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 abouteconomic 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 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.

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.

February Market Commentary

Market Overview

Despite January having been a month rife with political turmoil and economic anxieties, for many investors the panic of Christmas Eve will have likely abated considerably as markets have so far rebounded nicely in 2019. The S&P 500 – which was among the standard bearers leading 2018’s 4th quarter nose dive – enjoyed its best January since 1987 thanks to positive contributions of over 8.5% growth from the energy, industrials and financials sector. Developed Market (DM) equities followed suit by gathering a head of steam in their own right, up 6.59% as measured by the MSCI EAFE. Emerging Market equities were also lifted in the momentum, up 8.78% as measured by the MSCI EM Index after having been battered in 2018.

 Despite January market performance putting a spring back in many investors’ steps, headwinds to economic and market growth abound. Among the more notable is the United States’ inauspicious start to 2019 that saw its government in the midst of a shut down that lasted 35 days – a record, but likely not the kind with which anyone would have wanted to have been associated. Having been triggered by President Donald Trump and Congressional Democrats wrestling over the former’s polemical border wall with Mexico – the shut down is estimated by the non-partisan Congressional Budget Office (CBO) to have cost about $11bn and to have wiped 0.2% off its 2019 annual growth forecast. Of course, when the shut down ended on January 25 much of the lost money was recaptured, but it is estimated that around $3bn is gone forever and that the full effects of the shutdown may be far greater than what initial figures might suggest as over 800,000 workers were affected and federal spending on goods and services were significantly delayed. While investors can take comfort in knowing that the shut down is over, there remains palpable risk of another one on the horizon if lawmakers cannot agree on a solution for enhanced security along the US-Mexican border.

Across the pond the world’s 5th biggest economy, Britain, is a matter of weeks away from crashing out of the European Union (EU) without a deal. Aside from crippling the UK economy, mainstream pundits, policy makers and business leaders have indicated that Britain will be susceptible to widespread food and medical supply shortages. While this self-inflicted wound is bad for the UK, a no-deal Brexit would radiate shock waves throughout the rest of the world and would ravage global markets. In 2010 the world was afraid of the possible contagion from Greece’s debt crisis, and yet Britain’s economy is more than 10 times larger, which raises the stakes considerably. We believe no one would be safe in a no deal Brexit and we will be hoping that Prime Minister Theresa May will be able to acquire further concessions from the European Union (EU) and secure an orderly and structured (hopefully soft) Brexit.

Henry James International's February Market Commentary
If the US and China do not agree a new trade deal by March 2 over $200bn of Chinese goods will see their existing 10% tariff more than doubled to 25%.

While Britain and the EU scurry to work out a last minute deal, the top brass of China and US have been knuckling down to avoid their own cliff-edge: if a new trade deal is not agreed by March 2 over $200bn of Chinese goods will see their existing 10% tariff more than doubled to 25%. China has promised retaliatory measures, which would likely result in a ‘gloves-off’ trade war, which would hit both the American and Chinese economies and reverberate catastrophically throughout the rest of the world. At the heart of the deal is correcting an imbalance in trade between the nations, as well as the more serious White House accusations that US tech companies doing business in China are coerced to hand over their intellectual property, which the Chinese vehemently deny. Talks began two days after the US charged Telecoms company Huawei and its chief financial officer, Meng Wanzhou, with conspiring to violate US Iranian sanctions; US officials insisted Meng’s arrest in Canada had nothing to do with the trade talks. Despite ample scope for disaster, the Chinese hailed the talks as a great success and promised to help correct the trade imbalance through buying more American soybeans; and both parties nebulously agreed progress had been achieved on the intellectual property front. While there does appear to be a positive glow about the meeting, the clock is ticking and the stakes really could not be higher.

US Federal Reserve Chairman Jerome Powell is apparently feeling the heat of a less rosy outlook for the US economy, the record-breaking shutdown, trade impasses and global headwinds to growth as he has done a near complete about-face with his monetary policy in a matter of weeks. On January 30, 2019 Powell signaled a possible end to incremental interest rate increases, saying that despite neither inflation nor financial stability being particular risks, ‘cross-currents’ of slowing global growth – including China having its weakest economic output in 2018 for nearly 3 decades – and a less certain US outlook required changes to the Fed’s monetary policy. While we welcome a pausing of rate hikes, it must be said that with interest rates between 2.25% and 2.5% there will be little wiggle room to combat any future downturn with rates cutes alone.

Brazil is the clear bright spot for international investors as its Bovespa index managed to build on its stellar 15% 2018 growth by hitting its all-time high after surging up more than 8.5% in January. The benchmark stock index is clearly enthusiastic about the presidency of the far right Jair Bolsonaro who began his premiership on January 1, 2019 and comes with the promise of a range of business-friendly reforms, including changes to the Brazil’s pension system. And yet, in the midst of the Brazilian buzz the Vale Dam tragedy literally burst onto the scene, incurring for the mining giant a combined $1.7bn of blocked funds and government fines. Over 300 people are believe to have died in this ecological disaster, and Vale confirmed that it will decommission other dams similar to the one that collapsed, which will reduce its production of iron ore by as much as 10% in the next 3 years. Besides providing an element of headwinds to Brazil’s thriving equity prices, China and Vale’s mining rivals BHP Group and Rio Tinto may profit by having to pick up the slack.

Brazil’s northern neighbor Venezuela wishes it could steal even a pinch of the magic that is propelling Brazilian equities as the ‘Bolivarian Republic’ is in a particularly bad place right now. In addition to the usual poverty, mass-food shortages, unemployment, hyperinflation and ruined economy, January brought forth fresh political crisis through the emergence of the leader of the opposition Juan Guaidó. Based on the widespread view that Nicolàs Maduro won Venezuela’s 2018 General Election through fraud, on January 23 Guaidó took an oath to serve as the Interim President of Venezuela. Since then the US, EU and range of European countries including the UK, Spain, France, Germany, Sweden and Denmark all recognise Guaidó as the interim president; meanwhile, Russia, Syria, Turkey, Iran and North Korea still back Maduro. Despite fervent backing for Guaidó among Venezuelans and world leaders, Maduro remains in charge of a country on the verge of collapse, particularly after the US divvied out new punishing sanctions on its oil. While this is devastating blow for Venezuela and the Maduro’s reign, it has only had a positive effect on the price of oil which, along with OPEC-led production cuts – has helped to push US crude oil up by more than 20% to over $55 a barrel, which represents its best January on record.

Investment Outlook

Even before the US government shutdown, we predicted more tempered economic growth; and only 1 month into 2019 the CBO has already wiped 0.2% off its forecast. Of course, the full extent of the shutdown’s damage remains unclear but it is likely that it will be far greater than what initial estimates have suggested as – according to the CBO – they have yet to incorporate the indirect negative effects such as businesses not able to acquire federal permits and certifications, reduced access to federal loans and the overall uncertainty that has compelled firms to postpone important business, investment and hiring decisions. As distressing as this “own-goal” has been to the American economy and its workers, it is possible that another shutdown is imminent if Trump and House Democrats cannot come to a resolution on the budget for the Mexican border wall.

Markets are hoping for a soft-Brexit – or even a scenario in which Brexit is entirely averted – however, if nothing changes between now and March 29, 2019 Britain will leave the EU without a deal. Were this to happen, middle-of-the-road estimates suggest a 9% drop in GDP, which would make the 2009 financial crisis look insignificant by comparison. This would increase unemployment, the cost of borrowing and could crush the value of the pound which could combine to set the UK economy back a decade and would drag other economies and markets with it.

While a possible US-China trade war has hung ominously over markets for several months, we are encouraged that the January trade talks ended positively and we are hopeful that President Trump will visit Chinese President Xi Jinping this February to shore up a preliminary deal and extend the deadline to work through the thornier issues. While it will hardly be adequate for Trump and his team, it is a good sign that China agreed to increase its purchase of American soy. However, until a final deal is agreed, markets will live in fear of a Sword of Damocles in the form of a devastating trade war dangling perilously by a single thread from above.

We believe there is excellent value to be found in EM equities based on their valuations relative to profitability: they are trading at prices lower than their 10-year average but are still posting returns near 13%, which is similar to their DM counterparts. This view is fortified by the Fed’s recent decision to pause the interest rate hikes that caused so much harm to EM equities in the first place; our optimism is also based on a relative calming of geopolitical tensions, particularly on a peaceful resolution to US and Chinese trade.

February Market Commentary
While Bolsonaro has so far been hitting all the right notes with markets, his volatile disposition seems to make him a risk both to himself and to the lofty ambitions on which Brazilian equities and Brazil’s economy are counting.

We expect the Brazilian economy to remain the darling of EM equities and continue its excellent 2019 run; Brazilian stocks should also get a boost from the Fed’s slow down in interest rate hikes. However, Brazilian equities have performed so well recently not because of anything that has been done as much as the potential of President Bolsonaro’s campaign promises – chiefly pension reform. Brazil’s current pension system – that sees men retire at age 60 and women at 55 – and has led to massive government debt: more than 75% GDP according to the Brazilian central bank. Bolsonaro plans to raise retirement age to 62 for men and 57 for women as well as roll back some benefits; yet, failure to enact these changes, and to do so immediately, will push Brazil further into an unsustainable debt profile. Furthermore, while Bolsonaro has so far been hitting all the right notes with markets, his volatile disposition seems to make him a risk both to himself and to the lofty ambitions on which Brazilian equities and the Brazilian economy are counting.

2019 is undoubtedly a year in which not just economic threats abound, but extremely serious ones. If there is another US government shut down, Britain falls out of the European Union without a new trade deal and the US and China breakout into an all-out trade war, the global situation would be dire. Indeed, it would be bad news if only one of these items were to happen. And yet, beyond just blind optimism, one has to be cognizant that world leaders – no matter how seemingly brazen – are unlikely to shoot themselves in the foot in a permanently debilitating way. Both President Trump and Democrats are all too aware of the 2020 Election barrelling towards them and neither will want any part in knocking the wind out of the economy, beyond the damage that has already been inflicted. Regarding Brexit, Prime Minister May will not want to be the premier who cripples the world’s 5th largest economy and while she cannot single-handedly get the Parliament to agree to her deal or coerce the EU to accept her demands, she does have the authority to either extend or cancel Article 50, which would give the UK and EU more time to work out a mutually beneficial arrangement. It must also be said that the EU – despite its draconian stance during the negotiations – stands to be damaged by a no-deal Brexit almost as badly as Britain does, for which reason there will be plenty of incentive on their side to see that a deal is reached. To complete the trifecta, neither the US nor China will benefit from a trade war, which suggests that cooler heads shall prevail, as it seems was the case at the January summit. Therefore, despite the ample threats to markets, we believe that the global economy will make it to the other side relatively unscathed; however, while there will be growth, current conditions and looming threats will make for subdued 2019 growth at best.

Disclosures

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

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

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

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

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.