Weekly Digest

Go your own way

Richard Stutley , CFA

14 January 2019

Countries are falling out of love with each other just as Stevie Nicks and Lindsey Buckingham did before writing the track from which this week’s blog takes its title.  President Trump’s wall at the southern border with Mexico, disagreement over which has left the US government in shutdown since 21 December, may become the enduring symbol of the trend towards national self-interest and protectionist policies at the expense of the international order.  We should not get too downbeat however; integration between countries has fluctuated over time and, for us as investors, uncertainty over trade policy has contributed to some attractive valuation opportunities at the start of 2019.

This is not the first time we’ve seen a pullback from integration.  Even today the level of foreign investment is not as high as it was at times during the 19th and 20th centuries: for example, only a third of the capital raised in the UK between 1865 and 1914 was invested in the UK itself, and a quarter of the world’s stock of foreign capital in 1913 was invested in countries with relatively low per capita GDP compared to just 5% in 1997[1].

Now I may have my own view that pulling away from integration is imprudent: larger markets benefit us all economically and there are some problems which can only be tackled by cooperation between nation states.  But this breakdown of international relations is no reason to get too downbeat.  There is a natural ebb and flow of integration and separation and this is just the latest wave.  Such an analogy may seem inappropriate given that the end of the last great ‘wave’ of integration coincided with – and some would argue helped cause – the events of 1914.  While it is our job to think about these tail risks, a dire outcome like this is an extremely remote possibility, thankfully.

Trump and Xi are locked in negotiations after agreeing not to raise any further trade barriers against each other for a period of 90 days at the start of December.  Talks between mid-level US and Chinese officials in Beijing concluded on Wednesday last week and so far both sides are making positive noises about the prospects for a deal.  This is very important for markets, with the IMF warning of the impact of trade wars on global growth.  Barring a very negative outcome – and by now the market should be used to President Trump’s hyperbole – we should see some rejigging of the terms of trade and then life goes on.

Arm-wrestles over trade introduces frictions out of which emerge winners and losers.  Our underlying managers are specialists in discerning genuine opportunities from things that only appear attractive at first glance, and hence together with them we continue to pay close attention to the investments in our portfolios.  I received a note on Thursday last week from one of our European equity managers, discussing a logistics firm in their universe that could see headline revenue decline by approximately 2-3% as a result of reduced trade between China and the US, but has been penalised a multiple of this by the market and hence is now attractively priced.

While painful in the short term, volatility caused by geopolitical events creates opportunities for disciplined long term investors, just as the disintegration of the relationships within the band coincided with Fleetwood Mac writing one of the best-selling albums of all time.  At today’s level, equities are not expensive and hence we have been adding selectively in our portfolios.

[1] Ferguson, N., (2008).  The Ascent of Money.  A Financial History of the World.  London: The Penguin Group.

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