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.


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