March Market Commentary

Market Overview

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

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

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

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

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

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

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

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

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

 Investment Outlook

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

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

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

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


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.

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What South Korea Learnt from Sochi’s Winter Games

Hosting the Olympic Games brings with it a recipe for prosperity – and opportunities for disaster.   past, trends have dictated that countries overspend and rarely see returns in the long term. South Korea has decided to take an innovative approach. They cut heavily on spending and infrastructure that usually lies derelict for years after the Games. Maybe they learnt something from recent events in Russia?




The Sochi Olympic Games in 2014 cost Russia a staggering $51bn. During the run-up to the Games, it was made clear that Sochi was to be the most extravagant Olympics ever. The 40’000-mile torch run from Kaliningrad to Chukotka which passed through all 83 regions of the country set the tone for a month of excessive and unnecessary folly. $30bn of the money went into embezzlements to Putin’s close associates while the rest was pumped into ensuring that Russia was portrayed affluently on the world stage. The absence of fair competition in building, strict censorship and clan politics led to sharp increases in prices and low quality of work. Only weeks after the event, Sochi began to fall apart with deserted buildings, empty streets and inhabited almost exclusively by stray dogs. Russia’s taxpayers are footing the bill and seeing very little return.


South Korea has learnt from these mistakes. Pyeongchang cut costs by saying no to unnecessary infrastructure and have to build low-cost temporary stadiums in lieu of behemoths that would later sit unused and decay. The stadium cost just over $109m and is set to be used 4 times before demolition. Currently, their frugality is bringing Pyeongchang bad press as blankets were handed out during the opening ceremony as opposed to intense heating. However, this decision is symbolic of their plan to cut costs. Although (like all Olympic Games) South Korea will break their budget of $12.9bn it is still a fraction of what was spent in Russia.




DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance. 


What are South Korea Gaining from the Winter Olympics?

The world’s eye is on Pyeongchang this February as they set the stage for the Winter Olympics. After winning the bid for the Games, South Korea is set to splash out large sums of money to attract positive attention to their country. There have already been huge political breakthroughs throughout the peninsula.




Bidding for the Olympic Games is not an open auction – getting through the application process is not a “survival of the richest”. There is a myriad of factors that are considered when the panel votes for the next host – including infrastructure, financial support, and even human rights records. Amongst all the applicants, three stood out: South Korea, Germany, and France. France was deemed unsuitable almost unanimously receiving only six votes, Germany took in 25 votes and was the closest, but nowhere near close to the winners: South Korea who took home the gold with 63 votes.


Hosting the Games is a financial burden. What is South Korea looking to gain out of this? Firstly, we don’t yet know how much the Games will cost, but generally, countries will be expected to dish out no less than $5.2bn. Their profits are most likely going to be indirectly obtained through tourism and stock market attention in subsequent years. Although financial profits are likely – there are more important political and cultural changes that have already occurred.




The Korean Peninsula has been divided since the 1950-1953 war. There was no post-war peace treaty signed, and South Korea boycotted the North in 1988. The Games have seen a diplomatic breakthrough with Kim-Yo-Jong visiting alongside her “army of beauties” – a group of women hand-picked for their good looks, talent, and loyalty to the regime. This is after Kim-Jung-un himself raised the prospect of North Korea’s attendance in his New Year’s speech.


It also gives South Korea a platform to show off their world-leading technology. Samsung, South Korea’s biggest company, will use this opportunity to expand their market share which will have positive ramifications for their domestic market.


DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance.