Investment Opinions 21 September 2018

“Whereof one cannot speak, thereof one must be silent”            Ludwig Wittgenstein.

Much is being made of the insults and slights which the American president is meting out and receiving. Most of these are relevant only because they affect the atmosphere behind the global equity and fixed income markets and these markets are subject to the sentiment of investors rather than facts.

The trade war with China instigated by Mr Trump, who opined that trade wars are easy to win, will hurt mainly the US consumer and US exporters, the Chinese having deliberately targeted the economic areas which are principally Republican strongholds. On the Chinese side, there is likely to be a decline in economic growth; quite how much is difficult to say as the figures are decided in advance by the central authorities and subsequently made to fit. Equally, Chinese economic growth is currently strong and the effect of a few tenths of one percent will be minimal.

China is also pressing on with its trade growth under the belt and road plan, which effectively will cover the world outside the USA. US economic sanctions, especially those imposed with emotion and lack of clarity will cause discomfort, but are unlikely to result in major problems.

Trade between China and the US will simply cost more for the US consumer as there are so many components in every day goods that stem from China. US inflation will rise, but from a low base; the consumer will however notice, which will have political implications.

Bigger problems are arising in the Emerging and Frontier markets, where macroeconomic (governmental level looking down) issues are disguising the fact that there are excellent companies in the third world. Specialist investors and fund managers identify these companies and invest in them even though market sentiment causes unhappiness and falling prices. The market relies on positive global attitudes and still needs to recover from an American president who has destructive tendencies but little understanding of the impact that his publicity seeking actions on the election hustings have outside his immediate horizons.

Interest rates are rising to more normal (i.e. pre financial crisis levels) in the United States. This is causing inflation there to rise too, although again to more normal levels. An inflation rate of around 2% is actually healthy. US companies are profitable and US unemployment is presently low, though the statistics belie the fact that many previously unemployed workers now have crushingly poorly paid work, which can be seen by the low level of wage inflation. The time to invest in US companies is still there, but the market is likely to become overheated as the hot money invested by the so called 16 year old inexperienced traders who follow panic rather lead markets becomes scared of higher volatility.

The European markets are now moving some three to four years behind the United States. While quantitative easing is being run down, interest rates cannot be allowed to rise, because the Italians and Greeks especially simply cannot afford to pay more for the debt they are still incurring.

My recommendation is to focus on investing in Northern European and Japanese markets and only with experienced managers who have a proven track record. There are opportunities in China and Emerging Market companies too, though volatility will always be a problem here.

Past performance is no guarantee of future profitability.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.