When the market is in free fall, the question we always ask before
being willing to assume more risk is “What will put in the bottom?” We have found through our years of analysis
and portfolio decisionmaking that the bottom usually arrives when a significant
gesture from outside the market changes the direction of sentiment. The severe
market correction stemming from the financial crisis a decade ago effectively
stopped in March of 2009 when Treasury Secretary Geithner gave form and
substance to the ideas put forth in the Emergency Economic Stabilization Act of
2008 (the Troubled Asset Relief Program, TARP). Europe stopped bleeding in late
July of 2012 when Mario Draghi, President of the European Central Bank, said in
his comments to the Global Investment Conference in London “…the ECB is ready
to do whatever it takes to preserve the Euro.”
After several months of outflows and painful underperformance, estimated money flows into the Vanguard FTSE Emerging Market ETF (VWO) — a popular investment vehicle — are picking up. Since its near-term bottom on October 29th, this particular security has risen nearly 6% after having fallen to a level last seen in early 2017. It may be early days, but this could be an encouraging development because the MSCI All Country World Index has only risen about 1.7% over the same time frame. Expanding investor interest in emerging markets may mark a point where appetite for risk assets begins to rise, which would be a welcome sign given the past two months of turbulence in global capital markets. We are optimistic on the prospects for emerging markets, especially Asia, in the long run. However, there are still significant headwinds—the slowdown in Chinese economic growth, the potential for continued trade-related friction, the strong US dollar and rising interest rates. Any stabilization in these factors could be supportive for further gains in the world’s emerging equity markets.
Today is Giving Tuesday. Numerous worthwhile charities are raising their hands and asking for our attention and our dollars in pursuit of their missions. The difficulty with a one-day campaign is that, while it may bring in new dollars from existing donor relationships, there is a low probability of establishing durable relationships with new donors. Whether the connection is spiritual or practical, driven by a single crisis or by a lifelong pursuit, connecting givers with worthy recipients is a process. Not only does a donor, whether organization or individual, need to find that alignment of purpose, that donor also needs to go through some degree of due diligence to see whether the receiving organization is a good steward of donated capital and creating meaningful and measurable impact with it over time.
Let today not just be a flash in the pan, but let it be the start of an ongoing process for kind and caring individuals, families, and institutions to discover and build long term relationships with impactful organizations creating positive change in the world. As part of that, donors should also consider solutions that help create a platform for purposeful giving that could last months, years or even generations. Consider donor advised funds (DAFs), private foundations, community trusts, and other solutions that make it possible to institutionalize giving, make larger financial commitments that can be disbursed systematically, and provide partners and resources to help identify and evaluate potential recipients.
We didn’t vaporize in a white hot nuclear flash, and the tone of the Singapore talks was cordial and concluded with few decisive next steps but at least a commitment to detente. We are looking for the market story in all this, and often like to look beyond the four walls of WCM for insight from other market participants. Here is a link to some insightful commentary on Korea from Michael Oh of Matthews Asia, a boutique we currently use in our ESG portfolios for emerging Asia exposure.
Matthews Asia Perspective June 12, 2018
And here we find ourselves on the cusp of… something. Only Trump (ok, maybe Dennis Rodman too) could go to North Korea or at least meet with them in Singapore. Conflict has continued on the Korean peninsula and with the Japanese for a century, and was codified on the map as a contest between two political philosophies at the 38th parallel in the closing days of WWII. Even though we have maintained a military presence in Korea post-armistice, and of course have troop exposure elsewhere in the Pacific theater, it is only in the last few years that they have become a true direct threat to the US. Whether it is the dubious reach of their ICBMs, or simply the potential leak of fissile material and weapons technology to other state- and non-state actors, they have achieved their objective of becoming players of global consequence.
The latest Talchum has unfolded like a WWE match between Little Rocket Man and the Dotard with grandstanding, trash-talking, outright threats, cancellations and reinstatements. What do we make of it as investors? Good theater but not much real-world consequence. Of course nuking Seoul or Tokyo would devastate Asian and global markets, but that was an improbable outcome especially while Trump waved his hand over his “much bigger and more powerful” (nuclear) button. Kim’s regime needs food, energy, technology, medicine, general economic vitality and some degree of acknowledgement and respect on the global stage, none of which would be achieved under a mushroom cloud.
If Trump and Kim part company having not advanced anything, we have the status quo and both leaders can return to their countries claiming they got the other to the table. The market continues along as it did yesterday, last week and last month with no new information. If they come to some accord, geopolitically there is a great deal of relief and we can back up the Armageddon clock a couple seconds, but little changes economically. NoKo coming into the international trading community does not have the same consequence as Iran with their oil and cash wealth. An open North Korea might in the fullness of time become a venue for producing nations to trade and in decades could be a candidate for a German-style reunification, but in the immediate future they are at best aid recipients.
If the talks degenerate into name calling, chair throwing, and fallaway moonsault slams which, if the White House can pick a fight with Canada at the G-7, could happen, we will update this blog from the basement. Absent that outcome, we remain committed to Asia, particularly developing Asia, and see a status quo for the market.
Following through on a campaign commitment, President Trump announced that he is withdrawing the United States from the multilateral accord that halted Iran’s nuclear program development and opened it to international verification in exchange for the lifting of economic sanctions. We will leave the analysis and commentary on the reasoning as well as the implications for regional stability to others. Our specific concern is what the implications for global public markets might be.
The most obvious place market participants are looking for a signal is in the oil market. Our view is that there will be little direct impact on the global supply-demand equation since consumption patterns are unlikely to change and most of the world can still access Iran’s output.
Where we think there is underappreciated and largely unmeasured risk is in the asymmetrical application of a sanctions regime in global fixed income and equities. Continue reading
Made you look. No, this is not about that. This is also not about tariffs and trade wars. This is a reminder that there are more forces at work in the market, more fundamental forces, than just headline news.
The Technology and Consumer spaces have been having a bit of a Waterloo moment. A steady drumbeat of information breaches from tech firms, consumer credit firms, major merchants, health insurers and others has shown that our digital lives are the new currency of commerce, and thieves will gladly take and then sell this information to the highest bidder.
To date, the response has been largely profiteering. Play on the concerns of the citizenry that companies cannot be trusted to care for their personal identifiable information and sell them identity protection and credit protection services, in some cases crassly by the very same companies that fumbled the information into the open in the first place.
Here is something on which the Partners at WCM do not agree. We have a diversity of views as to the merits of punitive tariffs and the possibility of a trade conflict if not a full-on trade war. There is an extraordinary amount of complexity in the system, and as a consequence no clear, straight line of causality. Raising steel and aluminum tariffs could help to revitalize US industry and jobs, or it could raise input costs for infrastructure companies, auto and plane manufacturers, commercial builders, etc. Those tariffs could spark domestic activity, or it could kill jobs and mute the stimulative effects of the recently legislated tax cuts. Our disagreement is fine. That reflects the realities of the country and the economy, and therefore the markets in which we operate. Economists, analysts, academics, business leaders, pundits, policymakers, politicians, and the press all have hot takes on what this does and could mean, but nobody knows, including us.
We have been looking at the charts, very much the heart of our process, and are a bit puzzled by Europe. Many of the fundamentals that we have discussed in our blogs, monthly and portfolio updates have been pointing to favorable market conditions for equities and a lid on rates thanks to ECB policy. But the charts – oh the charts. If we take currency out of the equation the market’s performance has been, to be kind, lackluster. Our question – what is holding it back?
Stock markets around the world have been gyrating in response to higher interest rates – particularly in the United States. Long-term US Government bond yields have increased significantly over the course of the past year and a half. Yields on the 10 and 30 year US Treasuries have recently reached levels that some market participants believe may become headwinds for equities. While recent advances have been steep, interest rates are still well below what would be considered “normal levels” which would imply more volatility in corporate securities markets across the globe.