The four major problems we had were: the trade-war, rising interest rates in the US, Brexit and Italy. However, these problems are changing colour from red, amber to certain shades of green. For that reason, we have –by en large – bought back the shares that we sold at the beginning of last summer. As a result, we have a neutral weighting on shares.
Have all problems disappeared? No, they haven’t and in view of their size they won’t melt as snow in the sun. But there’s movement on each front and in the right direction, with some cynical aspects to them. Take for instance the trade-war that is now also starting to hurt the US. Soybeans remain unsold and increases in steel prices are eroding the profit margins of car manufacturers. Stock markets have gone down. Trump will have to compromise to more than he will likely admit. He has ‘frozen’ the conflict with China, for the moment so even the global economy has started to show freezing phenomena. Obviously as a direct result of that same trade-war. Investors as well as consumers are ‘sitting on their hands’ when price levels go up and business models are affected. Not only the FED, but also the IMF is worrying as a result. A positive sign is that interest rates are likely to be hiked slower in 2019: maybe only twice instead of 4 times 0,25%. This is important for the valuation of equities and their growth potential. At the same time, longer term interest rates are now below short term rates: this so-called ‘inverse yield curve’ is frightening some investors that hear alarm bells ringing: doesn’t this point into the direction of an approaching recession? This seems a bit excessive: most previous recessions were triggered by much higher interest rate levels and it seems unlikely that rates around 2 – 3% can push the US economy into a recession.
At the same time, a special form of global monetary easing has occurred: oil prices have decreased recently by 1/3. This happens to be a strong stimulus for consumers and producers globally, except of course for oil producing countries. As a consequence, gas prices have gone down substantially, even in France and Belgium, though hard to imagine when watching the ‘yellow vests’ uproar and violence, at a time when fuel prices in France are amongst the lowest in Europe and even went down further recently. How to explain? My best guess is that France, like Italy, is incapable to compete within the Eurozone.
Social security costs and hence labor costs have been rising to unsustainable levels, resulting in substantial job losses. Poorer parts of middle-class workers lose their jobs and end up earning below the social minimum. And whilst the government increases charges and rents move higher, people notice that multinationals often pay too little taxes. This combination seems to be an explosive mix in an already hard-to-govern country, where people have a history of climbing barricades. The likely outcome? The government will have to compromise and at first postpone tax- increases and abandon them altogether later. The French budget deficit will again (for the 10th time, I guess) not meet the requirements of Euro-Stability pact, but this never seemed to have fascinated them anyway.
Did we forget something?
Next to some worries about trade and growth, we also have Brexit and Italy on our plate. As for Italy, a compromise with the ‘North’ through a slightly lower deficit (ca. 2% as opposed to the previous 2,4%) is being considered which could stop Brussels to start legal procedures. As a matter of fact, Brussels itself doesn’t even seek (to do) that. After Greece, nobody is interested in a next, much larger problem… Papering over the cracks and avoiding conflict, as we’ve always been doing with France.
This however is not possible in the Brexit-drama, with PM May still firmly in place. Maybe her name isn’t Theresa but TINA: “There Is No Alternative”, not for herself nor for the deal with the EU in fact. I suspect that it will probably be the ‘right-minded’ pro-Brexit parliamentarians that will vote down her deal, but what next? She already survived a vote of no confidence, probably because of ‘TINA’. At the end of the day – in January now – I guess that many of the self-proclaimed Brexit hard-liners will vote – with ‘Queen and Country’ in mind – in favor of May’s plan to prevent an even larger mess. It remains all very exciting and it could go either way, whereby the chances of a new referendum are even increasing a bit, though May doesn’t seem to be impressed by Tony Blair’s new Brexit vote call. That would be by far the best solution with the likely result the UK will stay ‘in’… But it remains anybody’s guess what will happen next.
As mentioned, we bought back European shares at 8 – 10% lower levels from where we had sold them previously. For global stocks, the difference was smaller, mainly as a result of the stronger dollar and the better performance of US stocks. We’ve also added exposure to Emerging Markets where prices had dropped substantially as a result of hick-ups in global trade but that have in the meantime caught up some lost ground. So not all lights are on ‘red’, some are on ‘amber’ but if we would wait till they’re on green, we would be late, and markets would have gone up. Like when we sold shares some time ago when all lights were on ‘green’ though some ‘amber’ was already discernable. An important element of investing is to anticipate events and not to wait until all has happened. So when would we go back to ‘overweight’ equities? Ideally when prices have dropped further. We understand that we’re in a mature phase of a bull market when it’s never easy to keep the economic momentum. At the same time, we realize that bonds are not the logical safe haven as they cannot offer a credible yield over the longer term. And when the dust has settled over the four major issues as discussed, this economic cycle could well last longer than some fear it will not. So, there are some bright spots: as it should be after a difficult year. On behalf of our whole team, I wish you a great festive season with many bright spots in these dark days.
DOOR: WOUTER WEIJAND, Chief Investment Officer