Henry James International Management May Market Commentary

In last month’s market commentary we said that we expected a global economic rebound in the second half of 2020, which would continue into and through 2021; that COVID-19 infections and deaths would diminish substantially and that its presence would be all but extinguished in Asia; and that global manufacturing would start to pick up again (particularly in Asia).

At this point, we’ve seen indications that the global economy is beginning to rebound nicely. Massive global government stimulus, including free cash to citizens, fiscal spending, the Fed and other central banks around the world buying corporate bonds and quantitative easing are all having a positive impact on the global economy. Interest rates remain at historical lows and remind investors of former United Kingdom Prime Minister Margaret Thatcher’s famous 1980s quote: ’there are no alternatives’. Consequently, investors are continuing to favor equities in developed markets over low interest bonds with increased trading volume pushing stocks higher.

At this point we see certain parts of the world slowing the spread of the virus and getting back to work. By the end of May, the COVID-19 infection and death rates in Europe’s Schengen Area was becoming substantially lower than the worrying and desperate heights experienced in April. As a result, much of the area’s economic activity and manufacturing are resuming. Conversely, other parts of the globe are seeing new surges of infection, such as in Brazil, where new cases are at worrying levels.

In North America and the United Kingdom (UK) the virus seems to be just about where it was last month in Europe and Asia: at a point that is far from ideal but which some believe is showing signs of abating. However, we believe that North America and the UK may be opening up again a bit too early which may make the dreaded second wave a distinct possibility. Such an outcome would be catastrophic for the global economy that relies on their output. However, to be more optimistic, we believe that institutional investors are looking well past the economic destruction brought on by COVID-19 and to a return to economic prosperity in the not-too-distant future.

We believe that investors anticipating economic recovery has largely driven the US stock market up over 40% from its COVID-19 bottom and that it is helping to power the ‘round trip journey’ made by the S&P 500; i.e. returning to pre-pandemic levels as it did on June 8, 2020. Of course, it is not just market optimism helping international equities flourish. Along with the massive support by provided by the world’s central banks, COVID-19 infection rates are going down nearly everywhere excluding South America and a very positive US jobs report has served to bolster investor optimism. We are encouraged that the June stock market surge has been largely driven by industrial and energy stocks, which shows that markets are reacting to increased demand as reflected by the increase in international movement of goods and increasing global manufacturing.

Looking into the future, we continue to have a positive outlook for companies that are able to deliver goods and services to consumers and businesses internationally. We see increased potential in the pharmaceutical and biotech industries as efforts to combat the pandemic continues to increase.  Businesses related to 5G and the use of 5G services and technology companies focused on communications services including cloud data storage are also likely to find favor with our portfolio managers.  Additionally, if the recovery stays on track more investment opportunities will likely emerge in the energy, industrials and financial sectors. We believe that in many ways markets have shaken off the trauma of COVID-19 and as the effects of the pandemic recede the global economy will continue to regain its footing.

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 April Market Commentary

Last month we stated that – despite the catastrophic way in which the COVID-19 pandemic has threated and affected life and caused the global economy come to a veritable halt – we believed a sliver of light was becoming faintly visible at the end of the tunnel. While the situation in which Earth’s inhabitants find themselves remains absolutely dire and no less serious today than it was a month ago, we feel that our prediction has largely come true, albeit with a caveat: though the light is visible it remains distant and faint. The month of April displayed evidence of “green shoots” as most major indices posted positive returns. Indeed, the broad based MSCI EAFE index returned 6.29% after posting negative returns in each of the preceding 3 months.

From the perspective offered from our isolated home desks, we are expecting very weak economic activity for the second quarter with all major countries having economic contraction and increased un-employment for 2020’s second quarter. Indeed, the economic plunge in this quarter will likely set records, the likes of which we haven’t seen since the Great Depression. And yet, there is hope. Provided that COVID-19 does not see a pernicious second wave, we expect an economic rebound in the 3rd and 4th quarters and continuing into 2021. With massive stimulus progams in place globally, alongside historically low interest rates – not to mention the price of energy and fuel being at all time lows, which essentially offers the positive impact of a global “tax cut” – there are good reasons to be optimistic for the second half of 2020.

While we seem very far away from life as we knew it, social distancing has worked and is working. Throughout the world the hallowed ‘flattening of the COVID-19 curve’ has been realized: in Asia, Europe and now in the United States. Consequently countries like Belgium, Germany, Italy and Portugal have started the slow reboot of the European Union through the opening of some retail businesses and slightly relaxed rules about leaving one’s home. Schools have even re-opened in Germany (with strict sanitation and social distancing protocols, of course). While it cannot be denied that there are fears of a second wave brewing in Germany and beyond due to the relaxing of social distancing measures, the world seems to be inching in the right direction.

As social distancing is relaxed and people are successfully able to get back to work, the economic vacuum caused by COVID-19 will abate. We believe there will be a resurgence of consumer demand pushing factories to ramp up production in order to restock depleted inventories as social distancing restrictions are lifted. Consumer demand is increasing in the developed markets and we believe that businesses will accelerate efforts to re-open as soon as possible given that their very existence depends on it.

In the United States COVID-19 testing is ramping up across the entire country. Here in New York City one is able to get tested for $50 at an Urgent Care Center; of course, while this sum of money may be ‘chicken feed’ to some, to others it will be prohibitive, which presents a range of problematic health and social issues. Nonetheless, we are optimistic that the increased testing, along with contact tracing will stop the growth of large infection clusters.

We expect that Asia and the Pacific Rim countries will lead the way in economic growth in the second and third quarters and that their markets and global investors may mutually benefit from one another. Despite fears of a brewing second wave in China, Japan and South Korea, we are hopeful that their manufacturing will continue to ramp up through the next few months. In early May South Korean Prime Minister Chung Sye-kyun announced that his government would allow business activity to resume in a phased fashion and that gatherings and events could take place provided they follow strict disinfection and social distancing guidelines. This will include schools, parks, museums and even the re-start of the Korean professional baseball league (unfortunately in front of empty stands).

Looking to the future, we have a positive outlook for the following sectors: companies that are able to offer consumers and corporations the ability to sell, package and deliver internationally; the pharmaceutical sector and its companies who not only provide services to fight COVID-19 but also those who fight cancer and a full range of diseases; communication services including streaming, telephone, video games and video conferencing; and technology companies that provide the backbone of communications services including cloud data storage.

In our view, the light at the end of the tunnel is visible, and its vibrancy and radiance will only increase as we continue to turn the tide in terms of our global health battle with COVID-19. We believe markets will begin to recover and there are several economic sectors poised to make solid gains as the recovery from the pandemic continues.

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 March 2020 Market Commentary

There is only one story in town: COVID-19. While these are unprecedented and extremely worrying times from a range of perspectives, including public health, health infrastructure, medical/pharmaceutical supplies, mass unemployment, economic contraction and falling equities prices and bond yields, we are optimistic that light is becoming visible at the end of this harrowing tunnel.

While it is obvious that global markets have been oppressed by this deadly pandemic, the forces that are affecting their movements are a bit of a mixed bag. On one end we have raging fear, Western nations charging towards what may be approaching the first wave of their COVID-19 infection’s apex, as well as the reality and implications of having been in social isolation for the past month and the likelihood of it persisting for a while longer. On the other end, we see improved and more stable market liquidity, global governmental stimulus packages along with evidence that South East Asia is approaching a place from which it may be able to resume some semblance of normality (economic and otherwise).

Despite COVID-19 having caused an alarming number of deaths in Southern Europe (Italy and Spain) as well as carving out a path of destruction throughout the rest of Europe, America and elsewhere, we are feeling more optimistic in the short term. Firstly, it appears that social distancing is beginning to bear fruit in Southern Europe, where infection numbers and deaths are decreasing for the first time in a matter of weeks (of course, decreasing does not mean infection and death figures are still are not really high). Moreover, on April 5, 2020 New York Governor Andrew Cuomo revealed that in the previous 24 hours new hospitalizations had fallen by 50%. Despite Cuomo wisely cautioning against wishful thinking that this evidence suggests that the crisis is beginning to plateau in New York State, as good news is in short supply these days, we will take it with open arms.

The fuel for our optimism is driven by the dramatic increase in COVID-19 testing after a disastrous start by the United States government. According to US government officials, labs are processing almost 100,000 tests daily and that over 1.4 million test have so far been administered. Abbott Labs delivered more good news as its new quick test could be used very soon to clear first responders, medical personnel and other key workers.

South East Asia is apparently about to get back to work – perhaps not as one envisaged ‘work’ pre-COVID-19 but ‘work’ nonetheless – as China, Japan and South Korea have begun ramping up manufacturing. A stunning example of this – which would have been unthinkable a matter of weeks ago – is Japanese automaker Honda Motor Co. along with rival Nissan Motor Co. both resuming partial production in Wuhan, the city in which the pandemic first began.

Looking to the future we have a positive outlook for the following sectors: pharmaceuticals that provide services to fight COVID-19 along with the revolutionary technology that will help fight cancer and other diseases; communication services including streaming, telephone, video games, video conferencing and more; and companies that provide the technology for logistics and cloud data storage. In terms of retailers, CVS and Walgreens appear to have a place in the future recovery and government expenditures will help major industrial companies stay afloat. Lastly, the low cost of energy, which many will view as a drawback, will help to power a global recovery when the time is right.

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 February 2020 Market Commentary

Market Overview

 Since last month’s entry, coronavirus – or for the more technical among us, COVID-19 – has gone from theoretically worrying to officially scary, life-changing and economically devastating. A short time ago coronavirus was mostly China’s problem and was a situation that we in the West looked at with genuine worry and sympathy. Now, no country is immune from the devastating impact of this virus on virtually every aspect of life. The effect of the coronavirus on China can be seen as a harbinger of the impacts of the virus on other societies and economies. Initially the West was seemingly mostly concerned about the economic effects of a disruption to supply chains and was reluctant to take precautions.  That has all changed as virtually every country in the world is taking extraordinary steps to abate the spread of this pandemic.

Until the last week of February most investors were all braced for a significant, but not necessarily ruinous, coronavirus impact. That all changed on February 21, 2020 when Italy’s very manageable and seemingly stable total of 3 coronavirus infections jumped to 20. The next day the number became 70 and a week later 1,128, including some fatalities. Markets took note of coronavirus making itself at home comfortably within a Western nation and investor panic ensued to deliver the worst week for stocks since the 2008 financial crisis, which saw the MSCI EAFE index tumble by -8.00% in February, the MSCI Emerging Markets index by -4.17% and the MSCI World ex USA Small Cap index plunge by  -8.74%. There has been little improvement since the final week of February; the current situation is far worse and several nations are seeing the virus run rampant through their populations. Moreover, economies are paralyzed and markets have been in veritable free fall.

Without minimizing how dangerous coronavirus is for both the elderly, infirm and possibly others – the death rate is generally believed to be less than 1%. Indeed, for the vast majority of people it is even less than that. What the virus lacks in deadliness to people, it more than makes up for in its lethalness the global economy. COVID-19 has the power to freeze the capitalism that drives global growth: slowing both production and consumption. As we have seen in China, Italy and now across the rest of the world, to prevent the spread of the virus, places of work shut down and whole cities and provinces are quarantined. While plenty of jobs in the modern economy allow for employees to work remotely at home, not only are many businesses not equipped for this kind of work, factories and the manufacturing sector cannot do so by their very nature. As was the case in China, factory closures suspend both product and component manufacturing, which not only stifles the quantities of items for consumers to purchase locally (and affects business cash flow), all global businesses whose supply chains run through China (and elsewhere) are starved for the items or parts required to sell and/or complete their finished products, respectively. Car manufacturing in South Korea, Europe, United States and beyond, for example, have been massively impacted by the supply chain disruption in China; many have already suspended their own production or are poised to do so.

On the consumer side, people staying indoors due to quarantine, self-isolation or fear of contracting coronavirus have seen the amount they spend in the economy plummet; indeed, in recent days consumer spending is at unprecedented lows. Simply put, we have not been spending in the retail sector, on entertainment, at restaurants or travel, etc. Moreover, doing so is scarcely possible since many countries have coerced such businesses to close. These sectors are huge parts of the global economy and not only does it mean that big businesses are suffering and small businesses risk bankruptcy, it also threatens millions upon millions of jobs that supply people with cash to afford their lives and to spend in the local economy. In short, people are not only refraining from buying because coronavirus is keeping them away from shops, restaurants, movie theatres; etc. – they also are cash deprived or soon will be.

The knock on effect is massive, and when production and consumption have been suffocated, it is down to banks and governments to step up to the plate, but the question is what can they really do when coronavirus has literally taken off the wheels of capitalism? Banks can give loans to businesses struggling to pay their bills; they can also let mortgage holders miss a couple of payments, amongst other items. However, as we witnessed in 2008, even the biggest banks are mere mortals and have limits to what they can do. Indeed, even governments and central banks have limits, not just because their pockets are not infinitely deep but also because policy changes – dramatic though they may be – cannot always have the desired effect. For example, on March 3, 2020 when the Federal Reserve slashed interest rates by 50 basis points – not to mention March 15th’s slashing of an entire percentage point – markets were left unsatisfied and continued in their volatile downward trend. Indeed, the face value for this seems quite obvious in hindsight: the reasons consumers are not spending money in shops is not because of expensive loans or debts, but the fact that they are afraid of contracting coronavirus. Ultimately, economies must pay their own way, and while government policy can help banks loosen their purse strings, delay or abolish tax payments and help to lubricate the wheels of capitalism through financial packages, it is down to whether production and consumption can persist through this pandemic and out-muscle and outlast the virus.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, believes that the impact of the coronavirus pandemic will catapult us into a global recession. ‘The major global sell off that began at the end of February indicates that as coronavirus spreads throughout the planet that markets will continue to panic and result in a global recession.’ He continued: ‘Hopefully everything will slow down through a coordinated global effort and prevent – or limit the impact of – this near inevitability.’ O’Leary suggests reasonable expectations include a 1% reduction in global economic output (from 3% to 2%) citing that the world’s second largest economy China has already been devastated by coronavirus and the reality that the pandemic is poised to smite the rest of the world’s economies in no time at all.

As readers will recall, as we transitioned from 2019 to 2020, despite being bullish, we were particularly aware of the full range of snags and snares desperate to trip up a roaring global economy (of course, who would have predicted a virus would have been the inevitable tripwire?). 2019 stiff-armed Brexit and President Trump’s tariff wars, including the US-China trade dispute, along with plenty of other headwinds. According to O’Leary, in a world without coronavirus the 2020 economy may have simply ploughed through these items to deliver returns for investors, as it did in 2019; however, in our current situation he believes that they will only add to the pain. He said, ‘Brexit and the US trade disputes with China will continue to have an effect on the global economy and coronavirus will only magnify their effects and make them more painful.’ According to O’Leary, a silver lining is that he believes that coronavirus has taken Trump weaponizing tariffs off the menu until at least after the November General Election, saying, ‘Trump needs a strong economy to be re-elected.’

While O’Leary does value globalism, he believes the coronavirus has exposed the fatal flaw of the status quo; i.e. a lack of diversified import sources. ‘It has negatively effected global supply chains as China is a major provider of parts that go into many finished products that are manufactured elsewhere, like in the automobile industry for example.’ He continued: ‘Since these parts are not available, manufacturers in other countries, like in South Korea, for instance, have to stop production lines altogether.’ In short, the undiversified supply chains that were arguably put in place to turbo boost capitalism, have become its undoing.

Of course, the implications are far more significant than negatively impacting the economic cycle: how does an undiversified supply chain threaten the supply of the drugs and medical equipment needed to maintain and manage our national health in normal times? In 2018, 88% of active pharmaceutical ingredients came from overseas, with around 14% of that sum produced in China. In short, from a pharmaceutical perspective, the US is not self-sufficient and relies on its supply chains, so what happens when there is a pandemic and our trading partners are either unable to continue supplying us with the necessary drug ingredients, or they simply become unwilling to part with their stash to instead look after their own populations? ‘Evidentially the USA is dependent upon China for some of the component ingredients that are needed to make drugs that are used to fight the coronavirus,’ O’Leary said. Of course, one hopes and expects that the experts will figure out how to overcome these present difficulties; however, it is clear that coronavirus has revealed that undiversified supply chains are not the best way forward on any front.

This brings us to the faint silver lining of the dark cloud that is coronavirus: will this hasten the creation of diversified supply chains? We think so. ‘We think that a decoupling of the US and Chinese economies will be a good thing for both countries and will mean US relying less on China for rare metals, pharmaceuticals and a range of other items.’ Of course, one may say that the US-China trade war was rather inadvertently a blessing in disguise in so far that it got businesses expanding their supply chains outside of China to avoid tariffs. Despite this, the US and Chinese economies are still deeply interconnected; indeed, the trade deal Trump has been working on presumably would strengthen, if rebalance, the relationship between these two economic juggernauts. O’Leary doubts that any business will want to continue with the existing supply chain status quo when coronavirus calms down; on the contrary, he believes that companies will be proactively diversifying their production and parts sourcing throughout the world. O’Leary said, ‘The impact of a diversified supply chain will make business production more complicated and likely more expensive, but it will protect it.’

In conclusion, we think it is likely that markets will be forced to endure more pain in the coming months and that coronavirus will have ruined any hope of 2020 being a bull year. However, we believe that it is reasonable to expect markets to find a bottom and begin to recover. This is not the time to panic, financially speaking – history has shown that even the most violent negative market spirals are often followed by significant gains. We believe in maintaining a portfolio of high quality stocks to weather the storm and remain in position to take full advantage of the inevitable recovery. Despite sucker punching international markets and creating a global health emergency, we believe the coronavirus will lose much of its sting by the end of 2020’s second quarter. Hopefully, by the middle of 2021 the economic wounds wrought by the coronavirus pandemic will be nearly or completely healed.

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 January 2020 Market Commentary

Market Overview

 While the first month of the new decade generally saw negative equity performance, after the way in which markets overcame apparent obstacles throughout 2019, we are hopeful that this is nothing more than a temporary setback. In January the MSCI EAFE index fell by -2.08%, which, while a deviation from its stellar 2019 returns, could quickly resume growth if the market returns to its long term trend in 2020.  Meanwhile, the MSCI Emerging Marketing index plateaued for most of the month before falling sharply at its tail end, resulting in performance of -4.66%. Lastly, the MSCI World ex USA Small Cap index did not fare much better, as its value fell by -2.88% in January.

For all the drama of 2019, the fresh decade has arguable ‘kicked it up a notch’. While memories of an impending World War 3 are fading and were almost certainly exaggerated from the onset, one cannot deny that the United States’ assassination of Iranian General Qasem Soleimani, and subsequent Iranian missile relatiation, was a rather tense affair that could have easily erupted into a deadly war; moreover, this skirmish added imense uncertaintry and risk to markets. If this wasn’t enough, we are now in the midst of a global health emergency courtesy of the coronavirus which poses a serious threat to large numbers of people and is playing a large part in disrupting the Chinese economy.

The final instalment in the trinity of geopolitical market perils was the impeachment trial of President Donald Trump. While the verdict in the Republican held Senate was never really in doubt, given the stakes of the trial, markets were under plenty of stress –  both actual and potential. While Trump polarizes opinion, what is clear is that markets would not have viewed removing the 45th President from office favorably. Of course, Trump was acquitted of all charges, which draws a line under this issue; moreover, it is widely believed that the President’s impeachment has damaged Democratic hopes in the upcoming US General Election and has put Trump in pole position for a November victory, a result that would likely be market-friendly in the short term. However, if a second Trump term results in even higher levels of fiscal spending with the Federal Reserve keeping interest rates at, or near, negative levels in real terms, not only would this be at odds with the fiscally conservative modus operandi for which Republicans are famous, but it would also dash our medium term optimism.

Boris Johnson’s January announcement of a new law that would prohibit the sale of gasoline and diesel motor vehicles from 2035 underscores our confidence that we are rapidly moving towards de-carbonization. There are a range of opportunites that will present themselves to markets and investors; of course, there are also risks. We believe that the electric vehicle (EV) market is one that will be of interest to investors as electric car deployment has sky-rocketed during that past decade. There were 5 million electric cars in 2018, which represented a 63% increase from 2017. We believe that 2019 will have seen an even more dramatic rise due to increasing consumer and governmental pressure on the automobile sector to play its significant part in helping to achieve carbon neutrality. Meanwhile, gasoline and diesel cars are starting to become more expensive as governments begin to impose punative taxes to make them less attractive to consumers; at the same time electric cars are seeing their prices reduced through a combination of government subsidies and tax breaks. In 2018 45% of eletric cars, or 2.3 million, were on the road in China, while Europe boasted 24% of the global fleet, with 22% in the US. Norway is the global leader in terms of marketshare. While electric cars and other EVs represent improvements in terms of green house gas emissions versus their fossil fuel counterparts, the best results will only occur when electricity grids are also less carbon intensive or fully green and/or sustainable.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, sees coronavirus as a major threat to the global economy. ‘We believe that the virus will take 1% off China’s GDP growth rate in 2020, which will see it fall below 6% for the first time in a long while. Furthermore, we see China’s first quarter GDP falling to 4%.’ He continued: ‘Since China is the world’s second largest economy, this will negatively impact global GDP growth.’ Indeed, though markets vividly remember the SARS outbreak of 2003, the economic stakes were far less significant as back in those days China’s economy was considerably smaller, ranking only 6th in the world and with a GDP that was well below $2tr. By contrast, in 2019 China’s GDP was over $14tr and represented over 16% of the global output, which presents a worrying picture for those fearful of coronavirus sparking a global meltdown. While coronavirus presents short term – and possibly medium term – issues for both China and all global economies, the result may be particularly harmful for China. Indeed, US businesses moving supply chains from China to other countries – like Vietnam, for instance – that began with the US-China trade war may well be accelerated due to the major interruptions that coronavirus has created for both product and component manufacturing. O’Leary said: ‘Once a supply-chain is moved outside of a particular country, it doesn’t automatically return once the initial problem is resolved.’

Despite the clear issues created by coronavirus, O’Leary says that China’s government and central bank have responded appropriately to thwart the economic rot by lowering interest rates, offering tax breaks and consumer subsidies and flushing their market with liquidity. And yet, even a totalitarian government can only control so much, as despite all of these measures including President Xi Jinping promising to help mitigate large-scale layoffs, it is likely that the small businesses; i.e. the lifeblood of the Chinese economy, will still be rocked by layoffs, bankruptcies and increased unemployment.

Coronavirus has complicated everyday life in Wuhan – the Chinese city in which the global health emergency began – severely impacting the local economy. Due to quarantine, businesses being shut for weeks beyond the expected Chinese New Year holiday season and citizens remaining indoors to avoid contracting the virus, China’s streets are empty and deprived of consumer spending. As a result the restaurant and retail sectors have been hard hit; moreover, they have entirely missed out on the Chinese New Year-induced spending spree (the local equivalent to our Christmas shopping season) which is a disastrous and often fatal blow for the many business who are utterly dependent on this annual sales spike. Moreover, on the recommendation of a range of national governments, foreigners are staying away from China, which has resulted in tourism spending drying up too. Indeed, many airlines including Delta and British Airways have suspended all flights to China until the coronavirus situation improves. ‘The Chinese economy is at the mercy of the coronavirus. Indeed, it is easy to see how the global economy may be in a similar situation in no time at all,’ says O’Leary.

According to O’Leary, while EVs currently make up a mere 2-3% of total global automobile production, it is a no-brainer to expect their marketshare to increase dramatically. He believes that companies that join Tesla to compete to become the standard-bearers of the industry will see increased growth which may lead to increased stock value. ‘The big beneficiaries will be chip companies that specialize in automotive applications and software producers that manage efficiency and safety,’ says O’Leary. Businesses that produce small efficient motors and specialized engine lubricants should also benefit by the emergence of EVs ramping up their global presence.

Henry James International Management has been an early advocate of ESG investing through our HJIM International ESG Large Cap strategy, whose track record extends back to September 2008. Our faith in ESG is not only because we see value in offering the chance for people to invest using their world view as a crucial overlay, but we also believe that it is important to ride both the cutting-edge and clear direction in which we see the market trending. As such, we believe in finding the industries and companies that will benefit from a move to a range of environmentally friendly solutions. But O’Leary offers a stark warning: ‘In order for the green revolution to be both environmentally impactful and economically beneficial we need to remember that EVs are not a solution unto themselves. For example, while EVs have become prevalent in China and even India, it is easy to forget that much of their electricity production is achieved through burning coal.’  Furthermore, O’Leary believes Trump must get on the same page as British Prime Minister Boris Johnson, who recently put into law a ban on the sale of gasoline and diesel engines after 2035, as otherwise this may become the next example of something that sees China run circles around the ponderous and clumsy West as it clearly is doing with its 5G technology. O’Leary believes that there is great growth to be had in the EV sector, but it is a question of whether the future will see us driving US- or Chinese-made electric cars.

O’Leary says that the price of oil will likely be greatly affected by the emergence of EVs becoming mainstream and gas and diesel fuel consumption gradually decreasing. ‘The one thing we know,’ says O’Leary, ‘is that while oil demand may decrease, it will never go completely away as oil and oil products are required in all vehicles and machines. This will not go away even when EVs take over our roads and highways.’ O’Leary believes that achieving carbon neutrality is something that will require governments, businesses and consumers working together. He said, ‘As we have seen through the coronavirus outbreak, the State (this time China) doesn’t always know best. Indeed, while the State may not always know how best to achieve the global goal of helping stop global warming, it is a objective that is as important as anything we are currently faced with and failure is not an option.’

As we enter the second half of the First Quarter, both economic threats and opportunities abound. While coronavirus’ potential to even further threaten global health and markets remains palpable, we anticipate that its momentum will eventually be thwarted and that the affected economies will recover. Furthermore, regardless of one’s views relating to global warming, we can hopefully all agree that there is money to be made in innovation, even if it is the green-friendly, carbon-neutralizing variety. While our concerns about high government debt and lower interest rates persist, we agree with Federal Reserve Chairman Jerome Powell that the US and global economies remain strong; as such, we see 2020 continuing 2019’s success.

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 December Market Commentary

Market Overview 

Whoever first articulated ‘no pain, no gain’ was probably talking about weightlifting or long distance running, but little did this word-smith know that this maxim would perfectly capture what investors experienced in 2019: soaring equity prices in spite of persistent economic threat, raging volatility and nagging market anxiety. 2019 was generally very good for investors; indeed, on December 31 the S&P 500 was up 724 points (28.88%) from where it was 12 months earlier. Such gaudy, portfolio pleasing figures, however, entirely fail to account for the true story of 2019: it was a year in which there was always at least one major (often multiple) geopolitical or economic issue seemingly poised to bring markets to their knees. For example, the MSCI EAFE index’s returns of 3.27% in December, 8.21% in the 4th Quarter and 22.66% in 2019 entirely obscure the pessimism with which 2019 began, not to mention the realities of the government shutdown and the feud between President Donald Trump and the Federal Reserve over monetary policy. Indeed, by looking at the MSCI Emerging Markets index’s return of 7.53% in December, 11.93% in the 4th Quarter and 18.9% in 2019, one cannot see the very real economic scars left by the US – China trade war, nor can one recall the way in which it constantly threatened to boil over. Looking at the returns of the MSCI World ex USA Small Cap index of 4.65% in December, 11.45% in the 4th Quarter and 25.94% in 2019, there is neither evidence of the uncertainty caused by Brexit and the disastrous prospect of Britain leaving the European Union (EU) without a deal, nor any indication of how Germany’s manufacturing recession further stifled Eurozone’s anemic growth. And yet, markets muscled through these very genuine headwinds and delivered impressive gains on the back of what clearly was a fundamentally strong US and global economy and Jerome Powell’s willingness to be flexible with the Fed’s monetary policy by lowering interest rates by 75 basis points. And yet, so persistent were 2019 economic threats that the slightest hint of positive news on a topic like the US – China trade war or Brexit generally resulted in a market bounce, something that highlights the discrepancy between the terms ‘markets’ and ‘economies’ and how positive returns for the former does not necessarily indicate robustness in the latter.

We believe in 2020 the US and global economies are likely to continue to boast the fortitude that saw them safely navigate the stormy waters of 2019, which we believe could set them up for another year on a steady upward trajectory. Despite cause for optimism it would be naïve to believe that the problems that dogged us last year have simply faded away. Indeed, a matter of hours into 2020 we saw as much when a US drone killed Iranian General Qasem Soleimani (the Islamic Republic’s de facto number two), which prompted somewhat hysterical fears of an impending World War 3, not to mention the price of Brent Crude spiking above $70 a barrel. Some may argue the virtues of pursuing a particular foreign policy agenda, but one thing is clear: markets dread the instability and chaos caused by even the suggestion of war. While tensions have apparently deescalated, and the price of oil has returned to a more reasonable price, a US-Iran conflict could flair up at any moment, which would knock the wind of out of the current optimism for the new year. To make matters even more precarious, though the US and China are inching towards a détente, it is pretty much a given that this trade war will plague markets in 2020 just as it did in 2019. While markets can take comfort in the knowledge that the United Kingdom (UK) will Brexit in a smooth and orderly fashion on January 31, 2020, time is short to work out an actual trade deal with the EU, the deadline for which is the end of 2020, which puts the possibility of a  ‘No Deal’ Brexit back on the menu. Moreover, while Germany appears to be bouncing back, failure for the global manufacturing bellwether to recover and begin growing again will be an albatross for the EU and global economies.

Investment Outlook

According to James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, ‘We are looking at stable global GDP growth above 3%, with 2% in the US and a modest 1% in the EU.’ He is anticipating a slight increase in growth in the UK through a so-called ‘Brexit Bump’ and the resulting economic stability markets have been craving. O’Leary also sees an increase in Japan’s growth with greater exports, but believes that we will see China’s growth drop below 6% for the first time in a long time. ‘We are anticipating a return to long-term market trend returns for developed markets and possibly above market trend returns for emerging market economies,’ says O’Leary.

In O’Leary’s view, the x-factor for the US economy in 2020 will be the forthcoming elections. ‘If the Democrats win the White House, take control of the Senate and maintain the keys to the House of Representatives, we would expect a raise in both corporate and personal income taxes.’ This, he believes, would result in a reduction in corporate earnings, which would negatively impact markets. However, if Trump is re-elected, says O’Leary, the US economy should be in an excellent position to thrive. In the build up to said election, however, O’Leary does not expect to see any large movements in US interest rates in 2020. ‘We expect the current 1.75% rate will remain steady with the possibility of a 25bps cut.  This is because if the Fed Funds rate were cut by too much it would look partisan during a Presidential election.’ Moreover, significant interest rate reductions would cut even closer to zero percent, which would leave the US and global economies with minimal defence in a recession scenario.

O’Leary welcomes a thawing of the US-China trade war and believes this is a big step in the right direction; however, he does not believe that anything substantive is in the so-called Phase 1 of the deal. ‘It does not address intellectual property theft, corporate governance or a method for penalizing China for violations. Instead it appears to be a deal that freezes tariffs and compels China to buy a lot of US pork.’ The existing tariffs, says O’Leary, will continue as a ‘tax’ on US consumers that will hurt the lower end of the consuming public. It will also hurt China, he continued, and pull down its 2020 GDP to below 6% for the first time since 1990. Moreover, the trade war has inflicted serious damage on China’s economy and will continue to do so until it is fully resolved. But one country’s loss is a gain for others. ‘The trade war is moving US supply chains from China to other Asian countries and, notably, to Mexico, too,’ O’Leary said.

O’Leary is hopeful that Germany will begin to recover in 2020. ‘We are looking for Germany to stabilize and move to positive growth in its manufacturing sector, which on a relative basis is two times larger than that of the US and therefore really important for their economy.’ He continued: ‘With global growth intact Germany and the Eurozone should benefit; and with the exception of France, Italy and Spain, the Eurozone has a relatively low unemployment rate, increasing inflation of 1% to a more targeted rate and positive GDP growth. Moreover, with Brexit uncertainty as a thing of the past there are fewer unanswered questions and therefore more certainty, which should result in better markets.’

With Brexit virtually guaranteed to happen at the end of January, O’Leary is forecasting continued low UK unemployment, stable GDP growth (with an increase in 2021) and an easing in fiscal policy; he also expects PM Johnson to fulfil his planned stimulus promises. O’Leary said: ‘The great Brexit versus Remain battle is over as the UK will leave the EU. It is in both Europe’s and the UK’s best interest to make a bad situation work for both. If both parties act reasonably, Brexit should work for both and their respective economies should benefit as a result.’

O’Leary is delighted that the US and Iran have managed to deescalate tensions and though the price of oil skyrocketed it has come down again as fears over oil supply disruption have abated. The question remains, how sustainable is this relative calm and does Trump see conflict with Iran as something that will help or hurt his re-election campaign. O’Leary said, ‘If it hurts him, the episode will subside and if he thinks it will help, we may see renewed tension.’ O’Leary’s clear preference is peace and tranquillity so markets can continue to thrive.

While geopolitical risk and headwinds are ever-present for the year ahead, they are perhaps less threatening than they were in 2019. What is more, the US and global economies appear to be in a better place, too. This combines to create positive mood music for markets in 2020, and yet, much like how it was last year, the question will be the extent to which markets will be able to resume their resilience and trample over present and future threats desperate to derail them and diminish investor profits.

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 November Market Commentary

Market Overview

 Perhaps the best thing about November’s market performance is that at least it did not damage the 2019 gains that seemed a rather far-fetched prospect a year ago. The MSCI EAFE index dramatically zigzagged up and down all month, and it appears that the month coincidentally happened to end while it was up an uninspiring 1.14%. The MSCI Emerging Market index followed a similar roller-coast path, but unfortunately finished the month down by -0.13%. The MSCI World ex USA Small Cap index posted modest gains that most will gladly take given the geo-political and economic conditions with which markets have been faced, up 2.28%.

November was set to be a turning point in the United States (US) – China trade dispute until a certain President was apparently moved to announce his support for the Hong Kong protestors. On November 27, 2019 President Donald Trump signed two bills on Hong Kong human rights, one that put sanctions on Chinese and Hong Kong officials who abuse human rights and another that prohibits the sale of nonlethal munitions to Hong Kong police. Despite Trump admitting that he signed these bills out of ‘respect for (Chinese) President Xi, China and the people of Hong Kong’, his actions incurred Beijing’s ire and the summoning of the US ambassador to communicate that the move would undermine trade negotiations.

November watched the Hong Kong local elections with unprecedented interest. Generally rarely anyone outside of Hong Kong gives a hoot about them as the election winners will ultimately manage municipal tedium like bus routes and garbage collection and will have zero ability to meaningfully push Hong Kong toward the democracy the protestors (along with the West) apparently crave. Nonetheless, in light of the elections taking place during the most heated anti-Beijing protest Hong Kong has ever experienced, the elections became a proxy-referendum on the status quo and Communist China’s political stranglehold over the Special Administrative Region. The pro-democracy camp won its biggest ever victory, taking 17 of Hong Kong’s 18 district councils. While this will have severely undermined the already beleaguered Hong Kong Chief Executive Carrie Lam and her viability as head of government, the truth is that her position is as tenable as President Xi’s autocratic whims say it is. Furthermore, while the election results in themselves can and will do nothing to achieve the democracy for which so many Hongkongers are demanding, the decisiveness of the pro-democracy’s victory will have sent shock waves to Beijing. The question is which is the more likely result: President Xi listening to and fully accommodating the protestors’ wishes or bringing forth Tiananmen Square 2.0?

Henry James International Management November Market Commentary
November saw the largest anti-Beijing protest in Hong Kong’s history.

After the hubris inspired by the surprise spike in German manufacturing orders in September and the hope that this signified a bottoming out, October saw the biggest downturn in a decade. According to the Federal Statistics Office, German industrial output fell by -5.3% in October versus the same month in 2018. This is horrible news for a German economy that thought it had turned a corner, as well as for the European Union (EU) who has been dealing with the impeding effects of Brexit; of course, an economically weak Germany holds dire consequence for the global economy. Germany’s political situation does not offer any help as the junior partner in government with Angela Merkel’s Christian Democratic Union (CDU) party, the Social Democratic Party (SDP), recently elected new party leaders that are hostile to the Chancellor and will vote on whether to remain in coalition. If the SDP chooses to abandon the coalition either the CDU will form a minority government or there will be a snap election, two options that will not offer Germany the short-term economic stability it may crave.

British Prime Minister Boris Johnson’s dramatic election victory on December 12, 2019 has given a strong indication that Britain’s three and a half years of Brexit limbo will finish on January 31, 2020. Johnson’s catch phrase of ‘getting Brexit done’ apparently appealed to British voters who gave the Conservative Party the largest Parliamentary majority enjoyed by any United Kingdom political party since the 1980s. When the exit polls revealed the likely extent of Johnson’s victory, the price of Sterling shot up to its 12 month high versus USD. Moreover, despite the fact that Brexit is generally not seen as market friendly, pundits have predicted that a Conservative victory might see Britain’s economy enjoy a short-term growth spurt in Q1 of 2020, though it would seem unlikely that it would be sustained throughout the year.

Federal Reserve Chairman Jerome Powell struck and optimistic chord about the economy when he said he saw ‘the glass as much more than half full’. According to Powell, his ever-flexible monetary policy that lowered interest rates by 75 basis points since July 2019 is maintaining the strength of the US economy and is protecting it against a serious downturn; moreover, it is subduing the damaging effects of trade and tariff uncertainty. The Fed Chairman confirmed that his monetary policy is helping to improve both consumer and business sentiment and to catalyze spending in interest-rate sensitive sectors such as housing and consume durable goods. Despite the already robust US labor market adding 266,000 jobs in November – a figure that smashed expectations – along with the joblessness-rate at a 50-year low, Powell indicated that he believes there is still plenty of room for growth on these impressive gains. He suggested that elected officials can build on the momentum through implementing the policies that will support and reward the labor force to get the training and education required to meet the challenges of technological innovation and global competition.

Henry James International Management November Market Commentary
Getting trade back on track is vital for Presidents Trump and Xi’s political survival, says O’Leary.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management sees the beginning of a US-China trade truce on the horizon, the recent tension resulting from Trump’s Hong Kong protest bills, notwithstanding. ‘ Presidents Trump and Xi have mounting incentive to bury the hatchet and to work together to resolve the trade dispute. Firstly, Trump’s re-election begins and ends with a strong US economy; secondly, one of the few items that can undermine President Xi’s lifetime term in office – not to mention the Communist Party’s complete control of China – is a weakened economy.’ He continued, ‘As such, a prolonged trade conflict between the world’s two largest economies is not just something that isn’t in anyone’s interest. Getting trade back on track is vital to political survival.’ Moreover, according to O’Leary, a fair and balanced trade deal should not only go a long way to balance US imports and exports with China, it will create American jobs and mitigate Chinese intellectual property (IP) theft, something for which Beijing has already increased the penalty and on which it has promised to crack down. While O’Leary remains dubious about whether China will carry through with its efforts to mitigate IP theft given that it is widely believed that it is state-sponsored, he is encouraged that other countries – Germany, in particular – are becoming aware of the seriousness of the situation. ‘A multi-lateral approach to stopping Chinese IP theft may be the best way forward,’ says O’Leary.

O’Leary was shocked by the recent German industrial output figures as he was under the impression that its manufacturing sector was back on track. ‘German large manufacturing equities have seen their stock prices rally over that past three months and based on the fact that stock performance is generally an indicator of future GDP growth, 2020 appeared set to be a good year for Germany.’ However, not only have October’s figures thrown this in doubt, Germany’s political situation will likely only make recovery and improved business confidence even more difficult.

O’Leary agrees with Federal Reserve Chairman Powell’s assessment of the US economy is in a good place; and he believes that Powell has done a good job managing the sugar high of the Trump Tax Cuts as well as issues created through tariff and trade uncertainty. O’Leary says that the sustained economic growth is starting to benefit lower earners, but he agrees with Powell that more can be done on a policy front to invest in workers both to ensure that American prosperity benefits a wider breadth of society, but also so that the American economy is ready for the challenges of the 21st century.

In many ways, November has been a microcosm of 2019: volatile, complicated, filled with economic headwinds but also reasons for optimism. Indeed, much like the year so far, the many causes for concern, notwithstanding, markets are generally delivering positive returns for investors. While it remains difficult to be 100% optimistic about 2020, we believe that many institutional investors will be more than delighted the US and China are likely on the brink of a trade deal and that the US economy is fundamentally strong (despite inflation lower than 2% and interest rates being too low for comfort). Of course, threats to markets remain – namely a prolonged German economic downturn, a Brexit that is messy despite Johnson’s election victory and Trump continuing his policy of weaponizing tariffs. From our perspective, we see the forces for economic growth capable of subduing those of contraction and remain hopeful that 2020 will be positive for investors.

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 October Market Commentary

Market Overview 

October was a good month for markets, and not just in the ‘growth despite raging volatility’ way that has become the 2019 norm. We believe we are seeing evidence of an economy that has resiliently chugged along despite being burdened and destabilized by a range of geopolitical and economic issues. Market performance spiked encouragingly in the month of October: the MSCI EAFE was up 3.60%, while the MSCI Emerging Markets and MSCI World ex USA Small Cap indices jumped by 4.23% and 4.12%, respectively.

While nothing is official, there is good anecdotal reason to believe that trade tensions are thawing between the United States (US) and China as both sides have either overtly or under conditions of anonymity (in the US’s case) admitted that the sides are working towards a phase one trade deal that would see the beginning of a tariff roll back. Of course, if this does not come to fruition in the short term that would be the par for course for this unpredictable trade dispute and would hardly be surprising, particularly as US President Donald Trump’s Trade Advisor Peter Navarro denied the report and indicated that it was nothing more than ‘Chinese propaganda’.

There is renewed optimism in German manufacturing – the global bellwether – due to the recently released figures showing a rebound in German factory orders. Demand rose by 1.3% in September, or 30 basis points higher than the predicted gain, which optimistically suggests that the euro-area economy has passed the worst of its recent troubles.  Indeed, as demand from outside the Euro area provided the biggest boost, Germany’s success will be good news for global manufacturing, too.

Henry James International Management September Market Commentary
It is difficult to see how Britain would ever Brexit without a deal at the very least.

While Brexit can be considered nothing more than a complete mess and the bringer of British, European and global economic headwinds, there is perhaps reason to be somewhat positive. Despite the fact that the continued uncertainty will only wreak further market havoc, there does not appear to be an appetite for a ‘No-Deal’ Brexit on any front, particularly now that we have passed the October 31, 2019 deadline; i.e. the time in which it was a distinct possibility. After ‘No-Deal’ cheerleader Nigel Farage indicated that his Brexit Party would not stand candidates against Prime Minister Boris Johnson’s Conservatives in more than 300 key seats, it is difficult to see how Britain would ever Brexit without a deal at the very least.

If there were any doubt about the green shoots of economic success poised to burst through the dried, rocky soil of 2019, Federal Reserve Chairman Jerome Powell set the record straight at his October 30, 2019 press conference when he said that monetary policy is in a good place to achieve moderate economic growth, a strong labor market and inflation near 2%. In other words, the US economy is in a surprisingly strong place and despite Trump’s vexations with the Fed’s chief, the latter may have helped the former’s chances at re-election.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management is hopeful that the US and China will make progress on a trade deal in the short term, but that the more serious issues will only be dealt with after the US’s 2020 General Election. He said: ‘I think that there will be some sort of an initial trade deal which will not include harder topics like trademark and patent protection.’ As a portfolio manager, O’Leary is excited by the prospects of the tariff certainty that a deal would bring and the related benefits for markets. ‘If there is a deal, while all securities will benefit, we believe that Chinese equities will do particularly well,’ he said. While O’Leary welcomes the possibility of a trade deal, he believes that Trump must hold his nerve and properly handle the problem of Chinese intellectual property theft as he is not certain that Xi Jinping can be trusted on this issue. A resolution to the US-China trade war that has hampered markets for well over a year would be a big boost to not only the economy, but also to President Trump. ‘A strong economy always favors the incumbent,’ says O’Leary; moreover, he believes a Trump re-election would likely compel China to address US IP theft concerns.

Henry James International Management September Market Commentary
We believe that Trump must hold his nerve and properly handle the problem of Chinese intellectual property theft.

Quite apart from any possibility of a resolution to the US-China trade war, O’Leary agrees with Fed Chairman Powell that the US economy is in a good place. He said: ‘The US consumer remains strong, as does America’s growth. We feel that US equities may be fairly valued given the current economic environment.’ O’Leary also believe that the upcoming 2020 US General Election will provide an added boost to both US and global markets. In O’Leary’s view, the seeds of economic resiliency were planted more than a decade ago: ‘I believe the strength of the US economy is in part a result of the plans that were put into place at the end of the Bush administration, which were continued by Obama and boosted by the Trump tax cuts.’ O’Leary continued: “Along and in conjunction with global leaders – including and especially China that has seen its economy rapidly grow from $4,600bn in 2008 to $13,605bn in 2018 – the US has greatly helped drive the global economy and its recovery.’

O’Leary sees Germany’s recent manufacturing data as a clear indication of a bottoming out of orders:  ‘It appears that France and Germany’s manufacturing is starting to improve as clarity in global trade disputes, including Brexit, start to become apparent.’ O’Leary indicated that economic growth remains positive in the European Union and that the European Central Bank (ECB) has cut interest rates and reactivated its bond-buying stimulus program to help shore up growth and get inflation back to its goal of just below 2%. ‘If manufacturing growth continues, I believe European and Chinese equities will be the big winners,’ says O’Leary.

Though O’Leary is delighted that the chances of a ‘No Deal’ Brexit are looking remote, he is less enthusiastic about the economic uncertainty emanating within and from the world’s 5th biggest economy. O’Leary hopes that the December 2019 General Election will bring clarity to Brexit and the economic stability Britain craves, but he believes this may be wishful thinking. Perhaps the clearest way out of the mess would be the Conservatives securing a majority in Parliament, which would likely see Boris Johnson’s Brexit deal take affect by the current January 31, 2020 deadline; however, the Parliamentary math isn’t necessarily in Johnson’s favor. The only other viable party to win the election is the Labour Party, a scenario that – while carrying with it the market-friendly possibility of reversing Brexit altogether – would see Brexit uncertainty spill over beyond the current deadline. With British voters never less loyal to the two main political parties, O’Leary sees a hung Parliament as the likely outcome in this election which would mean yet another impotent minority government who simply lacks the power – to use Johnson’s campaign slogan – to Get Brexit Done.

While we remain aware of the likelihood that the investment outlook can change for the worse at any moment, we currently have a positive outlook without too many qualifiers or caveats. With the stimulus that a US General Election will bring the world’s GDP, the improving trade relations between the US and China and the ECB’s stimulus package, we see the potential for increased global growth in 2020 and believe a recession in the short term is unlikely.

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 September Market Commentary

Market Overview

As 2019’s third quarter came to an end, the salient thought in our mind at Henry James International Management was ‘growth’, despite raging political, economic and market volatility. The trend evident across markets is that while 2019’s 3rd quarter was a downer, positive September growth partially offset the quarter’s losses. Despite this disappointing quarter, Year-to-Date (YTD) markets are up significantly. MSCI EAFE was +2.92% in September, -1.00% in the 3rd Quarter and +13.35% YTD; MSCI Emerging Markets +1.94% in September, -4.11% in the 3rd Quarter and +6.23% YTD; MSCI World ex USA Small Cap was +2.6% in September, -0.19% in the 3rd Quarter and +13.01% YTD.

Just keeping up with the news has presented enough turbulence to make even those with strongest constitutions feel motion sickness. Some of the prominent market influencing headlines continue to be the US-China trade conflict and a range of other tariff scrums between nations, Brexit, Iran’s provocation of the West and United States (US) President Trump’s subsequent saber rattling. The pro-democracy riots in Hong Kong show no sign of abating and one assumes it is only a matter of time before we see a version of Tiananmen Square again with China’s using its military to put the Special Administrative Region firmly under its thumb. Staying in Asia, North Korea is getting antsy and has resumed missile testing again at the expense of the Sea of Japan. Domestically any chance of short-term political stability was derailed when US Congressional Democrats launched an impeachment inquiry on the back of accusations that Trump encouraged the Ukrainian president to interfere on his behalf in the 2020 US General Election.  Germany, the bellwether of global manufacturing, has seen its output continue to drop; American and Chinese manufacturing has followed suit.

Henry James International Management September Market Commentary
Global Manufacturing is slowing.

And yet, somehow markets – despite personifying the before-mentioned volatility – have pressed forward in a mostly unperturbed fashion. Of course, there is some reason for optimism. The Fed lowered interest rates again by 25 basis points to between 1.75% and 2.00%, which should give domestic and global markets (particularly emerging markets) an excellent spark of positive momentum. Also noteworthy is a new US-Japan trade deal that is set to take effect on January 1, 2020; while it will technically have to be approved by Japanese lawmakers before it is official, it is expected to be ratified without difficulty.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, sees self-inflicted political turmoil as the main factor impeding global economic growth: ‘It seems that politicians globally cannot sit back and enjoy a stable and slowly expanding global economy,’ he said. According to O’Leary, the economic slow down, that we discussed at length in our August Market Commentary, will continue as long as Brexit is uncertain and continues to pull both the United Kingdom and European Union down, the US is mired in political turmoil, the US and China fail to achieve a mutually beneficial trade resolution and Iran continues to destabilize the Middle East and threaten oil through its support of regional terrorism.

Henry James International Management September Market Commentary
Markets have so far push through Iran’s destabilizing influence.

Despite the volatility, O’Leary sees markets as resilient, but to a point. ‘Markets took Iran’s bombing of the Saudi oil processing facility in stride, and were unaffected by Trump’s United Nation’s speech where he lambasted Iran and China,’ said O’Leary. Of course, the world remains awash with oil despite the actions with which Iran has been accused and, in spite of the US President’s bellicose rhetoric, shooting-from-the-hip style, and apparently being ‘locked and loaded’, he has made it very clear that he does not seek war.

At this point – around mid-September – O’Leary believed that markets were cautiously hoping to find some element of terra firma at their feet to use as a sturdy platform to reverse the global slowdown. What they were greeted with was what O’Leary views as Congressional Democrats who could not leave well enough alone and took impeachment action against Trump. Not only does this tremendously damage US-China trade war negotiations before the 2020 General Election – as a distracted, politically impeded President will not be able to negotiate from a position of strength in the face of Chinese Premier Xi Jinping’s absolute rule – it will also push the required robust domestic economic agenda to help stimulate the US economy to the back burner. When combined with the Chinese debt crisis, Hong Kong riots and Brexit taking yet another turn for the worst and paralyzing British business, one wonders how much more markets can take before the global slowdown becomes a global recession. Thankfully, the global economy is still expanding and is projected to grow just below 3% in 2020, though new International Monetary Fund Chief Kristalina Georgieva’s October 8th speech could certainly erode some optimism.

O’Leary is hopeful that the international economy will shake off the political uncertainty and that we will see a globally coordinated fiscal and monetary response. The ray of good news for the US and global economy is this: as pressure turns coal into diamonds, so may Trump’s ardent desire to get re-elected drive him to achieve a trade deal with China and get his own economy back on track with the help of falling Fed interest rates.

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 August Market Commentary

Market Overview

 August was not a positive month for markets. The MSCI EAFE index fell by -2.58%, the MSCI World ex USA Small Cap dipped by -2.30%; the MSCI EM index shrunk by -4.85%. Dramatic though these losses may be, they are arguably slight given the scale of market-influencing political volatility August witnessed on a global scale. The main protagonists were the United States (US) and China, whose trade conflict has escalated to dangerous heights in terms of new tariffs and fiery tweets. Worse yet, the path to a resolution is not nearly as obvious as many may have deceived themselves into believing only a matter of months ago. Brexit continues to impede both the United Kingdom (UK) and European Union’s (EU) economies and there is no end to the uncertainty on the horizon, despite new British Prime Minister (PM) Boris Johnson’s insistence that Brexit will happened, come what may, at midnight on October 31, 2019. August also presented markets with a range of worrying facts: 10 year US bonds fell below their 2 year counterparts for the first time in a decade (a telltale sign of imminent recession), the US economy is slowing, China is also in the midst of an economic slowdown as well as a serious debt crisis, Germany is in a fully-fledged manufacturing recession and Britain appears headed for their first recession since the financial crisis (July’s positive UK economic growth, notwithstanding). Despite all of this cause for genuine concern, there is some reason for optimism. Firstly, low US interest rates – despite making markets defenseless in a recession scenario – should help catalyze the US economy; furthermore, they should help Emerging Market (EM) economies who are already benefiting from Chinese supply chain disruptions. Indeed, we believe that the Federal Reserve will lower rates at least one more time in 2019, with possibly more reductions in 2020. Secondly, the World Bank is anticipating global growth of just below 3% for both 2019 and 2020, which would suggest that there is still a range of underpriced opportunities available for investors. Lastly, as we saw when Sterling surged in early September when UK PM Johnson’s bold Brexit plans were frustrated by the UK’s Parliament, in a world burdened by such troubling politics, any news that is even vaguely positive will create market optimism, however ephemeral.

Despite the projected growth that cushions markets from international recession, we believe we are experiencing a global growth slowdown. The US enjoyed tremendous short-term benefit in 2018 (GDP growing 2.9%) through the Trump tax cuts, which flooded the economy with corporate and consumer capital. However, it came at a big cost of adding more than a Trillion USD to the fiscal deficit, which a cynic might think is not necessarily symptomatic of the fiscal prudence for which Republicans are famous. Beyond that, a range of non-political voices, including that of the International Monetary Fund, were transparent in their view at the tax cuts’ inception that 2018’s turbo-charged economy would not only lead to an economic slow-down and recession, it would in fact hasten it. We believe we are experiencing this today, which has become even more problematic given the way in which the Fed was effectively coerced to keep up with 2018’s economy by raising interest rates to combat inflation. Today, with American growth stalling and further impeded by the US-China trade war, the Fed is really only able to stimulate growth by lowering the interest rates it – we think – unnaturally hiked up only last year which will leave it without any tools to combat the recession which many believe is on the horizon.

China and Germany – and certainly the two nations combined – corroborate our view that we are in the midst of a global slowdown. China has arguably been the main driver of global growth since the financial crash of 2008 and any reduction in its GDP is felt throughout the world. Part of China’s economic overdrive in the past decade has been heavy borrowing and loans that stand little chance of ever being repaid. Moreover, Chinese consumer debt is also worryingly deep. China has tried to rein in corporate and consumer lending, but each instance has led to a global economic stumble, which compelled Beijing to loosen lending again. China is currently at a 30-year industrial production growth low (4.8%), which may be part and parcel of its desire to shift its economy from manufacturing to services, but this will be a painful transition not only for China, itself, but for a world economy that is dependent on Chinese growth.

Henry James International Management August Market Commentary
Despite the projected growth that cushions markets from international recession, we believe we are experiencing a global growth slowdown.

Germany, meanwhile, saw its economy shrink by -0.1% in the second quarter of 2019 and a deeper drop is predicted in the third quarter. Its fate is largely in the hands of China as Germany exports nearly $100bn of goods to the Communist state and a slowing of Chinese consumer and corporate spending will hit hard. The Chinese buying fewer German products – chiefly cars, machines tools and manufacturing equipment – will continue to damage Germany’s manufacturing which is currently at seven consecutive months of decline. It must also be said that Germany imports more than $100bn of Chinese goods, and an economically declining Germany spells bad news for China, particularly given its trade war with the United States.

Brexit is not just bad for Britain, whose best-case scenario appears to be recession – it is also dangerous for Germany. Germany exports nearly $100bn of goods to Britain and a Brexit that imposes any element of trade friction and uncertainty will make this number fall; and possible tariffs will make the cost of business significantly higher. Indeed the uncertainly and chaos caused by Brexit are likely partially to blame for Germany’s recent poor GDP and manufacturing figures. With the October 31st Brexit deadline quickly approaching, the projections of economic Armageddon as well as food and medicine shortages are becoming less abstract and more tangible (particularly since the release of information pertaining to Operation Yellowhammer). Markets reacted positively to the news that Parliament managed to thwart a ‘No-Deal’ Brexit (for now) as well as possibly extending the deadline beyond Halloween. But when markets wake-up, they will realize that an end to the deadlock remains illusive and until a market-friendly resolution is achieved the British, European and World economies will continue to suffer.

Of course, among the largest contributors to US and Chinese market woes is their trade war, the stakes of which rose considerably this past month. August kicked off with Trump announcing a 10% tariff on over $300bn of Chinese goods, citing a lack of progress in trade negotiations. A couple weeks later, the US President did a partial about-face, saying that he would delay the tariff on cell phones, video games and apparel until December 15 to mitigate the damage it would have on US consumers in the run-up to Christmas. Trump hoped this gesture would impress Chinese counterpart President Xi Jinping and make him more dovish. This was not realized as the Chinese increased their hostility by ordering all companies to stop buying US agricultural goods (worth up to $20bn) and new tariffs on $75bn of US goods, which went into effect on September 1st along with the new US tariffs. Trump’s response was ordering US companies to no longer do business in and with China (an order that does not command legal weight) and set the preexisting 25% tariffs on $250bn of Chinese goods to go to 30% on October 1, 2019 and the newly introduced 10% tariff to rise to 15% on December 15, 2019. As of September 2019 we are at the high water mark of this trade war and markets will hope that hostilities begin cooling immediately.

Investment Outlook

James O’Leary, CFA, Chief Investment Officer and Senior Portfolio Manager at Henry James International Management, believes we are starting to experience a global growth slowdown. ‘Germany is the bellwether of global manufacturing and their manufacturing sector has slipped into recession,’ he said. Due to uncertainty that has negatively affected the Chinese economy on the back of the trade war and their debt crisis, says O’Leary, China simply has neither the need nor the money for German manufacturing machines and luxury cars. According to O’Leary the German and Chinese economies are co-dependents and their respective woes and uncertainty will drag the other down. Closer to home, German trade with the UK has slowed down simply because the British economy is shrinking, which will likely continue to be the case until a market friendly Brexit is achieved, says O’Leary.

Henry James International Management August Marketing Commentary
‘The German and Chinese economies are co-dependents and their respective woes and uncertainty will drag the other down.’

Regarding Brexit, ‘Who could possibly consider investing in the UK right now? It is not even clear whether they will be able to import food in a few weeks,’ said O’Leary. He continued, ‘Uncertainty breeds consumer anxiety, and this inevitably results in consumers tightening their belts and spending less money.’ While the likelihood of a No-Deal Brexit will have gone down considerably after Parliament wrested control from PM Johnson, the longer Britain and the EU kick the can down the road, market pessimism will persists and people will choose to save and not spend their money. The result: further economic slow down in Britain, Europe and the rest of the world.

O’Leary is not averse to the concept of playing hardball with China, particularly in relation to their recent history of intellectual property theft; indeed, he is even open to some element of ‘necessary’ market pain that may result. However, in his view IP theft is not a uniquely American problem. ‘Multilateral action against China that incorporated the likes of Germany, Britain and Japan would have worked far better in terms of actually getting China onside and limiting market volatility.’ What is more, says O’Leary, while the Obama administration’s Trans-Pacific Partnership (TPP) was not an effective way to subdue China, there is no reason why the US could not have remained within the robust trading block and still go after China in a multi-lateral fashion. The US-China trade dispute has put uncertainty into both countries manufacturing, says O’Leary, because tariffs automatically reduce the number of people on either side of the divide who will be open to buying the other’s products. ‘If one is going to produce goods, better be sure there will be somebody who will buy them,’ says O’Leary. Of course, a positive side-effect of the trade war has been disrupting Chinese supply chains, which makes the world economy less reliant on Chinese manufacturing and also gives Asian EM economies like Vietnam a big boost.

According to O’Leary, one of the most worrying elements of the global slow down from a US perspective is that the Trump Tax Cuts, despite boosting the economy in 2018, added significantly to its public debt. Indeed, much of this debt is foreign, which means that it actually has to be paid back, he says. Of the US’s $6.2tn foreign debt, $1.18tn is owned by China and $1.03tn is by Japan. O’Leary also laments the way in which Trump’s Tax Cuts effectively coerced Fed Chairman Jerome Powell to combat inflation through raising interest rates through gritted teeth.

At Henry James International Management our investment strategy bears the full range of these market issues in mind while it ‘quantamentally’ locates opportunities while minimizing risk. ‘We use a very disciplined country-weighted system that is based on equally weighted equities in each country based on their 52-Week Sharp Ratio,’ says O’Leary. He continued: ‘So when a country’s relative strength decreases the weighting in our portfolios for that country also decreases.’ He points to the UK, Germany and China, whose equities have decreased proportionally in our portfolios. Conversely, our portfolios are over-weighted in India, which has seen excellent growth during the past several years, and Russia, which is exhibiting growth in several sectors. Sector-wise, our ‘quantamental’ strategy has seen our funds naturally reduce investment in iron ore and, of course, manufacturing, while we have increased investment in biotech, internet retail and pharmaceuticals.

As we head into 2019’s homestretch, we are grateful that the year has mostly defied analyst predictions from back in 2018, in so far as markets have delivered for investors thus far. And yet, far from the political volatility abating, it has only increased. We would like to see world economies turn away from the tit-for-tat that has seen countries use tariffs to exploit others’ vulnerabilities. Moreover, we would like to see a world of inclusive economic relations for everyone’s mutual benefit, as using trade as a substitute for war is reminiscent of the politics of the Smoot-Hawley Tariff Act that arguably made the Great Depression both deeper and longer. As O’Leary puts it, ‘Let’s hope wiser heads prevail!’ Thankfully for investors in the medium term there is some global growth and lower US interest rates should help impede the global slowdown.

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.