Note September 5,2019: Not Time for Heroics – We see the present as being no time for heroics on investment. Current politics seem fractious and on a knife edge. Misjudgments would be costly for markets and growth. Only some pressure points include internally in Italy, Brazil and Britain as countries; Britain and Europe as well as for Japan and South Korea in intertrade; China and the United States over global trade as well as ongoing stress across the Levant to Iran to South Asia.
Momentum dispositions in capital markets continue, whether via algorithmic trading, ETF activity or more classical forms. Much has been made about central bank activity and quantitative ease. Negative yields have spread well beyond Japan and Switzerland to now many European sovereign bond areas. Private capital also attempts to immunize pension related liabilities with intent to hold assets to maturity. However, such intent has yet to be tested were fixed income yields to rise. Afterall, investment portfolios have long been marked to market. Emotions could yet overcome the objectives of long term immunization and thus give rise to herd behavior.
In equity markets, the present widespread discourse has been on rationalizing movements as being a derivative of that of fixed income yields. Inter day and intraday equity market swings have been large even as consensus earnings expectations are reduced. At present valuations in equities, we see fallacy in suggestions that sentiment is bearish and hence a contrary indicator. We believe instead that the political environment as well corporate assessments, individually and globally indicate a more selective security process to be underway.
We see current politics as fractious and on a knife edge. Political misjudgments are likely to be costly for markets and growth. The impact is likely to be more conflicted than appears incorporated in markets. Only some such pressure points of contention include internally in Italy, Brazil and Britain as countries; Britain and Europe as well as for Japan and South Korea in intertrade; China and the United States over global trade as well as ongoing stress across the Levant to Iran to South Asia.
In the advanced economies even among the G-7, only France and Japan can be considered long term oriented at present. Even then, France has strong domestic pressures pushing against long needed restructuring of accepted practices in employment and business. Japan has a stable government after its elections but also has strong external pressures in its neighborhood from legacy morphing into trade paralysis with South Korea, a bellicose missile testing North Korea and competition in the South China seas. We assess the United States as facing a bitter election struggle into 2020 even as it also disengages from allies while exerting trade and tariff pressures from China to Europe. In Europe, pressures from and within Britain over Brexit have not abated but have instead flared into unstable British politics. The same characteristics albeit for different reasons exist in Italy seemingly reverting back into ever revolving and unstable coalitions. In Germany, far right politics extracted gains in the latest state elections in its east. Canada is in general election mode into October even as relations seem strained with respect to key trading and political areas like China and the United States.
Among major emerging countries that were hoped to add to stable long term global growth, pressures loom at present in the business of government. China has high stakes trade tussles being undertaken with the United States, a flaring of governance resistance in Hong Kong of symbolic significance, domestic economic stresses. These exist all ahead of its 70th anniversary in October of takeover of government by the Communist Party, an event that was anticipated as celebratory just a year ago. India did return its government with an enhanced majority but instead of an economic fillip, a wide variety of indicators in India show pressures from debt servicing to automobile and property sales. In Latin America, while Mexico has also held its election and negotiated revisions to its trade agreement with Canada and the United States, the neighboring environment from Brazil to Argentina to Venezuela appears stressful. Many emerging countries from Latin America to Africa to west Asia face capital market pressures, including erstwhile favorites like South Africa and Turkey as well as energy rich but sanction burdened Iran.
In the capital markets themselves, we see momentum dispositions as continuing, whether via algorithmic trading, ETF activity or more classical forms. Much has been made about the injection of central bank activity in the form of quantitative ease. In recent months in fixed income markets, negative yields have spread well beyond Japan and Switzerland and into now many European sovereign bond areas. In turn, fixed income yields have also declined well into emerging country aggregates and BBB Corporate fixed income but less so in the CCC Corporate space. Such behavior can be rationalized in the private investment space as perhaps reflecting in institutional accounts, attempts to immunize pension related liabilities replete with intent to hold such assets to maturity. However, such intent has yet to be tested in the event fixed income yields were to rise. Afterall and aside from the long term objectives, investment portfolios have long been marked to market. Emotions could yet overcome the objectives of long term immunization and thus give rise to herd behavior.
In equity markets, the present widespread discourse has been on rationalizing their movements as being a derivative of the administered decline in interest rates and the suppression of fixed income yields. Seen in that context, it is not surprising that the higher yields of the S&P 500 than that of Treasury issues in the United States has received attention. Notwithstanding such predispositions, inter day and intraday equity market swings have been large even as consensus earnings expectations are reduced. At present valuations in equities, we see fallacy in the suggestions that equity market sentiment is bearish and hence a contrary indicator. We believe instead that the political environment as well corporate assessments, individually and globally indicate a more selective security process to be underway. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.