, this announcement only created greater doubts in the minds of investors.

Brexit Saga
Even casual observers will admit that Brexit has snowballed into a disaster.

Looking beyond the US economy and interest rate hikes, global equity markets fell, as disappointing economic data from Japan, China and Europe ignited global growth slowdown fears, and concerns around trade frictions and European politics added to investor uncertainty. China’s November retail sales and industrial production came in lower than expected. China’s stock market suffered a nearly 25% loss in 2018.  The on-going Brexit saga remains distressingly far from a resolution. Britain’s Prime Minister, Theresa May successfully avoided a leadership challenge within the UK’s Conservative Party, ensuring she won’t face a similar no-confidence vote for another year. However, she failed to win concessions from the EU that could have made the UK Parliament more likely to pass her Brexit withdrawal-agreement proposal.  Furthermore, even casual observers will admit that Brexit has snowballed into a disaster which might end well but has caused unnecessary uncertainty for the 2nd largest economy by GDP in the EU, the world’s 5th largest economy in Great Britain and the rest of the world whose economies are faced with the direct and indirect consequences of this mammoth tussle. Brexit weighed heavily on the FTSE as it dropped by 12.5% in 2018. Somewhat unexpectedly, Brazil’s Bovespa index surged by 15% during the year, as Brazilian investors welcomed far-right candidate Jair Bolsonaro’s rise to the Brazilian presidency and made the Bovespa the best performing major index globally. Overall, the world stock markets were almost all in negative territory as evidenced by the MSCI World ex-USA index sinking by -13.12% during the 4th quarter and finishing the year down -16.40%.

Investment Outlook

Despite the raising interest rates punching the mirth out of investors’ Christmas spirit and the effects of the partial government shutdown, the fact remains that on balance, 2018 was a good year for the US economy outside of stock market performance. In the Fed Chairman’s own words: ‘Over the past year, the economy has been growing at a strong pace, the unemployment rate has been near record lows and inflation has been low and stable. All of those things remain true today.’We share the Fed’s view that both the US and certain global economies have strong fundamentals and with the prospect for another positive year of expanding. While there remains cause for optimism in 2019, we view the risk of further market underperformance as significant. We believe The U.S. remains a relatively strong anchor for the global economy, and we see emerging market equities potentially offering exceptionally positive returns after being beaten down to attractive prices given the associated risk. Emerging market (EM) assets have cheapened dramatically this past year offering better compensation for risk in 2019 compared to the more developed markets. Country-specific risks, such as a series of EM elections and currency crises in Turkey and Argentina are mostly behind us. China is easing policy to stabilize its economy, marking a sea change from 2018’s clampdown on credit growth. EMs are set to maintain double-digit earnings growth, led by China as its tech sector recovers and a pivot toward economic stimulus supports its economy. Ultimately, investors will focus on earnings growth as a positive indicator while remaining guarded against macro-economic headwinds. U.S. earnings growth estimates look set to normalize from an impressive 24% in 2018 to 9% in 2019, consensus estimates from Thomson Reuters data show. This is still above the global average. EMs are set to maintain double-digit earnings growth, led by China as its tech sector recovers and pivots toward economic stimulus to support its economy.  Globally, dramatically slowing earnings growth and the impact of tariffs make for more cautious market expectations.

President Donald Trump
President Donald Trump added his own holiday touch by attacking the Fed Chief further and deflating the markets’ Christmas spirit by failing to sign off Congress’ proposed government budget and demanding that it include the required $5bn to build his polemical wall on the US-Mexican border.

While we believe recession is unlikely (and Trump’s impeachment even less likely than that), it is more likely now than it was a year ago. US-China trade frictions ominously hang over markets and it does not appear that they will go away anytime soon while these two economic behemoths duke it out for tech supremacy. And despite our faith in the Fed’s wisdom, it is absolutely the case that 5 straight quarters of interest rate hikes have created economic volatility, which have had perilous effects on developed world economies and most notably on emerging market economies.

Despite this somewhat bleak picture, one should be reminded that 2018’s growth was assailed by a range of threats – indeed, many of the same with which 2019 is faced, and it still exhibited solid economic fundamentals.

To sum up our 2019 outlook, we are cautiously optimistic that we will see modest positive returns for both the US and many global economies; however, we expect continued market volatility, geopolitical risks, increasing costs of capital and trade tensions to continue to weigh down expectations. We also believe that while 2019 will see additional rate increases, we will expect to see the Fed slow down its cycle to assess the effects of abating economic growth and tighter financial conditions, which should result in easing the pressure on asset valuations.

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.